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Big, curveball hit global markets this week in the form of DeepSeek, a new alternative to chat GPT that has sprung out of China. It was, we're told, dead cheap to build. It requires fewer fancy microchips than the dominant US versions, and it seems to work pretty well. Its emergence whacked a massive $600 billion off the market value of chip maker in video on Monday.
Even for the biggest company on the planet, that is really quite a lot of money. Today on the show, we're asking, why is this such a big deal? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, I'm not an AI robot and a human markets columnist here at the FT in London. And I'm joined down the line from New York City by fellow human, Robert Armstrong, from The Unhedged newsletter Rob How's it Going?
It's so great to have a day where markets go a little bonkers and it's not about American politics. It's about something else. There's still time. The week is younger. Yeah, we're not going to run out of bonkers anytime in the next couple of months.
not soon. Here's the thing. Deepseek has been around for quite a while, right? The tech community has been a buzz with it for weeks, but the simple souls of like financial markets, like traders and investors and stuff, and frankly, you and me, only really got the memo this week. So we're not techies and we're not going to pretend to be techies, but why are markets in a tis about this?
Several days ago, let's call it a week ago, DeepSeek said, we have this new model that was cheap to build and works really well. Everybody was like, yeah, tell me another one, broadly speaking. Then they released it, meaning you could download the model and run it on your own computers. It's slowly dawned on people in the AI industry. This thing really works.
And that message took a day or two to get through to markets, but the message did get through yesterday, boy. And it's interesting listening to people talk about it. There is remarkably little noise from people whose net worth has radically decreased as a result of the appearance of this model. Very few of them are
Calling bs on this thing. Yeah. Instead, they're saying, wow, this actually is very impressive. We're working with this. We're trying to reverse engineer this. Yeah. This is very fascinating indeed. Yeah. I've seen some of the work that it spits out. So the economist, Stephanie Kelton, she asked it.
What would happen to Canadian GDP in the event that Trump brought in 25% tariffs on Canadian exports? And it spat out a very credible answer, actually, and came up with a number that matches what a lot of actual humans have come up with. So we're going to have so much time for our hobbies, Katie, when this thing takes our sad little jobs. I'm going to take up quilting. I think it's what I'm going to do.
I'm thinking paddle. So last week, Angela Zhang, Z-H-A-N-G, she's an expert in Chinese tech. She wrote in the FT about how deep-seak is like the real deal. And here's a really interesting wrinkle that she was writing about. The reason I spell out her surname is that listeners, you've got to check this thing out because it flew kind of under the radar when it came out last week, but she is dead right. And she was saying, first of all,
Deepseak is not a one-off. There's a whole bunch of Chinese AI developers out there doing really interesting stuff and coming up with high quality products. The other is one of the reasons this has all happened is that the US has starved China of
good quality powerful US chips. And so Chinese developers, Chinese engineers, Chinese techies and nerds basically have had to work really hard and innovate really quickly to come up with new solutions of their own. Especially on the front of efficiency. They've essentially been deprived
of computer power. And so they've just been forced to think harder about efficiency. It is an important lesson in how technology evolves and how hard it is to keep it in a box, as it were. So open AI's chat GPT.
cost whatever, $11T bazillion to build. And OpenAI is still constantly saying, we need more bazillions of dollars, possibly even trillions of dollars, to keep building this out and create the energy platforms that we need to make this work. Yadda yadda. Deepseeker saying, yeah, we did it for $5.6 million. And you're like, you did it.
You mentioned before that we're not tech people. This point bears emphasizing, I'm a person who struggles mildly with the remote control on my four year old television. But I will- I can't use Excel. But I think something that you and I do know about that is worth thinking about is kind of how markets price things. And what's interesting, I think, is this moment has revealed
the assumptions we had about what economic structure the AI industry would have. Broadly, the vision of the future that had most of the market's attention until yesterday was AI model very tricky and extremely expensive to train up and pretty expensive to run to. The person who does the training up,
Now, has the model operating on their own computers, right? This is why everybody is building a massive data center, whether you're Meta or Google or Amazon or Microsoft or whoever, you're pouring money into having this gigantic computer, you can run this model, which you own and is proprietary to you.
