Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

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2/9/2005
Running Money, A Book Review by Michael Pomada

Running Money by Andy Kessler. It is what I would call a "popcorn & soda" book - reads just like watching a movie where everything is presented in bite sized, easy to digest chunks. It has the quick-version of the industrial revolution & how that pertains or doesn't pertain to the 'intellectual property' revolution currently occurring in the US. It also has some stories about his tech focused hedge fund in silicon valley, particularly about the trials & tribulations of finding the underlying, inimitable IP/product that will be the next important component in this or that new technology. all of this makes for an enjoyable, quick read, but it is fluffy.

"What a zoo," I said repeating myself. "H & Zoo. More like the H & Screw Conference," Nick quickly replied. "Who are all of these people?" I asked. "Well, it takes all types. See that guy drooling orange juice who looks like he just got out of high school? He runs the Fidelity Select Software fund....."

In chapter 7 he changes tone & topic to address the trade deficit. It is still 'dumbed down' in its presentation, but the concepts are salient & nicely illustrated: when you are exporting IP & importing physical goods you will run a trade deficit. Because of this trade deficit with the US, foreign countries will invest in the US (both financing the deficit & increasing stk market value).

"Let's open up that Toshiba laptop. With a $300 Intel chip (which has at least $250 in profit for Intel) and a $50 Windows license ($49.95 margin to Microsoft), the laptop is then sold by Toshiba back into the US for $1000. Toshiba and every other supplier are lucky if they make $50 in profit, combined, on the deal."

"So, while in this overly simplistic example, a $300 Intel microprocessor and a $50 Microsoft operating system are exported from the US, a $1000 product is imported, for a net trade deficit of $650. Yet on a profit basis, the US clears 300 bucks, and the rest of the world maybe 50."

His deficit theories run contrary to conventional wisdom & therefore were not well received. I am interested in what others more knowledgeable specs think about this line of thought, as I am a novice in understanding trade deficit economics.