Image above: Meredeth Whitney, sometimes called the Dollar Dominatrix or a Superstar Analyst. Maybe she is not liked on Wall Street because she is an attractive woman and married to a professional wrestler... or maybe it is because she speaks truth to power. From (http://moneywatch.bnet.com/investing/blog/investment-insights/muni-bonds-another-strike-against-meredith-whitney/636/).
I don’t know if Meredith Whitney ‘gets it’ or not when she claims the muni lending structure is kaput but she is on the right side of history:
Whitney: Next Financial Crisis - Local Government William Alden - The Huffington PostThe next major financial crisis could come from a crisis in local government budgets, according to a new report from analyst Meredith Whitney.
State budgets were over-extended in the years leading up to the recent financial crisis, Whitney says, as relayed by this Fortune piece. The situation is so bad that states are spending 27 percent more than they’re earning in taxes.
The state fiscal situation may be dismal, but Whitney’s thesis says that a future crisis won’t be cause by states directly, since they have a safety net from the federal government. Instead, the local municipalities — cities and towns — which, as Felix Salmon points out, are financially dependent on the states, would default on their debt.
“The state situation reminded me so much of the banks pre-crisis,” Whitney told CNBC’s Maria Bartiromo Tuesday. In 2007, Whitney predicted doom for Citigroup and was immediately vindicated when the bank’s stock price fell and the then-CEO Chuck Prince resigned.
“The similarities between the states and the banks are extreme, to the extent that states have been spending dramatically, growing leverage dramatically. Muni debt has doubled since 2000, but spending has also grown way faster than revenue,” Whitney told CNBC.
States, most of which are constitutionally required to have balanced budgets, have paid for this spending by using money that would otherwise have gone to pension funds, Whitney, who is CEO of Meredith Whitney Advisory Group, said. “You borrow from future dollars to benefit the present, basically generational robbery,” she told CNBC.
The worst states, according to the 600-page report, are California, New Jersey, Illinois and Ohio. The best, with the most conservative fiscal policies, are Texas, Virginia and Washington.
Here’s a current version of Whitney-Vision:
It isn’t clear in her writing whether Meredith understands the nature of all debt as a call option on suburbia, on the growth of energy consumption (waste). I have never seen nor heard the words ‘energy consumption’ pass the bee-stung lips of Lovely (but Serious as a Heart Attack) Meredith. Nevertheless, the end game of municipal credit is grounded in the futility of further waste as a means to service rapidly increasing debts.Whitney warns on US state pension schemes Nicole Bullock - Financial TimesMeredith Whitney, the outspoken Wall Street analyst, who predicted a wave of defaults by troubled US municipalities, has warned that the rising cost of states’ retirement schemes could redirect funds away from public services and ultimately hurt the US economy.
Ms Whitney, who shot to fame for spotting trouble at large Wall Street banks ahead of the financial crisis, forecast “state arbitrage” whereby the weakest states, namely California, Illinois, Ohio and New Jersey, face the risk of large emigration of their highest tax base – companies and high net worth individuals – to stronger states that have better managed their finances over the years.
“When states start to cut essential state services [corporations and individuals in high tax brackets] say, ‘I can take or leave it,’ and you are potentially left with a constituency that contributes less to the tax base and takes more from social services,” Ms Whitney told the Financial Times.
The stock ‘n’ bond hamsters are outraged by Whitney’s truth to power. She’s costing finance racketeers some serious coin! They line up to pound nails into Whitney’s skull:
Meredith Whitney Speaks, Muni Market Yawns Mark Gongloff -Wall Street JournalProfessional scary person Meredith Whitney took to the op-ed pages of The Wall Street Journal this morning to sprinkle some more of her fear dust on the muni-bond market:
Municipal bond holders will experience their own form of contract renegotiation in the form of debt restructurings at the local level. These are just the facts.