And then people will have to come to you and say, pretty please, can I ask your big machine questions and you charge them money for that. Importantly, the really crucial pieces in this puzzle are all American. Correct. America has this absolute dominance over big tech, absolute dominance over AI.
This is like a, as one investor puts me recently, this is like a geo-strategic imperative to be in US big tech because this is just impregnable and no one else can challenge this stuff. Correct. And that brings me to, so the thing that investors are talking about here and listeners, you should like listen up for this word, is that people are saying, okay, there goes the moat. So Rob, what are people talking about when they're talking about the moat in investment terms?
A moat is the barrier to entry that keeps other people from copying your stuff. Classically, the difference between a good business and a bad business from the point of view of investors is the width of the moat. The classic example of this is the airline industry, which is amazing. What they manage to do, they move millions of people around the world through the air.
every day with very rare accidents, incredible technological and logistical feats. And it benefits us all hugely. And it's a terrible industry and you should never invest in it because it does not have a moat. Right. At any time the airline industry starts making decent money, some rich idiot is like, you know what? It sounds fun to have an airline and they can do that. Airlines. This is what I'm thinking.
Whereas if you're Microsoft and you have the operating system that everybody has decided that is the one they're going to run their personal computers on, and you can charge people for that IP, your moat is a mile wide and you just keep printing it forever.
There's been this idea that, like, Nvidia has a very deep, very wide moat around it that's full of scary animals that will eat you if you try and enter it. And it turns out that moat, actually, Nvidia's just standing on, like, a bit of a puddle.
Well, no, well, I don't know. I would take issue with you there. The stock fell 16% yesterday. Because it's the biggest company in the world, 16% equals a squillion dollars or whatever number you said earlier. It's 100 billion, man. 589, I think to be precise, but frankly, at that point, who's counting?
the in videos at the level it was back in september and even then we're like it was maybe the most valuable company in the world and we're talking about how incredibly richly valued it is so what the market is telling is in video
is 16% less valuable than it was. It hasn't been cut in half for anything. It's not a panic, and the stock has stabilized this morning. That's Tuesday morning. Yeah, as of Tuesday morning, this is still an almost unimaginably valuable franchise they have. It's just 16% less valuable than it was on Friday.
I mean, look, so there's two schools of thought here. One of them is, it's just a flesh wound. The other is, so just before I came to record this podcast, I got a note on this from Man Group, which is a hedge fund group here in London.
It says, the sell-off reflects fears of a deep air pocket in AI infrastructure spending. For years, the tech sector has built investment cases on the belief that developing competitive AI models demands massive hardware investments and seemingly unlimited budgets. So the launch of DeepSeek, for me, is the first thing that has
pierced that hubris. It's the first thing that has challenged that narrative. And that's why this is important. Like, we might decide further down the line that Deepseeker is too much of a security risk for people in the West to be using because who knows what kind of government interference there is in it in China. We might decide that it's just less good than chat GPT. Whatever doesn't matter to me. Point is, this is a challenge to US tech majesty over the planet.
It is a challenged US tech. And the point I would make is that it's a challenge to the view that AI was a winner take all industry. That one company or another would have the best model, which was proprietary to them and ran on their computers. And everybody who wanted the best AI services would have to build those services on top of that person's proprietary model. And we all just give them our money forever.
And that picture has to a certain extent gone out the window. And it might be that the spoils are shared more broadly here. But what is interesting, let me just make one more point, is that the stocks that really fell yesterday were, as you intimated earlier, were like the American utilities.
