Meredith Whitney to Moneynews: US Should Prepare for 'Steady Drumbeat' of Stumbling Municipalities

Thursday, 06 Jun 2013 04:56 PM

By Dan Weil and John Bachman

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Several U.S. cities, such as Detroit and Stockton, Calif., have suffered severe financial crises, and more municipal troubles are likely on the way, says financial analyst and author Meredith Whitney, CEO of Meredith Whitney Advisory Group.

They could even hit Los Angeles, she tells Newsmax TV in an exclusive interview. "You know no one mentions L.A.," she tells Newsmax TV in an exclusive interview.

"L.A. is one of the municipalities that's not at risk of default, but at risk of real loggerheads in terms of how deeply do you cut into social services, and how much are you going to push down to localities."

Watch our exclusive video. Story continues below.



Overall, "it's just going to be a steady drumbeat of municipalities stumbling because the states can protect themselves," she explains.

"The states can either push expenses down to the local level or just cut off aid to the localities, and that's what's been happening," says Whitney, author of the new book "Fate of the States."

Editor's note: To order 'Fate of the States' at a great price — Click Here Now.

So cities are left holding the bag, leaving some of them without full funds for their police and fire departments, Whitney notes. And many cities are being forced to cut library hours, pare back and close parks and slash garbage collection.

These are "all the social services that you count on as a taxpayer, and that's when taxpayers are like, what am I doing?" she adds. "I'm paying the same or more for less services."

Another big issue for cities is negotiating pensions with local government retirees, Whitney says.

The cities want to force reductions. But then pensioners look at bond payments being made by the city and ask why everyone but bondholders must accept cuts.

"Now the bond payments are constitutionally backed by taxpayer dollars, but try telling a mother that the education of her daughter or son is constitutionally subordinate to honor a $100,000 pension for a judicial clerk or [to make whole] a bondholder," Whitney says.

"I don't think all that stuff flies."

It's a political question concerning the willingness to honor financial obligations, she maintains. "The states clearly have the ability, the municipalities have less of an ability, but now the issue is what gives and where's the willingness going to come from?"

It's tough to determine when widespread trouble will hit, "because the most shocking thing through all of this is how state and local governments get away with so much accounting gimmickry," Whitney contends. "It takes a while to play out, but it's been a steady drumbeat since 2010 and it's not stopping."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

In the wide-ranging interview, Whitney also discussed:

U.S. Stocks Overall

Whitney remains bullish on U.S. stocks. "The U.S. stock market is incredibly attractive, ... because there actually is incredible growth in certain parts of the United States," she states.

"It's a tale of two economies. You have the central corridor growing at high single-digit, low double-digit rates, while, the entire U.S. [gross domestic product] is growing at 2-plus percent." The economy expanded 2.4 percent in the first quarter.

So it's a matter of picking the companies that can benefit the most from the strong regions, Whitney contends.

Bank Stocks

She turned bullish on bank stocks last year. "My expectations were that the big bank stocks would trade toward tangible book value, because I didn’t see anything on the horizon that would cause them to lose money."

But now that the banks have bounced back, "the obvious issue is how much money are they going to make [going forward]?" Whitney asks. "There's not a lot of revenue growth. How deeply they cut into their expense budget is really the story now. ... The group is not so exciting."

Housing

"It's terrific to see home prices not go down anymore," Whitney notes. But in a city like Phoenix, which has experienced some of the biggest home-price gains in the last year, prices are still 45 percent off their peaks.

"So you're really dealing with bounces off of very depressed levels," Whitney adds. And the activity consists largely of refinancing or cash buying.

"There's not the classic mortgage buyer." It's not someone just getting a mortgage to buy a new home. "So I really question the large demand numbers," Whitney argues.

Supply has shrunk as some foreclosures have gone away. But, "I am not as optimistic about the housing market in certain areas as some other folks may be," she claims.

"Actually, a housing market that you want to pay attention to is Texas and other areas where there's real solid economic growth, because there's less supply there." That's where the real homebuyers are, Whitney states.

Europe

The eurozone's deep recession will have mixed effects on the United States, Whitney says.
She sees some negative spillover, as the United States and Europe accounted for over 70 percent of Wall Street's revenue over the last decade.

"So when Europe slows to levels that are negative in some areas, that clearly affects Wall Street and it affects the U.S. economy," she claims. "The revenues are not expected to grow very much for the big banks."

But in other ways, the United States benefits. That's because it's so "expensive and onerous to operate in Europe [that] more European companies are building facilities in the United States, be that chemicals, manufacturing, automakers," Whitney notes.

On balance, "I don’t see Europe as being a massive risk outside of what will happen socially," Whitney says. But Americans should beware: "if people don’t have jobs and people have their social services cut back, as in Europe, there's a boiling point for social unrest that the U.S. has to be very careful of."

Softbank's Attempt to Buy Sprint

Some U.S. officials are worried about the move because Japan's Softbank owns nearly a third of the Chinese e-commerce company Alibaba and uses equipment manufactured by Chinese telecommunications companies Huawei and ZTE.

"The more xenophobic, protectionist you are, the less that benefits global trade and global businesses," Whitney declares. "So without a definitive answer [as to whether the government should permit the deal], it's something that should be examined very carefully."

Whitney's Special Economic Indictors

"I look at natural gas ... and the price of oil as being a really good indicator of underlying trends within the global economy — natural gas particularly for underlying trends within the U.S. ... It's in the perfect sweet spot right now."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

See these other exclusive excerpts from the Newsmax TV interview:

Meredith Whitney: Europe's Woes Have Mixed Impact on US

Meredith Whitney: US Stocks 'Incredibly Attractive'

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