PIMCO vs Whitney: The Muni War Of Words Turns Ugly, As Equity Mutual Funds Welcome The Wipeout In MUB

Tyler Durden's picture

One of the consequences of Meredith Whitney's recent prognostications that we could be facing hundreds of billions worth of municipal defaults, is that after tens of billions of investor capital have been pulled out of municipal funds, with last week seen record $5.8 billion in redemptions alone, virtually the bulk of this money has been recycled in the form of inflows into equity instruments. As such, it is surprising why so much energy is wasted to attempt to debunk Whitney's thesis: after all, she has done more to stimulate equity inflows than years of government/CNBC propaganda ever could. Yet one firm which certainly stands to lose should the ongoing muni redemption wave not moderate, is everybody's favorite PIMCO, which is oh so good at bashing the Fed and Satan Bernanke with one half of its mouth, while with the other investing tens if not hundreds of billions in federally subsidized Build America Bonds, which for the past month have been in free fall. It is therefore not surprising that as Charlie Gasparino points out, Bill Gross "has launched an all-out war to discredit Whitney’s research in an attempt to restore confidence in the $3 trillion municipal-bond market." Of course, this is nothing more than a good old-fashioned book talking campaign: Meredith, who after have failed to predict anything notable at her new venture, needs to return to her shock factor roots, and Gross, whose TRF fund, after seeing nearly two years of AUM increases in his flagship TRF, has been having a bit of a hard time recently, all due to the firm's huge municipal exposure.

More from Fox Business:

Pimco, which specializes in selling bond-related mutual funds and other investments, has been hit particularly hard; the redemptions from municipal-bond funds have hit historic proportions, according to a report by Barclays Capital, totaling tens of billions of dollars, though there are some signs that the run on the market has abated.

But it hasn’t abated enough for Pimco. While Gross quietly jabs at Whitney in his television commentaries, his people on the ground in charge of selling bond funds to brokers are playing offense. According to one person with direct knowledge of the matter, a Pimco representative said that they money management firm has even obtained a copy of Whitney’s report, and it “wasn’t worth the paper it was written on.”

The Pimco representative said, according to this person, that the money management firm paid $10,000 to obtain the report and considered having Whitney herself address analysts at the money management firm, but decided not to because officials there believed her analysis to be superficial.

FOX Business was the first media outlet to obtain the report, written back in September of 2010, titled “Tragedy of the Common; Launching Ratings on the Top 15 States.” As first reported on FOX Business, Whitney’s analysis contained none of the doomsday predictions she made on television, namely that there will be 50 to 100 major municipal-bond defaults costing investors hundreds of billions in losses over the next year.

It focused on state municipal issues, and stated that her analysts showed that no state would likely default. It made just a passing reference to the wider municipal bond market, namely cities and private entities that can issue tax exempt debt , stating “we believe there will invariably be defaults on the local level,” without giving specifics.

And while it remains to be seen who is right in the muni solvency debate, with both camps having seen an extended array of defenders, one thing is sure: as long as investors continue to pull money out of muni bond funds, the proceeds will be reinvested into equities. Which is why nobody at the administration level has budged to refute Whitney's doomsday scenario: after all, as noted above, she has succeeded in doing more for the equities propaganda camp with one 60 Minutes appearance, than all the momo cheerleaders ever could. And since investors are once again putting money into taxable bond funds, it is imperative for the mutual fund community that the muni scare persists - after all cash levels at mutual funds are already near record lows. Which is why we expect that Meredith, right or wrong, will most certainly be carted around various B-grade cable channels to force people to convert their muni holdings into stocks for a few more months, at which point not only will Whitney's macro call end up being proven right, but the spillover effect into equities and other asset classes will prove once again that in a time of record government stimulus, any deviation from the priced to perfection centrally planned model always leads to a wholesale wipeout of capital markets.

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jus_lite_reading's picture

Everything is a business model... even this.

