Wednesday, April 30, 2008

China's ascendancy

This is the first time I've heard anyone say just 'give up' , you won't be able to compete with cheaper workers overseas, particularly you IT workers :

For individuals: You can avoid competition with Chinese workers by doing place-based work, which ranges in value from highly skilled (emergency-room surgery) to menial (pouring concrete). But the many people who do information-based work, which is most subject to competition, will have to get dramatically better to be worth what they cost. For government leaders: Improve U.S. education above all.

Of course he throws in the obligatory 'more education' argument , but leaves out the critical part: What industry/jobs should anyone pursue education in that can't be done overseas and cheaper ? He does mention that we should do 'place-based' work ... so maybe he wants everyone to go back to school to learn to work in 'emergency-room surgery' ?

The vast majority of the new jobs and industries that will be created in the coming years will be work that is digitized. Because of this, it can be performed anywhere in the world . So new technologies do NOT hold hope for Western workers .

Even a lot of medical work is moving overseas (perhaps not emergency room work) from analyzing test results that are digitized and sent around the work in seconds to doing surgery and dental work overseas for a fraction of the cost.

And teachers are viewed as place-based work but teaching may soon shift dramatically to being online or at least having some significant component of coursework being online.

There is not enough 'place-based' work to substitute for the mass of work being shifted overseas and at the same time, even if this could happen , there would be a surplus of people competing for 'place-based' work leading to significantly lower wages.

The only things that will slow this globalization down are:

1- Political instability in the world (good chance)
2- Energy getting expensive makes the world larger , not smaller (happening now)
3- Unchecked markets destabilizing countries (happening now with food and also oil)

April 30, 2008: 5:41 AM EDT

You have 7 years to learn Mandarin
Forget cheap imports. China's rise will soon be a force on Wall Street and Main Street and in Silicon Valley.
By Geoff Colvin, senior editor at large

(Fortune Magazine) -- Back in 2001 when the International Olympic Committee chose Beijing as the site of this summer's games, the event was meant to mark China's debut as a player on the global economic stage. But a recent study by the economist Angus Maddison projects that China will become the world's dominant economic superpower much sooner than expected - not in 2050, but in 2015.
While short-term investors are already cashing in on China's growth by playing the global commodities boom, smart long-term thinkers are contemplating what happens when China matures from an exporter of cheap goods to a competitor in sectors where the U.S. is dominant - technology, brand building, finance. China has almost wiped U.S. makers of low-value items like toys and socks, but by 2015 it may threaten Apple (AAPL, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500), and Procter & Gamble (PG, Fortune 500). It will increasingly influence the S&P 500 and the mutual funds in our 401(k)s. So it's worth looking at how that will happen, what it means, and what anyone can do in the seven years before the baton is passed.
Just using the exchange rate to convert China's GDP into dollars isn't helpful in comparing the two economies, because China controls its exchange rate; by that method, China's economy might not pass America's for decades. Exchange rates apply only to tradable products and services; they aren't very useful in valuing nontradable goods in a country like China that is much poorer than the United States. So we need some way to compare the real value of China's economic output with America's, and economists have developed one. It is called purchasing power parity.
For example, Chinese construction workers earn a whole lot less than Americans do, yet they can still build top-quality buildings. If we used the exchange rate, the value of a new skyscraper in Shanghai would count much less toward China's GDP than an identical building in Chicago would count toward America's, which makes no sense. Purchasing power parity corrects the problem.
Will China take the crown?
Angus Maddison's forecast (which uses purchasing power parity) isn't built on outlandish assumptions. He assumes China's growth will slow way down year by year, and America's will average about 2.6% annually, which seems reasonable. But because China has grown so stupendously during the past decade, it should still be able to take the crown in just seven more years.
If that happens, America will close out a 125-year run as the No. 1 economy. We assumed the title in 1890 from - guess who. Britain? France? No. The world's largest economy until 1890 was China's. That's why Maddison says he expects China to "resume its natural role as the world's largest economy by 2015." That scenario makes sense.
China was the largest economy for centuries because everyone had the same type of economy - subsistence - and so the country with the most people would be economically biggest. Then the Industrial Revolution sent the West on a more prosperous path. Now the world is returning to a common economy, this time technology- and information-based, so once again population triumphs.
So how should we make the most of our seven-year grace period? For companies: Focus on getting better at your highest-value activities. Just because the Chinese will be fighting you in the same industries doesn't mean you'll lose. (Investors, remember that China bought $3 billion of Blackstone (BX) at the IPO price of $31 last summer, and the firm is now trading at $19.) It only means you'll have to work harder to win.
For individuals: You can avoid competition with Chinese workers by doing place-based work, which ranges in value from highly skilled (emergency-room surgery) to menial (pouring concrete). But the many people who do information-based work, which is most subject to competition, will have to get dramatically better to be worth what they cost. For government leaders: Improve U.S. education above all.
Those are the issues in China's becoming No. 1 that we most need to focus on. And as with so much else in China's recent history, we'll need to worry about them much sooner than we expected.

