Meredith Whitney’s claim to fame is her now famous October 2007 prediction that Citigroup would have to raise capital, sell assets or cut its dividend.  Since that time she’s proven a one-hit wonder.

As 2010 came to an end she panicked many an investor during a 60 Minutes interview when she predicted “hundreds of billions” of dollars of muni bond defaults in 2011.  It would be naïve to think this didn’t play a part in outflows from muni bond funds during the first half of this year.

How’s the prediction faring so far?  Midway through 2011 defaults are nowhere near the $200 billion predicted.  The running total is…wait for it…$746 million according to Income Securities Advisor (“ISA”).  Defaults are less than 0.4% of her prediction.

Defaults peaked in 2008 at $8 billion and according to ISA have dropped significantly since that time.  Why?  Despite the well publicized problems of states such as Illinois and California the ability to raise taxes and cut spending keeps bond payments current.  In addition improving local economies have translated into increased income and sales tax revenues.

State and local governments have a powerful incentive to keep bondholders happy.  Debt is an important financing tool and the ability to access capital is crucial.  Defaulting on current obligations is no way to make potential future bond buyers confident.

If you’re one of the fortunate ones to capitalize on the opportunities in the muni bond market then kudos to you.  If you’re one of the unlucky who fell prey to the herd’s love affair with predictions and one-hit wonders then it cost you dearly.  Let’s hope it’s a lesson learned.