• A rumor flew around Wall Street yesterday. "Some big hedge funds are in trouble. They didn’t expect the way GM and Ford bonds are being written down. There are some huge derivative positions that are coming unhinged."
We did not know what to make of it. How could anyone be dumb enough to be surprised by the automakers’ bonds? Everyone knew it was coming.
But when everyone knows something, no one knows anything at all. And when traders, investors, speculators, and average Joes all know the same thing — especially when it isn’t true — it has a way of "blowing up."
Colleague Dan Denning handed us a little passage from a book entitled Liquidity Black Holes:
"Episodes of high volatility reflect not a market adjustment to a more stable position, but a market disruption: where price changes no longer help to clear a market, but help to destabilize it… where they [markets] break down."
Fait tails happen, dear reader.
• And it’s not only the automakers that have gotten themselves into major trouble…
Late Tuesday, a bankruptcy judge in Chicago approved the transfer of $6.6 billion of United’s pension obligations to the government’s Pension Benefit Guaranty.
Delta Airlines isn’t looking any better, with $3.15 billion that they have to pay into its employee retirement plans over the next three years — and that’s in addition to the $450 million it will pay this year.
Karim Rahemtulla predicted these pension pains almost two years ago:
"In the eighties, the U.S. teetered on the verge of exporting the majority of its manufacturing to third-world countries. Other countries quickly caught up: in the nineties, the Japanese could crank out a car in half the time of American companies, and the Chinese were finally getting the hang of capitalism.
"Back home, things changed, too — for the worse. The giant corporate handouts in the form of lucrative retirement pensions persisted for many of the largest industrial companies. But the money stopped flowing in at the same rate and with the same margins.
"The result? Deficits in the pension plans."
• And here’s an amusing little item about the welfare state we’re in:
England has a well-intentioned program to help people with disabilities get around town. The government’s "Motability" scheme pays for automobiles for people on public assistance. So along comes Sheikh Omar Bakri Mohammed — known locally as the "Tottenham Ayatollah" with a gimpy leg and a request for a $50,000 Toyota Previa. The car had to have satellite navigation, cruise control, leather seats, AC, and tinted windows, to told the dealer. And why not? British taxpayers are paying for it. He’s got a right to it.
The Sheikh has urged young Muslims to become suicide bombers, says the report in the Daily Mail. He has already received nearly a half million dollars in state aid for his large family.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.