I was going to say, I was going to say, so, Rob Armstrong, tell me about how this has affected other stocks. Well, I'm telling you, men, these stocks, we wrote about this a month or two ago, these utility stocks that are located in the areas where the data centers are being built, meaning Washington, D.C., Washington State, the Northeast,
These stocks were up like 40%, 100%, 200% last year, because they saw the demand going up. But then, if you have a more efficient, cheaper model, it means you drink less energy. And these stocks not only fell massively yesterday, more than Nvidia did, but they're still falling today. So there's this revolution going on in all the people who are building these data centers.
Building equipment for the non-chip equipment for the data centers, the utilities that we're going to build a gigantic wire into the data center, all of this stuff has fallen out of bed even more dramatically than Nvidia. It is super, super interesting. Let me ask you two questions here that normies ask about this whole thing. The first one is, is this the .com crash all over again? It is interesting. What were the stocks that we were all worried about?
The Magnificent Seven. People who thought we were in a bubble were very focused on alphabet, Amazon, meta,
Microsoft, Nvidia, and Tesla. Did I get them all? I think I got them all. You might. Yeah, something like that. Okay, something like that. Those stocks haven't moved that much. Well, 17% on Nvidia, but yeah. They were massively investing in AI. And in way, there is an argument that they may be in an important sense better off now. Yeah.
Whereas they thought they had to get in this great money-throwing contest over who would own the big AI model because if you're Google or Amazon or Meta and you don't have your own giant hugely expensive proprietary AI thingy, then everybody else will eat your lunch. Well, now your lunch is safe and you can spend your money on something else because it turns out there's a possibility that you will be able to have AI applications
that don't require you building this expensive fortress. The other thing to me that differentiates this from the dot com crash from God, we're old Rob, like 25 years ago. Geez Louise. But that was different because that was a bunch of like internet made up companies that didn't really do anything and they were valued in enormous access to the earnings they were making. Yeah, not necessarily true here.
In video, yes, it's taken a big hit, but this is a thing that makes proper money, like 30-oddling in a quarter or something. No, six of the seven of the magnificent seven.
are six of the best companies there has ever been from an economic point of view, in terms of return on investment profitability, growth potential, the width of the moat, all of that stuff. The seventh, of course, being Tesla. I thought we were going to say that. Let's leave that one. Let's park that one.
But these are awesome businesses, and maybe they're overvalued, but they're not going to disappear. And that's very different now. People have also missed, I would say, how expensive.
all US big cap stocks are. Costco is a great company, the bulk warehouse chain where I often go myself and very much enjoy. It's trading at something like 50 times earnings. It's more expensive than any of the Magnificent Seven.
So stocks are really damn expensive. Large capitalization US stocks are very expensive and they could massively correct. Predicting win is a fool's game. But again, it doesn't feel quite like kitty litter.com or whatever was the nonsense businesses who are youth.
Yes. So it doesn't feel like that. And that, again, to recap, perhaps for our younger listeners, that was an enormous crash that took the entire market down with it and ended up in the Fed, the US central bank interest rates super hard, bailing everyone out, arguably stored up a lot of problems for another day by having interest rates too low for too long.
This doesn't feel like that. But the other question that Normies ask is, do I need to worry about this for my pension? And I guess the sort of related question that is being asked there is, is this going to turn into some sort of financial crisis? I'm going to say no, by the way, for what it's worth. I'm OK. I'll make the argument for elevated caution, and I'll say what I think that means for people's portfolio, and certainly what it means for mine.
We have, I would argue, an unusually uncertain moment in the path forward of interest rates, which means the price of money. And the price of money being uncertain makes everything unstable. At the same time, every risk asset in America is priced about as richly as it is ever priced. That is a volatile combination. I will let listeners reach their own conclusions about
political risk which is a fraught topic i don't understand very well i mean the point is panicking and having all your money in cash has never almost never
in the last 150 years been a good strategy. But is there an argument for maybe reducing your exposure to the United States a little bit, increasing your exposure to cash? Europe's been doing actually very nicely, record highs in the DAX and the FTSE in the UK. Yeah, I think there is a case. I don't think it's probable.
