Municipal Finances Reaching an 'Inflection Point': Whitney


Cash-strapped local governments are facing an "inflection point" that will force them into deciding between providing services and honoring debt obligations, financial analyst Meredith Whitney told CNBC.

Meredith Whitney, founder and chief executive officer of Meredith Whitney Advisory Group LLC.
Graham Morrison | Bloomberg | Getty Images

Speaking amid high-profile local government bankruptcies — primarily in California — and more than a year and a half after making her much-noted forecast of a rash of municipal bond defaults, Whitney predicted more financial stress ahead.

"You haven't seen state and local governments cut to the degree they have. Now you reach a point where it's an inflection point: At what cost am I going to honor my pension obligations?" the founder of the Meredith Whitney Advisory Group said on "Squawk Box."

"How much am I going to cut into basic social services to honor obligations that I just can't commit for the long term?" she continued. "Precedents are being set now and you're going to see more and more cities adopt" cost-cutting measures.

Whitney's call, made during a December 2010 appearance on "60 Minutes," that 50 to 100 governments would default on debt obligations and cause $100 billion or more in damages has not come to fruition.

However, recent bankruptcies, such as the one in San Bernardino, Calif., last week have signaled increasing stress at the local government level. San Bernardino was the third California city to go broke.

Whitney insisted she is not doing a "victory lap" because of the bankruptcy headlines, adding that she does not even advise clients in terms of investing in local government debt.

Going against munis this year still would have been a bad bet though they've underperformed the stock market. The Barclays Municipal Bond Index is up 5.3 percent year to date and even the Barclays California bond gauge is up just short of 6 percent.

Whitney on Split in California's Muni Market

"I never advise my clients on municipal bonds. That was never part of my argument," she said. "It was an aside. It happened to be what '60 Minutes' focused on. But what I've advised my clients on doing is, look where the growth is going to come from."

As she has in the past, Whitney advised investors to look to the American heartland for opportunities.

"It cannot come from these vortex economies like California, Arizona, Nevada, areas that powered our economy. Where growth is coming from  — I mean, Texas is a juggernaut, Florida's back on its feet. You've seen incredible growth from what people call 'silicon prairies' — right-to-work states that have clean balance sheets that are creating jobs, that are investing in education."

She said current trends are preventing opportunities in consumer, financials and transportation stocks.

"What always attracts me is how the U.S. is going to reconstruct itself, how it's going to reinvent itself, and it does it every 60 years," Whitney said. "It's a very dynamic economy."