T's will be the last man standing.

TheGreatPonzi's picture


LMAO, this is so 1931.

In our modern times, companies, banks and cities do no longer default. Central banks worldwide have proved to the world that only ordinary citizens can default.

This is the magic of Charles Ponzi and fiat paper money.

No US State or big city will ever be allowed to default. I'm ready to bet $10,000 on this.

asdasmos's picture

Just curious as to how you think they will be bailed out.


Will it be in the open or through PDs or....?

TheGreatPonzi's picture

US States such as California will continue to be bailed out by the Federal government and associated entities (it has been the case for already 1.5 years now).

Cities are probably already being bailed out in secret by States.

Pension funds are like cities, they will be bailed out by the States.

In the open? No, honesty and truth are things from the past.

There may be one or two articles in the press, but there won't be any open and public bailout announced on CNN.

As I've repeatedly said on this website, the only thing that can stop the global Ponzi is worldwide hyperinflation.

Deflation means default, and default means deflation. No local or global government in its sane mind will ever accept its own death.


Bastiat's picture

Actually in California, the State has been looting Cities and local agencies.   That is why Prop 22 passed last Nov by 62% amending the State Constitution for forbid such takings.

TheGreatPonzi's picture

Since when Ivory Coast is part of the developed world and has stable international relations?

Jasper M's picture


    I propose you stick 10 Large into a Muni bond fund. I am already sort such (have been for awhile – money where my mouth is), so if you do, we will have structured your bet. 

Let us know if execute. 

TheGreatPonzi's picture

Muni bonds will of course drop, and the rates will rise, but they will never default.

So shorting munis is a good idea, but they will not technically and legally default.

ThirdCoastSurfer's picture

Poor Meridith, she makes the argument that a loan restructure should be counted as a technical default. Her projections under this "technicality" are spot on. You promised to pay X by Y at Z% but you can't so,  for a fee,  Goldman will gladly loan you a hamburger today for payment on Tuesday. Surely, given a long enough timeline,  almost all taxable debt is repayable. All we need to put all this to issue to bed is a 100 year muni bond. 

LowProfile's picture

Muni bonds will of course drop, and the rates will rise, but they will never default.

Yeah, because it's never happened before in a high inflation low employment envrionment...

The most infamous default cases involving general obligation bonds include New York City's default in 1975 and Cleveland in 1978.



I am a Man I am Forty's picture

Why would anyone buy a municipal bond "fund" when you can buy municipal bonds.  funds are just another way of managers to skim off the top.

I am a Man I am Forty's picture

you can do that on your own, but I can see why people would do that if they were dealing with a small amount of cash, but i would still pick my own.

dark pools of soros's picture

is that $10,000 now or $10,000 benny blowup bucks???

gwar5's picture

Bill Gross is attacking by camel and very vocal

Finger pointing is going around

It's every billionaire for themselves

I'd still rather feel their pain

Things must be getting pretty desperate indeed

MsCreant's picture

Why pick on Whitney like this? So she has predicted nothing of merit lately at her company, so she is going back to her shock roots. Hmmm. Seems to me this whole muni thing is a prediction she is willing to go out on a limb about...

Just sayin'.

Tyler Durden's picture

There were many who were speculating that the muni situation is dire long before Whitney. This is nothing but a cash recycling ploy that benefits stocks. According to ICI we just had $2.7 billion in muni outflows, which money ended up going to stocks. Nothing could make Ben Bernanke happier.

MsCreant's picture

Hey Sexy,

You will still be my top pick for Wired's "Sexiest Nerd Pin-up Guy" of the year.

Everyone called her a sellout, pimpin' for GS or the Bernank, when she came out and made the call that the market was going to go up after the 2008 crash. I thought that call absurd. Then it went up. And up. 