But I think it is, if there was a pretty significant re-pricing in American risk assets in the next year or two, exactly zero people would be surprised by that because of the setup I just described. But it's very expensive. And I know this because I've made the mistake myself, trying to time exactly when that is going to be. So all you can do is look at your portfolio allocation and say,
Am I going to feel like a bad human being when I look at this portfolio or an idiot when I wake up on the morning where the apple cart has been overturned?
The one thing, so like I say, I don't think this is laying the groundwork for some sort of financial crisis, but I do think this could, this whole shake out in tech and in speculative tech and in AI stuff for all the kind of tourists who moved on from web three, remember that? And decided that the future was all in AI. Was the web three the metaverse or was it crypto or was it, I can't remember which of the things we were excited about?
Just obviously. Anyway, there's a lot of venture capital money in AI and in the kind of energy complex behind AI. There's a lot of private equity money in AI and in that energy complex. I'm just going to say there must be some portfolios out there of like early stage incubator money that are getting pretty squeaky bums right now. Well, after yesterday's events, the prices we would almost like to see were invisible.
Open AI is a private company. If you had to mark the value of that company, how much did fall yesterday? I have no idea. I'd sure like to know, though. Similarly, Anthropic. Anthropic? I don't know. I don't think I've ever said that word out loud before, but similarly, all these cluster of private companies in this space, how do those books look?
I don't know, but I can tell you that Sam Altman, who runs OpenAI, which backs a chat GPT, he said that the emergence of deep-seek is, and I quote, legit invigorating. Yes. That is tech pro speak for, ooh, lads, we've got a bit of a problem here. I think this is what Mike Tyson's opponents used to say. Being punched in the face by Mike Tyson is legitimately invigorating.
basically what is going on here. But we often like to wrap these things up with a little bit of a prediction. So let me ask you, Deepseeker, are we still going to be talking about it this time next year? Is this going to be like a part of the tech just furniture? It is impossible to say. We will certainly this time next year be talking about the competition among AI models and which is best and which is cheapest and which one is good for what. But whether
Deepseak will be overtaken next week by something we don't even know the name of. I have some sort of, you know, maybe the Brits. Or the Europeans will really make a splash here. Yeah. So I'm going to back away from that prediction because I don't know how to make it.
All I know is it is possible to do this AI stuff on a, not necessarily a shoestring, but a lot more of a shoestring than we've been led to, believe, by Silicon Valley. So, interesting times. If you are at a venture capital firm or a private equity firm and you don't like your job very much and you would like to tell us how much money you've lost on this stuff, we are all is unhinged at FT.com. And we're gonna be right back with Longshot.
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Okay, now it's time for long short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what you got?
I am long Brazilian jujitsu. Not because I will ever do that sport or any combat sport of any kind. I am a man of peace. And it's this huge trend. Zuckerberg does it. Everybody, every man in the world is doing Brazilian jujitsu. And I was skeptical of this whole thing. It's like macho nonsense.
But my son, who's 15, is doing it and he loves it and it like burns his energy. It kind of has built his confidence. And now I have someone in the house who can kill me with his bare hands. And I just feel like this trend has legs. My 16 year old boy is into Muay Thai. Maybe we should get them to fight each other. We should fight them. Yes. I am short. You're a 16 year old.
My 16 year old is likely to be somewhat shorter than your 15 year old. But I think they'd be up for this. Let's make it happen. My short is really quick. I am short winter. It's too dark. Everyone is ill. The weather is terrible. I'm absolutely sick to the back teeth of this whole thing. It's time. It's spring now. It's over. Only two and a half more months, Katie. Oh, for the love of God. Also dry January. It's really tracking.
could really use a drink at this point. Anyway, let's wrap it up there. Listeners, we will be back in your ears on Thursday, so listen up then.
Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topa Forheads. Cheryl Bromley is the FT's global head of audio. Special thanks to Laura Clark, Alistomaki, Greta Cone and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to FT.com slash Unhedged Offer. I'm Katie Martin. Thanks for listening.