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DeepSeek, AI and the markets

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January 28, 2025

TLDR: DeepSeek unveiled AI using less resources than US rivals, causing market drops in chipmakers and power companies. Sam Altman was excited. Katie Martin and Rob Armstrong on show discuss China's advances and their children's fight.

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The latest episode of the Unhedged podcast dives into the significant impact of DeepSeek, a newly emerged AI competitor from China. This episode features hosts Katie Martin and Rob Armstrong as they explore the consequences of DeepSeek's entry into the market and its implications for U.S. tech giants.

Introduction to DeepSeek

  • What is DeepSeek?
    DeepSeek has successfully developed a competitive AI model that operates on significantly fewer resources than leading U.S. counterparts like OpenAI's ChatGPT.
  • Market Shock
    The announcement shocked global markets, resulting in a staggering $600 billion drop in valuations for chipmakers, particularly Nvidia. Sam Altman, CEO of OpenAI, characterized the situation as "legit invigorating."

The Implications for U.S. Markets

  • Challenging American Tech Domination
    The emergence of DeepSeek highlights a potential shift in the balance of power in the tech industry and challenges the existing narrative of U.S. tech dominance.
  • Investor Sentiment
    While some investors experienced significant losses, many are recognizing the potential of DeepSeek, indicating a shift in perception about AI development costs and capabilities.

Key Insights from the Episode

1. Innovation Born from Restriction

  • Forced Efficiency
    Due to U.S. restrictions on high-quality chips, Chinese developers like those behind DeepSeek have innovated alternative solutions, creating efficient AI models for under $6 million compared to super high overheads of U.S. models.

2. Redefining AI Development Costs

  • The Myth of High Costs
    Historically, the AI industry has been viewed as needing monumental investments in hardware and infrastructure. DeepSeek’s success illustrates that powerful AI can be developed more affordably and efficiently.

3. Market Reactions

  • Assessing the Threat to Existing Giants
    Investors are reevaluating the competitive landscape, recognizing that the purported "moats" (barriers to entry) of companies like Nvidia may not be as formidable as believed. Market analysts are now considering whether the tech industry's assumptions about exclusive AI capabilities may need to be updated.

4. Industry Comparisons to the Dot Com Bubble

  • Are We in Another Bubble?
    While comparisons to the dot com bubble are suggested, the episode notes fundamental differences, such as the sustainability of the profits generated by current tech giants, which contrasts with the inflated valuations of many dot coms.

Economic Impact and Future Outlook

  • Investment Strategies
    The hosts advise caution for investors as the landscape is changing. While they don’t foresee an impending financial crisis, they suggest reassessing portfolio allocations and possibly seeking diversified exposures outside of the U.S.
  • AI's Evolving Landscape
    The discussion concludes that while DeepSeek introduces disruptive potential, the future of AI technologies remains uncertain, with the possibility of new players emerging.

Conclusion

DeepSeek's entry into the AI space signals a transformative moment in technology, forcing investors and companies to reassess their strategies and the traditional paradigms surrounding AI development. As the market adjusts, it will be crucial to keep an eye on the evolving dynamics between these new competitive forces and established entities.

Listeners are encouraged to stay engaged with these developments, as they signify not just the evolution of AI, but broader implications for investment strategies and market behaviors.

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