She makes some good points, frankly, and offers some alarming numbers. State and local finances are plainly a mess, and off-balance sheet liabilities in the form of unfunded pension and other benefit obligations are a potential headache. That point is controversial, but it’s always important to listen to Cassandras like Ms. Whitney, who made her bones as a prognosticator before the financial crisis.
But, interestingly, muni-bond investors are not exactly heading for higher ground today on her words. Muni-bond ETFs such as the iShares S&P National AMT-Free Muni Bond fund, are basically unchanged on the day — at six-month highs.
You would think the Journal could come up with a more unflattering image? Below is more Meredith bashing from Bloomberg. If you take the time to look online you can find soothing bromides along side Whitney-bashing all over the place:
Meredith Whitney Trips Over Muni Default Tale Joe Mysak - Bloomberg NewsIt’s no wonder Meredith Whitney wants to distance herself from her prediction of the municipal market’s meltdown.
“I never said that there would be hundreds of billions of defaults. It was never a precise estimate over a specific period of time.” So said Whitney on Bloomberg Radio on Wednesday morning.
This is what she said on an episode of CBS’s “60 Minutes” that aired on Dec. 19, 2010:
“You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.”
As for timing, “It’ll be something to worry about within the next 12 months.”
What this sounds like is Meredith Whitney saying there will be hundreds of billions of dollars’ worth of municipal bond defaults within the next 12 months. That sounds like a precise estimate over a specific period of time. And that’s how it has been reported and dissected in the press since then, with not a word of protest from Whitney.
Until this week. Whitney told Bloomberg Radio host Tom Keene that she thought “60 Minutes” did a “really good job” on the story. “But the risk is that they take bits and pieces of an hour-and-a-half interview and certain portions are more magnified than others.”
Whitney also later told Keene: “In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that. That’s not the nature of our research.”
Our waste-based economy is a scaled-up version of a family that lives in a large house. They have been heating the house by burning the furniture and have started on burning the house. ‘Industry’ notices a problem exists and suggests more efficient furnaces so that the house can be burnt more completely. Salesmen insist that burning the rest of the house is the only way to ‘prosperity’. Whitney notices the furniture is gone but hasn’t made the ‘furnace’ connection, yet.
Keep in mind that debts are being incurred as a money-flow substitute for ‘utility’ received from furniture burning. Real returns from this nonsense does not exist so something has to be created to stand in returns’ place. What economists consider to be ‘margin’ is really the difference between rates of burn. The ‘economy’ only grows when furniture — or the house — is burned faster than during previous times.
The world’s economies burn furniture faster in 2011 than they did in 1911, this represents GDP growth and ‘progress’. Furniture isn’t burned faster now than in 2005 or in 2006 which puts the world at the edge of the pit. Meredith Whitney may not be able to articulate the entire process in detail but she is able to grasp the outline of the process’s form.
“By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.” (JOE 2010)
Modernity’s madness reaches escape velocity: things ARE different this time. Our house is our resource patrimony, a form of irreplaceable capital. To properly invest our capital the end must be to gain a return on its existence in a useful and enduring form not its destruction. It might have been excusable to immediately burn for heat the fuel we extracted in more benighted times, before the turn of the Twentieth Century. There is no reason why the oil extracted in 1950 is not in our world as capital now, either as a store of value like gold or performing some service, perhaps as a 100% recyclable lubricant or chemical feedstock or part of some process we cannot now imagine.
A businessman whose company made enduring use of the same oil for many decades or centuries — as a conscientious farmer might husband his soil and water — and improved its qualities in the process would be a wise businessman indeed!
The same businessman would also be exceedingly prosperous. His capital account would increase while those of his wasteful competitors would vanish taking their businesses with them … the same way capital accounts and along with capital itself is vanishing around the world right this minute!
Humans constantly seek more to degrade, burn, waste or corrupt. We refuse to think of resources as capital. Beginning with this central and essential lie, all of economics is corrupted! Whether it is coal or water, farmland or natural gas, ‘culture’ or knowledge our attitude bends toward the ‘consume’ part without understanding. The refusal to understand is the inevitable outcome of the lies’ corruption which spirals out from the center.
