Wednesday, December 17, 2008

Adobe and the Capitalist Firing Squad

Did you hear about the leftist firing squad?

Everybody stands in a circle and fires at each other.

So now lets talk about the capitalist firing squad. They are in a circle now, blazing away, and hoping the government will intervene to

They are not firing bullets (yet); they are firing people.

I thought of this because I listened to Adobe (the software makers of Acrobat and Flash fame) management do their analyst conference yesterday. You can read my financial commentary on Adobe at Dissecting the Bull. Here I want to remind people about how selfishness can be negative even for the selfish (in contrast to the Adam Smith inspired sentiment that greed is good for society).

Adobe is immensely profitable. In the latest quarter they had profits of $320 million on revenues (sales) of $915 million. They say they would have done better if we were not in a recession.

So what are they going to do? Their profits were up 10% from a year-earlier, at a time when a lot of people and companies are in a world of hurt. But their response is to fire a large percentage of their employees. Actually, apparently the pink slips went out at the beginning of December.

Those employees will respond to their own personal situations by cutting their spending. Joining other laid-off workers, they will contribute to a macroeconomic spending downturn. Other companies, feeling less demand, will do another round of layoffs. Perhaps compelling Adobe itself to lay off more workers in 2009.

You can understand layoffs when a company is losing money. But Adobe is not the only company that is firing people just to keep its stock price up. Practically every profitable company I have paid attention to has done the same. They have absolutely no loyalty to their workers. If the past is any indicator, corporations will lay off some of their best workers and keep the ones whose main characteristics are lip puckering and back stabbing.

I believe we are actually in a fairly typical cyclical economic downturn. For the usual reasons, probably in 2009 we will realize that the bottom is behind us. Companies will start hiring again. The capitalist firing squad will go back to its usual anarchistic ways. Housing led us into the recession and will probably lead us out of the recession. Very few new homes are being built right now, and with interest rates and housing prices low, excess inventory is beginning to be sucked up (except when it was built in the middle of nowhere) [See California Housing Dynamics]

On the other hand, if the capitalists close their circle tighter and shoot more accurately than I expect, there is still a possibility that they can turn a recession into a depression. Then it will be the leftists turn to go hunting among the disillusioned and hungry.

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