Rip Van Whitney: Is Bearish Meredith Snoozing?

Includes: KBE, KRE, XLF
by: Tom Brown

I admit to being, in a weird, upside-down-and-backwards kind of way, a bit of a Meredith Whitney fan. It’s true that when I read her stuff, I have trouble figuring out just what the hell she’s talking about. But that’s the case, to a lesser degree, with a lot of banking research I see.

On the other hand, Meredith’s definitely her own woman. The two of us were on a panel together at a research conference in Baltimore not so long ago, and I found her to be forthright and utterly sincere. I might not be able to make head or tail of the stuff that comes out of her mouth but, trust me, she means every word.

Anyway, Meredith had me baffled yet again this weekend as I read the interview she did with Charlie Rose in Business Week. I got so confused I had to re-check the date of the issue: Meredith seems to not be aware that the past twelve months have even happened. Instead, she’s apparently in her own little, ever-bearish Meredithland.

Look, for instance, at her take on the jobs outlook. A year after the apparent end of the recession, she seems to believe the economy is still flailing. “I think there are massive structural problems underpinning the employment picture in the U.S.,” Meredith tells Rose. “Small businesses . . . have no way to fund themselves. So they're out of the game. You're left with the large corporate sector, which has shed only 3 million jobs. So it's mathematically impossible to get to a constructive job growth scenario.”

Mathematically impossible” for the job picture too improve? Really! Well, I’m sure she’s run her numbers. Still, the monthly jobs reports over the past year have looked more or less the way one would expect following of the end of a recession. In May of 2009, the economy lost 439,000 jobs. In May of 2010, it gained 427,000. In the interim, some monthly jobs reports have come in stronger than expected, and some weaker. But if you stand back and look at the progression as a whole, it’s been a line pointed straight up. Whether a “constructive job growth scenario” is mathematically impossible or not, it’s happening anyway.

As to the stock market itself, meanwhile Meredith seems to have turned off her Bloomberg off and stopped buying newspapers. “[T]he market's rise [over the past year] was really driven by expectations that earnings and unemployment would be far better than they've turned out to be,” she says. “As we get into the second half of 2010, the hope for 2010 has diminished because the package of economic data has been disappointing.”

No! As Alan Blinder pointed out in the Wall Street Journal this week, economic growth over the past year has been wildly better than anyone had dared expect (including Blinder himself, and he’s been King of the Optimists). Everything from GDP growth to corporate earnings to the unemployment rate has improved faster than anyone dreamed they would a year ago. The economic data hasn’t been “disappointing.” Relative to expectations, the numbers have been stupendous. Which is why the stock market has been on a tear. Everyone but Meredith Whitney seems to understand that.

Just one more, and I’ll leave the poor woman alone. A year after the recession, Meredith continues to be worried about the state of consumer balance sheets. “[Y]ou have the unavoidable issue of the consumer delevering. That means homeownership going from 70 percent probably back to 64 or 65 percent.”

Oh brother. Actually, “delevering” is just Meredith’s polite way of saying “defaulting,” which, as you might have noticed, U.S. consumers have already been doing for awhile now. Total household debt has fallen for seven quarters in a row. And as that has occurred, the consumer’s ability to service his debt has improved markedly.

According to the Fed, the household debt service ratio (debt payments divided by disposable personal income) has fallen for five straight quarters, through the fourth quarter of 2009, and is now at its lowest level since the third quarter of 2000, when we were all still worried about the dot-com bubble. (As for the homeownership rate, it’s down to 67.1% from a peak of 69.2% in the fourth quarter of 2004. That’s its lowest level since the first quarter of 2001.) So the delevering that Meredith is so worried about is already well underway.

“I am more bearish than I’ve been in a year,” Meredith pronounces. Which means, if you’ve been listening to her lately, that she’s pretty darn bearish. And I’m sure she is. Then again, she has a funny way of showing it: earlier this week, Meredith upgraded two of her four remaining “Sells” to “Hold.” Ah, I see she’s confusing you now, too.

Meredith Whitney is obviously entitled to be as negative on the stock market and the banking business as she wants. (She looks for a double dip in housing at the end of this summer, for example. We’ll see.) But it’s not too much, I don’t think, to ask that she inhabit the same reality the rest of us do.

And as it happens, that reality is a whole lot more constructive than she seems willing to admit.