All my bloggers I read made this muni call long ago (before the crash). Hell, all you need is to know what was/is happening with tax receipts. I could make that call. Meridith is a mainstream talking head. If you haven't noticed, most of them are late to the party or they never show. Relative to them (i know, not much to compare oneself to), she has been early to come out publicly and bring "mainstream attention" to the muni story. As wonderful as this blog, KD, Mish, Jessie, and more are, she has the cultural capital that people who are ignorant of alternative media WILL PAY ATTENTION TO. If she is too far out there with her calls, she will lose them. Saying this puts her position with Ma and Pa Kettle and their kids Joe and Jane six pack at risk. In a relative way she is out on a limb.

Could be she is whoring for Stanke Bernake and I have it all wrong. Could be she is playing a more subtle game than you might suppose.  

I need more of the story before I say she is only talking her book and working for our corrupt system.

New_Meat's picture

Ms.--well that was kinda' sloppy trolling for Ty. ;-O

But M?  I'd guess that she's making a rather ballsy call (obvious to us, but not public).  Why?  Most anyone who has munis says "but mine are insured".

We have a local money show (pretty good on personal finance) that has as routine guest host Susan Kaplan.  She shows up on Barrons top 100 "financial advisors" and is like the top independent woman in the top 100 woman's list.  She's almost conventional, except that she is proponent of 'managed' mutual funds.  And good funds imho.

Why do I bring this up?  b/c many of the folks in my circle say 'but the muni bond is insured' and can't get their minds around the AIG/LEH situation of the insurer vanishing.  Working on that, but tough sledding (on-topic, since we are exceeding all snow fall records).

- Ned

MrPalladium's picture

Perhaps you haven't heard the rumors going around the hedge community that the Fed staffers are suggesting that the Fed will "taper" its purchases soon, steadily decreasing the monthly amounts, but keeping the $600 bil total, so as not to subject the market to a June cliff dive.

Slow torture withdrawl of QE 2 might be an attempt to drive down equities and route money into long Tbonds. If QE-2 failed to drive long rates down, then perhaps withdrawl of QE-2 might. After all, the Govt. cannot benefit from inflation until it gets its average debt maturity well out past 7 years, so panicing retail money into the long end of the curve would make sense from the government's standpoint. If inflation is heading down the pike anyway, why not take advantage of it! What the long bond needs is a good deflation scare, so perhaps the Fed's purpose for QE-2 was not to goose stock prices but rather to drive down long term riskless rates just as the (criminally clueless) Chaircreature said.

Never assume that the actual consequence of policy was an unspoken design, when the simplest explanation for the consequence is likely to be a simple screw up.

Rainman's picture

Makes sense. Let us not assume these Fed peoples is smarter than they really are.

thepigman's picture

TRF has abandoned treasuries but is

sucking wind anyway on Gross' "safe

spread" strategy.

RockyRacoon's picture

Money will make its way from the digital printing presses to any significant fund with notable creditors.   The route will be disguised, obfuscated, and impervious to MSM analysis, of course, so it will go unreported.  Except on ZH naturally.

This has been the pattern and there is no indication that it will change.   Haircuts?  Ha!  Not in the cards.

topcallingtroll's picture

Interesting if Whitney was turned and is now the devil's servant, but  more than likely this is one last big call and roll of the dice for her.  However it is straight out of the new Machiavallian playbook to engage and hire those who have hurt you in the past, or those who could hurt you in the future.  Witness BP putting all the marine scientists and academic departments on retainer essentially.


I agree with Mad Hedgie for the prudent who have lots of assets and who are in the highest tax brackets some of the munis represent good value now. No I wouldn't bet the ranch on munis but a balanced portfolio with a skew toward collapse for those who like to predict the future could still include some carefully chosen munis.

Josh Randall's picture

Muni funds: secure your investments with cities that produce over 50% high school drop out rates, legitamately over 20% true unemployment, and 40% under employment rates, surging Food Stamps and other assistance programs, and college grads making Starbucks Barrista salaries ?? No thanks..give me the Gold y Silver

virgilcaine's picture

Baltic dry on ice.. have to go with Ms Whitney. Something big is brewing.


