If the U.S. economic recovery accelerates later in this decade, Meredith Whitney thinks any such boom would be most pronounced in the central corridor from Texas to the Dakotas. This energy- and agriculture-rich region characterized by low tax rates and debt levels is poised to grow at a much faster rate than other parts of the country where tax rates and debt levels are much higher, Whitney told attendees at the second annual Fiduciary Gatekeepers Investment Research Managers conference in Boston earlier this month.
The U.S. is a mirror of Europe, albeit a somewhat prettier one. Central Europe, Germany in particular, is doing noticeably better, just like the U.S. energy and farm belts. In contrast, the coastal regions on both continents, where big banks went bust and expensive home prices got slammed, are struggling.
Whitney, who heads her eponymous financial research firm, noted that rates of consumption in states like Texas, Oklahoma, Kansas, Nebraska and the Dakotas are rising at 33 percent higher levels than in the big-spending states on the coasts. "A Texas consumer has one-third of the debt as a Californian consumer and is twice as likely to be employed," she said.
For investors, small, well-run, strongly capitalized banks in the central U.S. might find a lot of room to run as consolidation in the banking industry has left many regions under-banked. It's one reason why companies like American Express and Wal-Mart are devising cards that perform many of the same functions as banks.
Smaller banks are better positioned than big banks because it is easier for them to capitalize on shrinking revenue and expense pies. They also have regulators on their side. "U.S regulators want big banks to get smaller and small banks to get bigger," she said.
As for municipal bonds, Whitney said she expected that market to enter a period we "haven't seen in 90 years." A municipal borrower's willingness is "becoming an issue down the food chain." It is even becoming a "bigger issue than what does the contract" say, much like public pensions.