Business Insider: What Meredith Whitney Could Learn From Nouriel Roubini About Making Big Economic Predictions
From Business Insider:
“The rule on staying alive as a forecaster is to give ’em a number or give ’em a date, but never give ’em both at once.”–Jane Bryant Quinn, Reader’s Digest, 1 Dec. 1980
Meredith Whitney broke the rule. This now haunts her to the point that she declined to appear before a Congressional committee that wanted to discuss Muni default issues. Nouriel Roubini is a skilled economist. He knows this rule. He, therefore, used modifiers to adhere to it.
Let’s talk about Whitney’s forecast first. With great media fanfare, she predicted “50 to 100” sizeable muni defaults, totaling about $100 billion, in 2011. That is correct: she said this year. The year in which the economy is in some sort of recovery and when the interest rate is held near zero by the Fed.
Meredith did not know about any oil shock when she made this forecast. While the current MENA turmoil is a serious new development, the resulting oil price shock will not help her be right in her forecast. In our view, there is nearly zero chance that there will be 50 to 100 sizeable Muni defaults amounting to $100 billion in the calendar year of 2011.
Nouriel Roubini suggested that there may be “close to $100 billion of defaults over five years, but typical 80% recoveries are far higher than on corporate bonds.” Nouriel outlined his view of trouble in the Muni world and attempted to measure the exposure in a very thoughtful way. He noted that most of the bonds he expected to default were in the high-yield or junk-bond category. His base-case estimate of defaults over five years for the investment-grade sector was under $30 billion, with “ultimate recovery” of nearly all the losses. Nouriel reminds us that “governments cannot be liquidated” like corporations.
Bloomberg’s Joe Mysak observed the following about Roubini:
“And so noted doomsayer Nouriel Roubini joins the numerous commentators who have opined about the municipal bond market, the most famous, of course, being Meredith Whitney, who in December on the CBS show ‘60 Minutes’’ blurted out the prediction that there would be ‘hundreds of billions’’ of municipal bond defaults in 2011. That $100 billion estimate from the Roubini firm isn’t in the same league as the Whitney call. What’s more, it may not be so outrageous, depending upon how you count defaults. …
Roubini does examine recovery. He offers estimates and methodologies. And he thoroughly describes the issues involving Chapter 9. His conclusion is that Muni recovery is much higher than markets seem to be pricing and that the widespread use of Chapter 9 is unlikely.
We believe the Roubini report is straightforward and worthy of respect. It is serious research work. It examines nearly two centuries of development in state and local government debt in the United States. It explains the methodology that it used to reach conclusions and estimates. We are less respectful of the Whitney report.
Roubini also attempts to estimate the price adjustment needed in the market in order to normalize the Muni-treasury spread. He notes that the financial crisis sell-off brought Munis to “absurd panic levels.” He reminds readers that, while things are improved since these wide spreads, the Muni market is still under “extreme strain.” …
Read the entire article here.
Editor’s Note: For more on RGE’s analysis on muni stress please read the following available exclusively to RGE clients: State’s of Despair Part 1: Muni Stress – Past, Present and Future
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