Talk about holding onto a losing trade. At the Milken Conference today, Meredith Whitney says there is nothing controversial about her muni call and she maintains that she has more conviction about the muni crisis call than anything in her entire career. Via Bloomberg:
Whitney said on the panel, “It’s not that big of a call..There’s nothing controversial about that call, if you look at the numbers.”
“You can criticize me for everything you want, I’m just numb to it because I have more conviction on this than I’d had on any single thing in my career.”
On the same panel, David Solomon, Goldman Sachs’ co-head of investment banking said, “I don’t think we’re doomed. I think the resources available to us, and the changes that will evolve as we come out of a very, very difficult economic period that we’ve been stuck in over the past couple of years, will provide more flexibility than I think Meredith believes.”
Whitney is certainly right that the states are suffering fiscal woes, however, as we’ve seen in Europe, there are mechanisms which can be utilized to combat these issues. While I still maintain that there is a chance of local defaults, I think the United States will be proactive in fending off a Euro style crisis. And that means the US federal government will do what it has always done. It will credit the bank accounts of the states in order to ensure that any single municipality cannot cause widespread economic hardship throughout the United States. This would be nothing new. The USA has always credited the bank accounts of the states that are part of this union. If Europe were truly united we would see the same thing occurring in Europe, however, because they are not united they instead choose austerity due to fears of inflation. The reality is that the ECB is not creating inflation. They are merely stopping the potentially deflationary debacle that would ensue with sovereign defaults. I would hope that a UNITED States of America would be a bit more caring of its own member states.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.