Sunday, May 15, 2011

Random thoughts

So the Middle East seems to be escalating again, it's unclear if the nuclear reactors at Fukushima have been covered by any water since earthquake and just when everyone is predicting the pending collapse of the US dollar, the greenback has actually been staging a little rally.

When everyone thinks the market will zig, it usually zags...

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Oil should be $60-$70/barrel?

Under questioning from Senators the CEO of ExxonMobil said that based on current supply/demand dynamics, the price of a barrel of oil should be about $60-$70. This fits with my estimates that market demand is little changed over the past few years. The spread between this price and the current market price is probably explained by companies locking in prices via futures, uncertainty in the Middle East, and speculation.

This doesn't make it any less painful at pump but at least this adds some real facts to the conversation.

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Is the Chinese experiment over?

I think the Chinese economy has many years of strong growth ahead of it, but there are cracks starting to show around the foundation of the Chinese economic miracle. Companies often overestimate the cost savings by outsourcing and underestimate the additional cost of moving operations overseas. Many smaller businesses seem to be realizing this earlier than their larger competitors (perhaps because the larger companies have more invested overseas and aren't as nimble).

"For US firms, the decision to manufacture overseas has long seemed a no-brainer. Labor costs in China and other developing nations have been so cheap that as recently as two or three years ago, anyone who refused to offshore was viewed as a dinosaur, certain to go extinct as bolder companies built the future in Asia. But stamping out products in Guangdong Province is no longer the bargain it once was, and US manufacturing is no longer as expensive. As the labor equation has balanced out, companies—particularly the small to medium-size businesses that make up the innovative guts of America’s technology industry—are taking a long, hard look at the downsides of extending their supply chains to the other side of the planet."

If the dollar strengthens, it could put the brakes on this trend, but further weakens in the dollar would speed it up.

Cheers!

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