One year ago today, analyst Meredith Whitney predicted gloom and doom for municipalities and for municipal bonds. She claimed that we should expect at least 50-100 “sizable” muni bond defaults totaling hundreds of billions of dollars in 2011. Whitney’s prediction evoked great fanfare and was highlighted on 60 Minutes. “I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S economy,” she said. Whitney’s argument was that state and local governments were running huge deficits with federal stimulus dollars in their coffers; when that stimulus ended, the massive defaults would begin.
New Jersey Gov. Chris Christie famously claimed that “the day of reckoning” had arrived. I disagreed and have been correct (at least thus far). I argued that the situation wasn’t as dire as Whitney forecast and that judicious municipal investments ought to pay-off handsomely (I suggested focusing on quality generally and pre-refunded issues and revenue bonds backed by reliable revenue streams more specifically as well as overall caution with respect to general obligation bonds). An investor who bought $10,000 of muni bonds the day after Whitney’s December 19 60 Minutes appearance would have made a returns well in excess of 10 percent on that money in one year (based upon the Merrill Lynch Municipal Master Index, which calculates price changes and interest income). Lower interest rates and overblown credit risk claims both contributed to this performance, which beats U.S. Treasuries, stocks, corporate bonds and commodities over the same time period. This return is better still as a practical matter because muni interest income is tax-exempt.
At least to this point, we have seen no “day of reckoning” — even for Whitney.