Monday, April 21, 2008

What's left for the American worker?

Research science, the final frontier (in offshoring/outsourcing) .... let them do it overseas and we can then ' convert the scientific know-how from abroad into market gains and profits. ' .... Like Einstein and the European physicists who did the work on subatomic structures and then Americans raced to create the bomb and also the nuclear industry ...

We'll be more and more just the 'idea people' and marketeers . What makes these guys think that overseas people can't also figure out how to use new scientific findings and turn them into marketable products ?

Remember when offshoring supposedly meant shipping dirty, hard or mindless, repetitive work overseas ?

Some of the comments are pretty blatant and extraordinary .

The bad news is that there is no work left for anyone in the US that can be done economically.
The good news is that at least we don't have to crack open math or science books.

I particularly liked this quote:
In the short-term at least, higher spending on scientists by India and China could create a glut of them in these countries, driving wages down further and making the costs of acquiring science even lower.

More workers drives down wages ? This directly contradicts what Bill Gates and other corporate business people say, that we need lots more H-1B workers here because of the high demand for their unavailable skills.

April 20, 2008
How Scientific Gains Abroad Pay Off in the U.S.
AT a time of economic belt-tightening, might cheap science from low-wage countries help keep American innovators humming?

Americans have long profited from low-cost manufactured goods, especially from Asia. The cost of those material “inputs” is now rising. But because of growing numbers of scientists in China, India and other lower-wage countries, “the cost of producing a new scientific discovery is dropping around the world,” says Christopher T. Hill, a professor of public policy and technology at George Mason University.

American innovators — with their world-class strengths in product design, marketing and finance — may have a historic opportunity to convert the scientific know-how from abroad into market gains and profits. Mr. Hill views the transition to “the postscientific society” as an unrecognized bonus for American creators of new products and services. ( Steve's note -> note that this bonus is only for the 'creators' of products)

Mr. Hill’s insight, which he first described in a National Academy of Sciences journal article last fall, runs counter to the notion that the United States fails to educate enough of its own scientists and that “shortages” of them hamper American competitiveness.
The opposite may actually be true. By tapping relatively low-cost scientists around the world, American innovators may actually strengthen their market positions.

“We shouldn’t fear the rise of science in Asia and other poorer countries. We should figure out how to take advantage of it,” says Patrick Windham, a lecturer in technology policy at Stanford and a former staff member of Congressional science committees.

Optimism about scientific globalization is a wrinkle on the familiar story of outsourcing. Just as United States companies have contracted out physical production, they can do the same for scientific “goods,” which range from formulas and ideas to the results of experiments.

In the short-term at least, higher spending on scientists by India and China could create a glut of them in these countries, driving wages down further and making the costs of acquiring science even lower. (exactly the process that business denies is happening now in other fields) .

Science is the ultimate global activity,” says Richard B. Freeman, a labor economist with the National Bureau of Economic Research. “You can outsource research.

Mr. Freeman, among others, questions whether there is a shortage of scientists in the United States. He cites evidence suggesting that American dominance in science will decline over time and that we should worry less about purported shortages at home and more about “developing new ways of benefiting from scientific advances made in other countries.”

Of course, scientific knowledge isn’t a thing, like a child’s toy or an electric motor, so the day may never come when “science” can be purchased from a Chinese or Indian catalog. For the foreseeable future, United States companies will need their own highly paid scientists “to evaluate the purchase of foreign science and to make sense of it in their own labs,” says Daniel Sarewitz, director of the Consortium for Science, Policy and Outcomes at Arizona State University.

While the United States is expected to remain the home of choice for the world’s best scientists for some time, industry is increasingly striking deals with scientists in developing countries eager for wider exposure.

Seagate Technology, a leader in digital storage, pays scientists in Singapore to do basic studies, and even benefits from subsidies given those scientists by Singapore’s government, making the relationship even more affordable. Seagate runs a research laboratory in Pittsburgh. Roughly 10 to 20 percent of the lab’s budget for outsiders goes to scientists working abroad.

Benefiting from foreign science isn’t new. Last October, the Nobel Prize for physics, for instance, was shared by French and German scientists for their basic discovery of what is known as the “giant magnetoresistance” effect, which enables much more digital data to be stored on a disk drive. The breakthrough, by Albert Fert and Peter Grünberg, had essentially no commercial impact in Germany or France. But by using open scientific literature and attending conferences, Seagate found ways to capitalize on the breakthrough, which had been financed by European governments.

“This is a really good example of how foreign scientists help,” says Mark Re, Seagate’s senior vice president for research and head of the company’s research center in Pittsburgh.
Commercializing science isn’t easy, which is the main reason that rising scientists from India, China and other countries can’t readily achieve business success. In the case of the magneto effect, Seagate engineers ended up using different materials — at different temperatures — than the Nobel winners.

“We made the big step to get the scientific advance into products,” Mr. Re says. “And then we had to manufacture hundreds of millions of them. This is a very different challenge.”
PRECISELY because the gap between basic science and commercial innovations is large, Mr. Hill’s postscientific society makes sense to innovators on the front lines. One implication for the future is that the United States “won’t have to import so many scientists,” says Stephen D. Nelson, associate director of policy programs at the American Association for the Advancement of Science.