BDI will soon be in Triple digits, levels reached in the credit crisis of Early 09.

I luv that Gal.. Smart, Talented, Aggressive.. Blonde..




CrashisOptimistic's picture

Gross doesn't care if Meredith is right.  What he cares about is loss of Annual Expense Ratio in his Muni Bond funds.  It is **THAT** money that has him scared.

Deep's picture

Hey tyler, please keep this for your refrence, the idiot Lavorgna staetment,

CNBC had it



The Fed will begin a tightening of monetary policy after its quantitative easing program ends in June, with a gradual increasing of interest rates by the end of 2011 and into the following year, according to Deutsche Bank’s Joe VaVorgna.

With the second leg of the Fed’s QE program to run out in June, after it purchases another $600 billion of Treasurys to expand its balance sheet to nearly $3 trillion, it will then be faced with a tough choice of how to proceed.

Investors will be watching the move closely.

Nomura Securities’ Bob Janjua estimated earlier this week that QE2 has been responsible for 250 points of the S&P 500 rally since late August 2010. Pimco’s Bill Gross also attributes a chunk of the stock market gain to the Fed, putting the impact at 4,000 Dow points since it started intervening.

LaVorgna, Deutsche’s chief US economist, lays out his expected timeline:

As QE2 runs its course in June, the Fed at its June 21-22 meeting will announce that it will let its mortgage-backed securities run off its balance sheet and will not reinvest the proceeds in Treasurys, as it has been doing.

The Aug. 9 meeting will see a move toward reverse Treasury repos of about $500 billion that will allow the Fed to start unwinding its positions in government debt.


RELATED LINKS Current DateTime: 12:07:21 02 Feb 2011
LinksList Documentid: 41392256


After the Sept. 20 meeting, the critical “extended period” phrase will be notoriously missing from the Fed statement, signaling that the QE end is near. The central bank has been including “unusually low for an extended period of time” in all its statements since the initial QE began.

Following the Nov. 2 meeting, the Open Market Committee will signal a tightening bias and will supplement the reverse repos with term deposits.

The Dec. 13 meeting will see the Fed raise rates on interest on reserves to 0.5 percentage point, a signal that the current rate structure is coming to an end, with the result being that the funds target rate will move from its current zero to 0.25 percent range to 0.25 to 0.50.

From there, LaVorgna expects a series of quarter-point rate hikes as the Fed will be forced to tighten to keep up with economic expansion and, presumably, inflation.

Even though rates will start rising, LaVorgna says, “policy will have considerable room to tighten before it approaches anything considered “normal”, let alone neutral.”


sschu's picture

You may be right, but it is difficult to imagine the Fed raising rates in the face of 9% UE and 17% U6 heading into an election year.  The stock market would "adjust" big time and this would not be good for those trying to get re-elected.

Unless of course the PTB have made the decision that Bam has worn out his welcome as this would assuredly sabotage his campaign.

They have so little room to move right now, a real "black swan" would send the market down big time.


M2Market's picture

It is little wonder that we have Keynesian policies when TRF is being run by Neo-Keynesians.  Let's see what the fixed income market will look like if Peter Schiff runs the TRF and Marc Faber is the Special Economic Advisor to PRC.  The Muni mart will need to be printed back to zombie status.

alien-IQ's picture

I'm bettin the blond is right.

slackrabbit's picture

As a conspiracy theorist, I belive Whiney played the media at its own game.

Namely "Happy Talk" in the from of a white paper she knew they would accept after her last 'truther' moment.

'Happy' that she would walk the 'happy talk, she then did the unthinkable again - tell it like it is; but hey, once you live its all too late.

the states are bankrupt, just like US is, and many in the EU.

