In response to the finale of the debt deal debate, Wall Street analyst Meredith Whitney, spoke with CNBC, expressing her belief that signs point toward a double dip as cities and states are squeezed by federal funding cuts.
When asked if she believed the budget proposal voted on Monday evening was enough, she explained:
“I don’t think what’s going on in D.C. has as much of an impact as the states own issues and budget cuts…”
Whitney discussed the fiscal health of states and municipalities and their vulnerability, as the debt ceiling standoff resulted in new fears for problems in the municipal bond market.
Most recently, Whitney earned publicity with her ominous warnings, doubling down her prediction that there will be numerous defaults in muni-bonds in the next several years. Economics professor Nouriel Roubini and JP Morgan Chase & Co. CEO, Jamie Dimon agree, having analyzed the rising debt service levels and declining revenues in municipalities and subsequently suggesting that we’re on the verge of an inflection point.
Because many states heavily relied on stimulus money for survival, which ran out in June, many are now “left faring for themselves,” she said, referring to the current 12% GDP.
“Our GDP number on Friday was an indication that states and local governments… are really pulling back. We’re certainly in a double-dip on housing,” which places an “enormous pressure on the economy.”
“[46] states have had to make big cuts, which effects employment, spending… every corporation within the U.S.”
States with sloppy budget sheets had to cut social programs and raise taxes, which can push the value of homes down further than where they already rested in a lousy housing economy.
She explained that states with clean balance sheets attract more business and aren’t required to raise taxes.
The analyst, famous for predicting the financial crisis, has received boatloads of criticism, as some believe her bold claims over-reached.
Yet Whitney maintains her forecasts.
Another reason Whitney predicts a double-dip is the recent series of layoffs, referring to the 50,000 jobs lost on Wall Street along with additional professional dismissals by nonfinancial firms, such as global healthcare leader, Merck.
“All industries will [make staff cuts] and then it will get really bad when the state and local governments really start to impact the corporations,” when they are forced to cut back on issuing contracts,” she said.
“Muni bond defaults are just a product of overspending and overleveraging the system,” she said. “The call is so much bigger than what happens in the municipal bond world.”
Whitney also made headlines on Wednesday by calling many of the top U.S. financial institutions “zombie banks” that will need a decade or more to adjust to the new business environment.
On Wall Street, the term “zombie bank” refers to a bank that has little net worth but is backed by the government.
"The large banks which dominate most of the lending in the United States are effectively zombie banks," she said. "You've got an expense structure that just doesn't match the revenue structure. So it's a classic issue of negative operating leverage. You don't buy institutions that have negative operating leverage. This is a multi-year cycle that these guys will have to go through."
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