Blue Coat Systems: More Global Labor Arbitrage

We see in the news something I believe has been happening for many years, and continues ... under the surface, slowly but surely. I call it erosion because it is not obvious or a "big bang" emergency, but as we look around and ask where all the jobs went [Aug 14, 2009: No New Normal Say Some Economists, Prosperity Without Jobs?] while concurrently trying to create bubbles on 5 year cycles to create work, the truth can be seen in countless press releases.

Here is an example of some news with a technology company we have owned in the past - Blue Cost Systems (BCSI). As I wrote Thursday morning (and many times before) this increasingly flat world is great for capital, not so fun for labor. Especially labor in high cost countries...(we can argue its a net positive for labor in low cost countries). Speculators are correctly driving up the stock of Blue Coat (+14%) as "costs are lowered" - sort of ironic because what is good for this company, if extrapolated over countless examples the past 2 decades and many more in the future, is harmful to the domestic society as a whole.

• Blue Coat Systems (BCSI) Thursday morning said it will cut about 10% of its staff under a new restructuring plan. The company currently has a little under 1,500 employees.
• The company also said it will acquire S7 Software Solutions, a software R&D firm based in Bangalore, India, for about $5.25 million in cash. Blue Coat said it will shift some engineering positions from Sunnyvale (which is where the company is based and Austin, Texas to Bangalore and other locations. It is closing offices in Riga, Latvia; South Plainfield, New Jersey; and Zoetermeer, the Netherland. (sorry good people of Latvia - looks like even you are too expensive to pay)

Sunnyvale, Austin, South Plainfield, Zoetermeer, Riga: 0
Bangalore: 1

If similar to what happens in most companies; expect another victory in Bangalore in about 2-3 years as another tranche of technical jobs is moved out of Sunnyvale and Austin.

The question that needs to be asked is at what point can the government no longer borrow against future incomes to keep the balls juggled in the air. As people lose income one by one, government steps into the void, borrowing money we do not have to keep the Ponzi economy going. I suppose this can go on as long as we can print more money and hand it out in stimuli, and our generous lenders (many of which are taking the jobs) continue to hand us rope.

The gulf between the have and have nots continues to grow by the year, with the government furiously trying to bucket water out of the hull of the boat. While telling us this is just a cyclical issue... not structural. I've disagreed long ago. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] The effect on wages has been here for well over a decade now, and now that the bubble jobs have been destroyed, you are seeing what is out there as the tide goes out.

I will keep repeating it until I am blue in the face... deflation is necessary for the "average" American to be able to tread water. The cost of living needs to go down - period. [Aug 18, 2009: Bloomberg Opinion - Deflation Theory is Lemon We've Been Sold] Wages across countries are going to slowly but steadily move closer together - we can stay in denial as long as we want, but it is like fighting the immovable object. Fruitless. Using every government arm possible to try to inflate prices is just about the worst thing you can do to "the masses"... but that's the national policy / solution. Oh well ... I am sure I'll be repeating these themes in 2015 as the successor to Ben Bernanke will be trying to inflate us out of the next crash - because these policies that have failed repeatedly surely will work "the next time". For now, as long as fiat money creation makes the stock market go up - everything under the surface is dandy. (source: dogma)

I will repeat the questions I wrote in September as we are told this is healthy because the middle class of China (Asia) will soon create countless jobs in America by buying our goods (what goods exactly?) [Sep 14, 2009: Global Wage Arbitrade at the Micro Level: Marvell Technology]

1. How many years will take place between the displacement of workers "today" in America and the "middle class demanding things in China" from America?
2. What do we do with those workers in the meantime aside from plugging them into government work or pseudo government (healthcare)?
3. What will happen to the income of said "displacements" as they move out of jobs from a very good high tech company to... (crickets chirping)?
4. What exactly are Americans making today that the Chinese want and need to import excluding large scale industrial weapons / defense?
5. What exactly will Americans be making in "some day in the future" (5? 10? 15 years?) when the Chinese middle class get to a level of wealth and can buy things from us... ?
6. Whatever those products are you named in question 5, why can't the Chinese make them internally in 5, 10, 15 years?

Disclosure: Author does not own shares in Blue Coat Systems

Comments

[John Galt:]

<deflation is necessary for the "average" American to be able to tread water. The cost of living needs to go down - period.>

Don't worry, it is happening and it will continue to happen. Ben Bernake can print all the money he wants, but he can't force borrowers to borrow, banks to lend, and consumers to spend money.

In a world without a Federal Reserve/Treasury continuously printing money, deflation is actually a natural course of action. If the supply of dollars stayed the same and the population rose, your dollar would have more purchasing power. Also, as technology improves and the costs to produce go down, it takes less and less money to buy these cheaper goods.

But when you have a Fed/treasury manipulating the money supply to steal money from the middle class/poor to pay for wars, entitlements, government pensions etc....

Nov 06 09:06 AM

[tripleblack:]

Our Founding Fathers understood the dangers of things like the Fed. We have since lost this fear, to our collective regret.