Pimco's just annoyed they could sell their trash on to other first...just mortgage backed securities 2-3 years ago.

ow, who wants to buy California

buzzsaw99's picture

Certain people will not take losses no matter what happens. You know the list.

robertocarlos's picture

Can we have pictures? I keep getting Merideth Whitney and Meg Whitman mixed up.

oogs66's picture

She's really not credible. Very superficial work on muni's. I think they are I trouble and so do a lot of other people. It's great cnbc has someone they can bring on to highlight problems with mubi's - it's just a shame they can't find someone who has the knowledge to compete with the big boys. Someone who could actually refute them with facts and figures rather than a stamping of prada stiletto's, a pout of the lip, a twirl of hair, and a 'coz I said so' response.

Prof Gulliver's picture

She's the female Assange. Lots of talk but little going on behind the curtain. Both do love to soak up the media spotlight, though.

dark pools of soros's picture

so she doesn't like condoms either??

PhotonJohn's picture

So Meridith Whitney made her little speech on January 12, 2 weeks after that equity inflows went down from previous weeks from 6.5 billion to 4.9 billion, corporate bonds went from 1.4 billion to 3.6 billion. Can we safely say they went into equities?

week ending 1/12 muni out flow was 2.4 billion
week ending 1/19 muni out flow was 5.8 billion
taxable bonds in flow was 1.4 billion 1/12 3.6 billion 1/19
equities were 6.5 billion 1/12 4.9 billion 1/19
so muni out flow increased by 3.4 billion
corporate inflow increased by 2.2 billion
equity inflow decreased by 1.6 billion

earnyermoney's picture

Wonder if Gross was thinking of Meredith when he penned that letter on female praying mantis bitting off the head of the male praying mantis during intercourse?

Zero Govt's picture

before we sleight Meridith any further anyone like to compare her accuracy against Bill Gross and his Pimco teams endless snake oil?

...uh, no didn't think so!

oogs66's picture

I would love to see her returns versus bill's. Real actual returns from her calls. When she made them. The good and the bad. Back to at least her start at Oppenheimer.

George Parr's picture

Inflows into equities at the beginning of the year = money flowing into 401K's
I put my 401K money to work early in the year, and that may be true of many more. Or not? Any thoughts?

bogey4's picture

" investing tens if not hundreds of billions in federally subsidized Build America Bonds"


I don't think there's that much outstanding in BAB's.  Could be wrong, but hundreds of billions strikes me as much too large.

High Plains Drifter's picture

If Gross keeps jacking with her, he had better watch his mouth,  because John Bradshaw Layfield, also of the APA, Acolyte Protection Agency, will be looking for a piece of his bony ass.

WTF2's picture

Send Al Arian back to Egypt.  Is he here on a green card?

Johnny Lawrence's picture

I've said this a few times.  There isn't a more despised asset class on the planet than bonds.  Brokerage firms are talking shit about them.  ZHers are talking shit about them.  There's nothing contrarian about disliking bonds right now.  In the most recent Barron's Big Money poll, only 3% of portfolio managers predicted bonds will be the best performing asset class over the next 6-12 months -- 62% chose equities, 15% precious metals, 6% cash.

When all the experts and forecasts agree, something else will happen. 

If you look at the muni's that have defaulted recently, it's been mostly legacy issues...all shitty municipalities to begin with.   I think you'll see drastic spending cuts and increased taxes before muni defaults occur in non-legacy issues.  And keep in mind not all issuers are cities/towns.  Harvard issues muni bonds.  Yale issues muni bonds.  I'd feel very comfortable owning those.

Just my two cents....

And I'm very bearish on the economy and market.


KickIce's picture

The wild card is that the states need their bonds to pay union pensions.  Obama has already lost the independents and unions are some of his main supporters.

ChicagoGenius's picture

DB posted a link to the MWAC Muni report, however, it was taken down yestderday PM.  Does anyone have a copy or link to the applicable report? Thx