We haughtily pretend to dominate nature not accepting as first principle that nature is indomitable. We act as if our frauds or labels mean something to anyone or thing but ourselves.
The act of consumption revalues what is consumed.
Consumption requires the cheapest possible inputs so as to allow profits. Increased scarcity of inputs makes capital too expensive to waste. In this way waste- based economies are self- limiting. Recognizing how fuel resources or money reprice themselves by way of scarcity is more than a matter of making adjustments for scale.
Availability reprices the entire consumption dynamic into something that excludes consumption. Availability of a resource sets both the amount and the kind of the return on the resource’s use. ‘Kind’ identifies the character of an asset to be traded, which changes as the asset becomes scarce. Scarcity morphs a cheap throwaway such as a bubble-gum card into a rare collectible to be put into a museum. Scarce oil ceases to be an loss- leader for the auto- and real estate industries and instead becomes an asset to be hoarded.
Meanwhile, the appearance of asset speculation in a ‘use market’ is a scarcity indicator. Exhaustion of resource capital amplifies speculation returns. These returns become greater than those from any of the other ‘uses’ which are driven from the market.
At that point Hotelling’s Rule takes hold. Scarcity of return ‘re-proxies’ money used to measure the return. What is taking place right now under the noses of economists is the titanic struggle between concepts: money as proxy for a good versus money as a proxy for the process that destroys the good. The struggle manifests itself as currency volatility and incipient inflation/deflation. When the perception shifts from input destruction to input hoarding the consumption process will be annihilated because inputs will be unaffordable.
The ‘proxy dynamic’ is the scaffold upon which the idea of hard currency is deployed. Anyone who does not believe that hard- currencies are central to the economic ‘discussion’ taking place right now is not paying attention. The only issue is whether the currency basis should/will be gold — which is useless — or oil, which is not. When the waste- based economy by way of its ‘marketplace’ elevates oil, that resource will morph from ‘something to be wasted’ to become a store of value. The industrial economy that prospers by burning its capital in a furnace will have nothing left to burn.
Few will be able to afford to buy oil other than wealthy speculators seeking to sell it to others for a gambler’s profit. Like gold, oil would become ‘useless’ unless some non- destructive uses can be found for it. This in turn would support higher values still. John D. Rockefeller in the 19th century did not buy oil for himself. He marketed oil as a way to leverage investments in oil consuming industries. As a result, we have ‘infrastructure’ — Whitney’s muni world — built for the ‘masses’ to waste fuel on an unimaginably colossal scale.
When only the Rockefellers of the world can afford oil, none will remain to pay for these ‘infrastructure investments’ … or to service associated debts.
It is this ‘perception of oil as an investment asset’ dynamic rather than net- exports or simple oilfield exhaustion and depletion that hangs over the fuel- waste economy. Oil that is too valuable to waste strands the past 80 years of ‘investment’ by every nation on Earth. The pricing/value shifting process is visibly taking place right now. The stranding part is what Meredith Whitney observes: the fact that she is remarking about it speaks for itself!
The next rung on the ladder of understanding is whether the ‘cease to exist’ part takes place before the ‘hard currency’ part? The answer will be at what price level does the demand- side bid shift perception? At what price does oil become ‘good as gold’ and treated accordingly? Is the price $147? How about $130?
Diminishing return on waste is our economic crisis: we cannot profit by our counter-productive activities any more. At all levels, whether at the grocery store or the central bank, we are pricing ourselves out of business because we have wasted too much of our irreplaceable capital.
In this sense of the ‘pricing out of business’ part, Whitney is absolutely correct and her detractors are misleading. Our states and cities as they are currently constituted cannot afford themselves. The putative ‘customers’ of these entities cannot earn enough from wasting activities to pay for the accumulated debts incurred as substitutes for the past’s non- earnings.
The idea of states or locale entities ‘earning’ or having a return over any period other than the short-term when all that is produced is waste- enablers is a fantasy. Hello! Germany!
