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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Jim Willie CB who wrote (9057)7/11/2004 12:48:57 PM
From: Haim R. Branisteanu  Read Replies (4) of 116555
 
JW/ sorry you are not willing to stick your "neck out" but that is fine with me. Would appreciate to know were you think the equilibrium value of the USD is as we agree that is must go lower and you dismiss my 20% depreciation in the dollar index as hogwash - just wonder then what is the right level if you can enlighten me.

As to the manufacturing part, go trough this exercise - (yes there may be lots of errors but I think you will get the flawor).

Lets assume the following.

HWP makes a widget whose all direct labor is $35 and sell for $100.

At this rate it barely makes a profit therefore is moves manufacturing to offshore were direct labor is $4 to $5 transportation back to the US $12 and logistic and oversight expenses $3.

Because of offshore manufacturing HWP need to hold around 3 months of inventory of finished goods raw material and various parts. At interest rates of Libor + 2% this works out to ($60 * 0.8%) = $3.5 financing costs.

Net HWP earns $35 – ($4+ $12 + $3+$3.5) or $12.5, which equals 12.5% of the finished product.

Now if the USD is depreciating by 20% the FED will need to raise rates by at least 5% to 6% if not more, to compensate for inflation. Financing cost more than double to around $7.5 to $8, freight grows to $16 and labor $5.5. As such the relative saving slide by ($4+$4+$1.5) or about $9.5 less in profits which makes the product not viable economically or adding only 4% in cost savings.

Moving manufacturing back to the US will leave a gap of 4%, which is not enough to cover the risk of offshore manufacturing,

One can argue about my calculation but this example is reflecting what a substantial USD depreciation can do to the manufacturing sector

Net result - less imports and more manufacturing in the US
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