On Nov 06 09:06 AM John Galt wrote:

> <deflation is necessary for the "average" American to be able to
> tread water. The cost of living needs to go down - period.>
>
> Don't worry, it is happening and it will continue to happen. Ben
> Bernake can print all the money he wants, but he can't force borrowers
> to borrow, banks to lend, and consumers to spend money.
>
> In a world without a Federal Reserve/Treasury continuously printing
> money, deflation is actually a natural course of action. If the supply
> of dollars stayed the same and the population rose, your dollar would
> have more purchasing power. Also, as technology improves and the
> costs to produce go down, it takes less and less money to buy these
> cheaper goods.
>
> But when you have a Fed/treasury manipulating the money supply to
> steal money from the middle class/poor to pay for wars, entitlements,
> government pensions etc....

Nov 06 09:21 AM

[leonf675:]

Generally, I find this article to be very on-the-point, but do you really think that deflating the cost of living will allow the US workers to compete with people who are used to surviving on $2 a day? The difference in the lifestyles cannot be simply addressed by deflation or by reducing the impact of foreign exchange games some governments engage in. It's going either take a major adjustments in terms of the quality of life (from both ends and in both directions) or require putting up major trade barriers.

America has pretty much lost its industrial base with the trend originating in the 70's and there isn't much we can offer to the Chinese middle class now or in the future given that they have the depth of their own poor, hungry and eager working class to support them for as long as needed.

I saw this link in today's posts by Doug Kass (bit.ly/4wZx4d).

Could this be a sign of the US government waking up to the reality of having to confront China and other emerging economies and a precursor of possible trade (or military) muscle flexing? If yes, then what would these trade wars mean for de-coupling of the US and Chinese economies and for the future of the Dollar and Treasure debt?

Don't get me wrong, - I am against unnatural, anti-competitive things like trade barriers, but I just don't see how we are going to be able to compete with the rest of the world when it's so flat and know-how is transferred so fast.

The other alternative is the "if you can't beat them, join them" mentality.

I think the only hope the US-based working masses have besides hoping that the government is going to put up protective barriers is to become capitalist owners in the newly emerging world order.

Generally, not to get all Marxist on you, but if we look at the world through the prizm of socio-economic classes, then majority of population in the developing countries can be viewed as Proletariat with their own emergring and strengthening Bourgeoisie while the majority of the developed Western world is then be made up of the class of capitalists with a very thin layer of service industry workers (since some local services cannot be easily outsourced abroad). The way out for the displaced and historically overpaid Western workers is to invest in the multinationals that moved their jobs oversees and hope their ownership interests are adequately protected against riots and takeovers by their government and military.

Nov 06 01:50 PM

[TraderMark:]

leon its not to win back business ... the business has already been lost and wages have stagnated for a decade

hence we need deflation just so americans (average, not the top 2%) get back to where they were a decade ago

What the "middle" guy in america is now facing is prices far higher than a year ago whereas he has made little progress on wages. Those in blue collar far worse as many have taken new jobs at 30%+ reduction. Many in white collar now learning that situation in past 18 months.

Thats why we need deflation.

A lot of these things are irreversible... the architect in Romania can draw a house plan up for far cheaper than the guy in Orlando. Etc.

Hence we need to adjust but instead we're doing the exact opposite - trying to inflate even further. Thanks for your ocmment.


On Nov 06 01:50 PM leonf675 wrote:

> Generally, I find this article to be very on-the-point, but do you
> really think that deflating the cost of living will allow the US
> workers to compete with people who are used to surviving on $2 a
> day? The difference in the lifestyles cannot be simply addressed
> and explained by the internal cost basis or foreign exchange games
> that the emerging economies engage in. It's going either take a
> major adjustments in terms of the quality of life (from both ends
> and in both directions) or require putting up major trade barriers.
>
>
> You are absolutely right, America has pretty much lost its industrial
> base with the trend originating in the 70's and there isn't much
> we can offer to the Chinese middle class given that they have the
> depth of their own poor, hungry and eager working class to support
> them for as long as needed.
>
> I saw this link in today's posts by Doug Kass (bit.ly/4wZx4d).
>
>
> Could this be a sign of the US government waking up to the reality
> of having to confront China and other emerging economies and a precursor
> of possible trade (or military) muscle flexing? If yes, then what
> would these trade wars mean for de-coupling of the US and Chinese
> economies mean for the dollar and Treasure debt?
>
> Don't get me wrong, - I am against unnatural, anti-competitive things
> like trade barriers, but I just don't see how we are going to be
> able to compete with the rest of the world when it's so flat as you
> describe.
>
> The other alternative is "if you can't beat them, join them" mentality.
>
>
> I think the only hope the US-based working masses have besides hoping
> that the government is going to put up protective barriers is to
> become capitalist owners in the newly emerging world order.
>
> Generally, not to get all Marxist on you, but if we look at the world
> through the prizm of socio-economic classes, then majority of population
> in the developing countries can be viewed as Proletariat with their
> own emergring and strengthening Bourgeoisie while the majority of
> the developed Western world is then be made up of the class of capitalists
> with a very thin layer of service industry workers (since some local
> services cannot be easily outsourced abroad). The way out for
> the displaced and historically overpaid Western workers is to invest
> in the multinationals that moved their jobs oversees and hope their
> ownership interests are adequately protected against riots and takeovers
> by their government and military.

Nov 06 01:59 PM