[evilgenius]

What's up with the stories that accuse Meredith Whitney of some kind of misstep by calling for problems in the municipal bond markets? From what I can tell her critics are mad at her because her predictions did not come true immediately. Was that the expectation? I don't see the problems with the State's budget gaps going away any time too soon. The threat is even worse for cities. Personally I see this act of reprisal as coming from two potential sources: the investors that believed her, but bet that it would happen over a short time horizon or the people who are angry that her forecast has caused so much competition for the monies that investors had hoped to get into in order to offset the kinds of losses they might face should it come true.

[Outcast_Searcher]

$this->bbcode_second_pass_quote('evilgenius', 'W')hat's up with the stories that accuse Meredith Whitney of some kind of misstep by calling for problems in the municipal bond markets? From what I can tell her critics are mad at her because her predictions did not come true immediately. Was that the expectation? I don't see the problems with the State's budget gaps going away any time too soon. The threat is even worse for cities. Personally I see this act of reprisal as coming from two potential sources: the investors that believed her, but bet that it would happen over a short time horizon or the people who are angry that her forecast has caused so much competition for the monies that investors had hoped to get into in order to offset the kinds of losses they might face should it come true.

[jdmartin]

I think that's about right. The states will visit a lot of pain on its own citizens before it defaults, or let its cities default, on GO bond issues. No state can afford to abandon or ostracize the bond market right now.

[smiley]

What is interesting about this debate is that the most vocal opponents of Whitney are the holders of big muni portfolio's. The so-called experts that CNBC and CNN bring to the floor to counter her arguments usually have a big stake in the muni market. That in itself is fine, these people are entitled to an opinion and they certainly stick their money where their mouth is, but these should not be presented as independent opinions.

In contrast, the actual holders of debt, like the Illinois and Conneticut controllers, the former GAO chief and the various municipal stateholders tend to agree with Whitneys assesment. Of course these people might have their own agenda's, but at least thy know exactly what is in their books.

If they are concerned I guess so should we. I've said this before in some older treads: I think the Muni market will be the big story of 2011.

- I have a strong suspicion that this situation will escalate in Q2 this year; expiration of the Built America program, Federal budget problems, alt-A resets, rising interest rates.

- I also think that the states cannot cut themself out of this problem, something has to be done on the revenue side.

- With State and Fed both looking for more revenue, there is a real possibility that they will choke-off the economy. I'm no fan of reaganomics, but I do agree that a sudden tax shock can have the opposite effect, namely an economic contraction and decreasing revenues.

- With the amount of debt out there, the states and the government have put themself in a situation that they are entirely dependent on others. For instance if the average interest rate on the federal debt rises by 1%, the administration needs to increase their revenues by 8% to make up for the interest costs alone. The same applies to the muni debt only there there the risk of an interest shock is even higher since the owners of the debt are largely private investors with less consideration for political agenda's and economic stability as the large owners of treasuries have.

America is walking a terribly wobbly fine line here. They need to adress the budget and debt problems, but they cannot afford to dent the economy or to tick off investors. If this happens the situaton could escalate in a matter of days, and then even the predictions of Whitney might prove to be conservative.

[evilgenius]

I like your reasoning, Smiley. What prompted me to start this thread was the nonchalance being put off by Whitney's critics vis a vis her prediction. Those critics almost exclusively use an overall gestalt view of the situation in order to allay fear. I look at that and see how that view is just like not recognizing the danger of subprimes in the mortgage market. Once a sizable enough failure rate amongst the weakest in the class causes a panic level high enough to discredit the investment class, then rates have to rise even if the gestalt model would not have yet predicted a rise. Investors will perceive more risk and demand a higher reward. The thing is, investors can also flee this market altogether thus overstating the reward demand. This kind of reaction could cause perturbations that municipalities and states are not the least bit ready for nor in many cases able to handle.

[smiley]

$this->bbcode_second_pass_quote('', 'W')hat prompted me to start this thread was the nonchalance being put off by Whitney's critics vis a vis her prediction. I look at that and see how that view is just like not recognizing the danger of subprimes in the mortgage market.

[Outcast_Searcher]

$this->bbcode_second_pass_quote('smiley', 'W')hat is interesting about this debate is that the most vocal opponents of Whitney are the holders of big muni portfolio's. The so-called experts that CNBC and CNN bring to the floor to counter her arguments usually have a big stake in the muni market. That in itself is fine, these people are entitled to an opinion and they certainly stick their money where their mouth is, but these should not be presented as independent opinions.

[Outcast_Searcher]

Today on Fareed Zakaria's "GPS", he interviewed George Soros.

Soros said he thought that we would see some Municipal defaults, but he didn't go into detail or give probabilities.

He also said that he expects the general bond market (Treasuries were implied) to have a big problem when our wonderful Washington political crowd continues to fail to meaningfully address the debt problem.

He declined to give a specific time frame, but he implied that long bond interest rates were likely to go WAY up, induce a lot of pain, and derail the economic recovery.

Whatever your politics may be, Soros has been a successful investor and has a lot of experience investing in the bond market per Zakaria's comments (I think he has credibility anf balance as a news analyst), so I thought this was worth passing on.

One more experienced investor not buying the Bernanke line...

[americandream]

Markets act in a co-ordinated manner, overall. I can't see them leaving events to arise that risk killing the goose thats laying their golden egg, the consumer. In addition, there are ample reserves in the Chinese kitty. Having said that, there are limits to papering over capitalism's many fault lines. So I reckon Whitney's timing is a bit off but her fears are well founded.

[kiwichick]

i'd take whitney and soro's prediction's over the usual idiot on Luddite TV (CNBC)

[smiley]

Well if you include Soros you might also want to add the other investment ultraheavyweight.

$this->bbcode_second_pass_quote('', 'J')une 2 2010 (Bloomberg) -- Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the bonds in coming years.

“There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”

<snip>

Buffett, Berkshire’s chairman and chief executive, has previously warned about the risks of insuring municipal bonds. In his annual letter to shareholders in 2009, he said public officials may be tempted to default on bonds whose payments are guaranteed by insurance companies rather than push through needed tax increases.