An Alternative View of the Trade Deficit

A lot of to-do has been made all around the Street over Wednesday's release of the so-called astonishing trade deficit numbers for October. RealMoney contributors got into a small debate over it Thursday in Columnist Conversation, too.

The trade deficit hitting $60 billion in one month -- as Steve Leisman from CNBC noted Wednesday night on Bullseye -- is equivalent to the entire fourth quarter's trade deficit at the top of the bubble in 1999. Hey, that's some astonishing growth, and the traditional economists are rightly up in arms trying to figure out what such a deficit means.

Before declaring the trade deficit numbers as the precursor to the end of the U.S. economy and stock market, let's point out a few nuggets to chew on. First, I'd just note that the same permabears who are all over this number are in many cases the same ones who argue all the time that the government's inflation numbers and/or employment figures are all sleight of hand and bunk. Don't you just love having one's cake and eating it too? Are the governments meaningful or aren't they? Usually the answer is, only if they work in one's thesis.

I take any of the numbers from our bureaucratic so-called leaders with about eight spoonfuls of salt, and I'll include this trade deficit number in that salty group. I highly recommend reading Andy Kessler's Running Money, if you haven't already. He really highlights some interesting approaches to investing in tech, many of which parallel my own approaches. But what's relevant here are some of his theories about the trade deficit as measured by our government.

I'm paraphrasing here, but the concept is what's important. If Intel (INTC - commentary - Cramer's Take) and Microsoft (MSFT - commentary - Cramer's Take) "export" $350 of chips and software to a laptop vendor in China, who then turns around and sells that laptop into the U.S., such that a consumer "imports" it for $1,000, the U.S. has a trade deficit of $650 on that transaction. The Chinese vendor hopes to squeeze out a few dollars -- let's be generous and say $20 net profit -- on that PC. On the other hand, Intel and Microsoft netted out profits of -- and let's now be conservative -- say, $150 net profit between the two of them on that transaction.

The upshot is that the trade balance showed a huge deficit for the U.S., but the profit balance would show a huge surplus for the U.S. It's not that those foreign banks are idiots putting their money into the U.S. They do it because this is where the profits are.

I'd just note also that Google (GOOG - commentary - Cramer's Take), Yahoo! (YHOO - commentary - Cramer's Take) and countless other media and Internet, as well as other nontangible goods companies, are reaping billions of dollars of profits without truly "exporting" much of anything.

It is what it is, as I like to say. And, as an investor, I think profits, not revenue, are a good thing.

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At time of original publication, the firm in which Willard is a partner was net long Intel, Microsoft and Google, although positions can change at any time and without notice.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback and invites you to send it to [e-mail].