The association, which for decades has generally favored policies to expand the ranks of American scientists, is devoting a portion of its annual policy seminar next month to talk about the “postscience” situation.

Industry, meanwhile, is adapting to a world where scientific goods can come from anywhere — and fewer scientists work on abstract problems unrelated to the market. “It is no accident that many corporate labs have fallen apart,” Sean M. Maloney, executive vice president of Intel, says. “They were science farms looking for problems.”

Monday, April 7, 2008

Winning a lottery every day

Remember Steve Austin, the $6 million 'bionic' man ? That was supposed to be an amount of money to inspire awe in the vast majority of TV viewers back in the '70s .

Nowadays compensations for Hedge fund managers have regularly topped $1billion , for ONE YEAR's 'work' . Here's the new record, double last year's record, $3 billion .

Is one person worth $3 billion to any enterprise on earth ? Probably not, but there it is .

Most of us don't understand very large numbers (such as a $3 trillion ANNUAL federal budget !!) but their meanings become clearer when brought down to some easily understood context ... such as an hourly wage .

For those interested :

$3 billion (top Hedge Fund compensation) is 500 times the $6 million cost of a bionic man in the '70s .

$3 billion is $250 million / month .

$3 billion is $57.7 million / week .

$3 billion is $11 million / day

$3 billion is $961,500 / hour (assuming he works 60 hour weeks , for 52 weeks)

If he takes off a month to enjoy his earnings, bump everything up by another 8% or so , i.e. his hourly would be around $1.04 million / hour .

This is something we can all understand:
$11 million / day !!! Imagine winning an $11 million lottery every day for 365 days in a row !!!!

Pity the poor CEO today who gets only $30- 50 million or so ... $30 million is only 1% of $3 billion . Or to put it another way, the CEO would have to work 100 years at $30 million to get one year's compensation of this top hedge fund manager.

The hourly rate for the $30 million CEO is 1% of the Hedge Fund mgr's, or about $9,600 / hour.

Contrast this to an 'average' IT employee. The rule of thumb is that companies save $100K for every employee laid off. This is an average individual compensation, plus benefits and some other 'overhead' (room, electricity, office supplies, printing, etc) amortized per employee . A good round number to work with.

$30 million (CEO) = $100K (employee) x 300 . It would take the average employee 300 years to earn what the CEO earns in one year.

Hedge Fund mgr = $961,500 / hour (60 hour week)
CEO @ $30 million = $ 9,600 / hour (60 hour week)
Avg IT worker = $ 38 / hour (50 hour week)

April 7, 2008
Hedge Fund Managers Make Mint on Housing Crisis
Filed at 7:08 a.m. ET
BOSTON (Reuters) - Millions of Americans may be facing the prospect of losing their homes, but a handful of fund managers have become the best paid in their industry -- taking home 10-figure paychecks last year -- by betting against mortgages.
John Paulson, who ran a medium-sized fund until last year, zoomed to the top of the industry's earnings table when he took home an estimated $3 billion in 2007, double what the top earner made in 2006, according to data released by magazine Trader Monthly on Monday.
By standing conventional wisdom on its head and deciding that housing prices could decline on a national level, and that investment-grade mortgage bonds would be subject to default in record numbers, Paulson, 52, set a new record for payouts on Wall Street, industry analysts said.
Paulson's $3 billion payout is equivalent to $26 for every U.S. household (114.4 million in 2006).
This year seems to be no worse for Paulson as his Advantage Plus fund was up roughly 8 percent through the middle of March. Many other hedge funds, however, are suffering heavy losses, with industry analysts estimating the average fund lost 5 percent in the first quarter. Hedge funds often promise to make money in all markets by using tools, such as shorting, that are off limits to other money managers.
Following behind is Phil Falcone, 45, whose shrewd housing market bets at Harbinger Capital Partners netted him a $1.5 billion payout. Falcone, a former Harvard hockey star, also made headlines by demanding changes at the New York Times Co .
As a group, the 100-best paid hedge fund managers earned $30.3 billion last year, 26 percent more than they took home in 2006, the magazine reported.
Both Paulson and Falcone squeezed past Jim Simons of Renaissance Technologies and Steve Cohen of SAC Capital Advisors, perennial top earners who each took home between $1 billion and $2 billion in 2007.
Some of the previous year's top earners, however, fell far down the list and ESL's Edward Lampert dropped off completely as his investments in Sears Holdings Corp and Citigroup Inc soured last year. Citi wrote down billions on housing market losses.
John Arnold, who topped the 2006 list with a $1.5 billion payout he earned by taking the other side of a bet that felled Amaranth Advisors, made between $400 million and $450 million in 2007, the magazine reported.
Veteran oil trader T. Boone Pickens topped up his personal fortune with a $300 million to $350 million payout in 2007, a lot less than the $1 billion he took home in 2006.