Remaining oil resources are difficult to exploit. Their ‘asset’ value becomes greater than their ‘consumption’ value.
We destroy our capital in the name of ‘progress’ and money capital is revalued as an integral part of the process. No wonder people are confused about inflation and deflation because the measurement is the two interconnected relative rates of capital destruction. It becomes impossible to determine what anything is worth.
We assume that the future will provide us with increasing benefits while our consumption devours what tools we need face this future.
Municipal Finance 101
In a fuel constrained environment, as prices rise choices must be made. Something must be cut in place of the fuel; the ‘somethings’ are revenues which decrease relative to expenditures. These in turn represent additional fuel waste by government which creates a vicious cycle. To make up the ongoing and expanding gap funds must be borrowed. Municipalities wind up chasing their tails, caught within incipient debt compounding spirals driven by embedded fuel costs. The only escape is to eliminate fuel waste which is impossible because the municipality is completely invested in it.
If fuel waste is eliminated, revenue vanishes as this is a ‘fee’ enacted upon the rate of wastage. If waste continues the costs increase to stifle returns. More revenue disappears at the same time fuel-waste ‘investments’ are stranded. There is no escape from the waste- based system without an overhaul or a breakdown.
Whitney suggests that state and local governments will reschedule debt payments. This is more can- kicking but what other choice to these entities have? Here is a sketch of state/local income and expenditures since 1990 to 2009 from the Census Bureau: (Please click on the chart for a large picture)
Notice the 1990s period had revenue surpluses; a period of cheap oil and economic ‘growth’. This table — which skips years — indicates a widening gap between revenues (which includes funds transfers from the Federal government) and expenditures. Indeed, state and local tax revenues are increasing but other funds are diminished. Purchase of fuel requires other funding needs be neglected, with differences made up by borrowing.
Whitney is forgiven for not going far enough. The world’s militaries will do so in La Whitney’s place. Here is the Defense Department’s think tank Joint Operating Environment 2010:
A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict.
This sort of thing is the ‘container’ within which municipal and state financing exists. Finance insists that ‘growth’ is a given, which is not true:
Energy Summary (JOE 2010)To generate the energy required worldwide by the 2030s would require us to find an additional 1.4 MBD every year until then.
During the next twenty-five years, coal, oil, and natural gas will remain indispensable to meet energy requirements. The discovery rate for new petroleum and gas fields over the past two decades (with the possible exception of Brazil) provides little reason for optimism that future efforts will find major new fields.
At present, investment in oil production is only beginning to pick up, with the result that production could reach a prolonged plateau. By 2030, the world will require production of 118 MBD, but energy producers may only be producing 100 MBD unless there are major changes in current investment and drilling capacity.
By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.
The Progress Pimps insist with increasing desperation that stocks are going to go up, bonds are going to go up, both residential and commercial real estate are going to go up, that commodities are going to go up — with perhaps the dollar as the single financial asset that declines in value, also bullish.
How is an energy shortage — that could begin as soon as next year — be bullish for anything?
Energy prices are supported by economic activity. If activity declines due to a lack of return, what will drive prices?
If shortages result in fuel being so expensive that economic activity is thwarted, what funds can be had to afford anything else? A structural overhaul toward real sustainability falls out of reach. What we have invested so far in wasting activities leaves less capital remaining to fund replacement infrastructures.
Price constrained economies cannot spark-off enough cash flow to service debts. The issue becomes triage: which debts to service or pay off and which to repudiate.
Whitney accepts the obvious, that the revenue/expenditure gap is unlikely to be filled without the hard school of default imposing a new order. The dead must give way to the demands of the living … It is different this time.
Video above: Hudson ad Wolff On Debt and Recession. From (http://www.youtube.com/watch?v=GkALt1GnJa4).
See also: Ea O Ka Aina: Possible Municipal Bond Failure 5/4/11 Ea O Ka Aina: Muni Defaults in 2011 12/21/11 .
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