Kilroy was Here

By: Rob Kirby | Wed, Oct 12, 2005
Print Email

This past weekend saw automotive parts giant Delphi [NYSE: DPH] file for Chapter 11 bankruptcy protection for its U.S. operations. For those who may be unaware, Delphi is the largest auto parts maker in the U.S. and it was 'spun off' from GM back in 1999. Like GM, Delphi has recently been publicly vocal about their legacy costs - citing the crippling effect of rising costs of health care benefits.

"Like GM, which is seeking changes in the health insurance portion of the contract, Delphi also has complained about the rising cost of health care. GM's annual bill for health care has increased 20 percent in a year, according to GM executives."

Delphi and GM are not alone in this respect. Interestingly, other long established mature industries are encountering the same types of 'legacy cost' strain on their operations as well. The troubling situation the airline industry currently finds itself in is also in large part due to rising legacy costs which are typically 'spun as' or assume the public face of failing business models or under funded pension plans.

"Twenty years ago, 40 percent of American workers were covered by traditional pensions known as defined-benefit plans. Today that number's dropped to 20 percent. As the Bethlehem Steel and United examples show, even that 20 percent may not be able to count on what they've been promised."

Pundits are often quick to lay blame for these dislocations at the heels of outsourcing or 'globalization' - as related by Michigan's Governor, Jennifer Granholm:

"Globalization is ravaging Michigan's manufacturing job base. Delphi's decision will undoubtedly have a ripple effect through Michigan's economy -- an economy already reeling from outsourcing."

What About Good Ole Fashioned Corporate Greed?

Some, if not many, would have it that outsourcing, along with under funded pensions and the like are the result of corporate greed. Could this really be the case? Perhaps, but in a piece I penned in this space earlier this year - I outlined how GM's recurring pension shortfall [negative cash flow resulting from pension asset's return] was roughly equivalent to 500 basis points [5%] shortfall on the fixed income portion of their pension assets. If one takes the time to revisit a most excellent interview of John Williams - by none other than Jim Puplava - which aired back on July 23, 2005, you might be surprised to learn that some researchers [yours truly would also fall into this camp] believe that inflation statistics are perhaps UNDERSTATED by as much as 500 basis points. If such is the case - one could argue that corporations have indeed built well thought out - sustainable infrastructure[s] to look after their own.

Would Everyone Not Be Affected The Same?

A great question to ask [patting myself on the back!] but in a land that espouses the virtues of 'free trade' and 'free markets' - if we look a little bit just under the surface - we can readily see that some companies or, shall we say, industries - are created a little more equal than others. In a seminal piece penned by Professor Robert Bell - we learn that some companies, and more specifically the defense establishment and their pension plans - are insulated from the vagaries of the market place as outlined in Professor Bell's adroitly penned, The Invisible Hand (of the US Government) in Financial Markets:

"There is even a potentially unlimited source of money to do this pumping. Federal government contractors operate under a special law, CAS, in their defined benefits pension plans. This gives them stock portfolio insurance, something which small fry players would obviously like to get, but can't find anyone willing to issue. Should the pension funds of the federal government contractors lose money in their investments to the degree that they fall below minimum reserve requirements imposed by other federal laws, they can simply make up the difference by adding it on pro-rata to subsequent items sold to the federal government. The vast sums of federal tax money devoted to plugging the holes in the pension fund for the largest Pentagon contractor, Lockheed Martin, were discovered by Ken Pedeleose, an analyst at the Defense Contract Management Agency. He was concerned about staggering cost increases for the C-130J transport but a chart he made public showed the mind boggling per plane cost increases for a number of Lockheed Martin airplanes. The chart amounted to a Rosetta Stone for the military-industrial complex. It showed, essentially, how the military-industrial complex linked to the stock market through the Lockheed Martin pension fund, and by extension through all the others covered by the same law."

These and other revelations brought to our attention by Professor Bell go on to explain how certain players, namely Central Banks - 'play' the treasury [bond] markets thus enabling them to effectively rig markets:

"Since the money comes from a handful of foreign central banks, the possible rigging of the Treasury market equals the possible rigging of the foreign exchange markets. These central banks have to buy dollars before they buy Treasuries. Even Alan Greenspan has acknowledged that the two go together, admitting that Asian central banks "may be supporting the dollar and U.S. Treasury prices somewhat."


The reason all of these things outlined above need to happen is as follows:

For all technicians out there - I would like to simply comment that what is presently occurring in financial markets today - is nothing more than history repeating itself - and I did not need a chart to discern any of this. I only needed to read a history book!


Rob Kirby

Author: Rob Kirby

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

All Images, XHTML Renderings, and Source Code Copyright ©