The Chinese AI startup company (2023) made news recently when they released their open source R1 model (a rival to OpenAI’s o1 model). It’s development (as claimed) came without the need to use Nvidia’s chips (which has been used an AI play in the stock market; that entire pump propelled Nvidia’s stock (NVDA) into the top 3 largest stocks by market capitalization. For folks like myself who have been invested in the stock market for over 2 decades. you become familiar when these bubbles start to form (and where the greater fool theory really begins kicking in). Once more companies began pushing their stock as an AI play, that was a sign that the smart money was already beginning to exit (to take profits).
What does this mean in plain english? This new model (as claimed) requires less computation power nor expensive chips (prices that were pushed up by the demand which also affects the costs for Nvidia’s GPU’s for example). AI/ML is computational intensive requiring signficant amounts of energy to train models. And there is so much garbage being used for training because of what it is being utilized for (I wrote about this only briefly).
China has also been investing in AI/ML much more than the US has, so it comes as no surprise to see advancements coming out of China. This competition is a good thing. The US also long outsourced many of its capabilities offshore because that is what happens when capitalism (at its late stages) goes unchecked (just profits aren’t good enough; you need quarterly revenue growth, year over year growth for those quarters, and year over year total revenue growth) in order to satisfy Wall Street. Look at the average P/E ratio to see the house of cards this is all built on. Look at how corporations can dilute your shares by issuing more stock, etc. It’s like how central banks print money. Every decade needs a bubble for the market to latch on to. You just don’t want to be the fool who ends up buying at the top and is left holding the popped balloon once it has burst.
As I’ve written on my old blog, the stock market is a rigged game (one that if played right with that knowledge, can at least help one grow what they earned to stay ahead of the curve). The elites have long been successful with the “fiduciary responsibility to shareholders” line where corporate executives have to keep finding ways to shrink expenses. Thus the lack of responsibility to employees (like a liveable wage and benefits), lobbying to keep the minimum wage unchanged, constantly cutting positions and asking the remaining workers to do more with less, etc. In the US, corporations also spend a huge amount to lobby for deregulation and other standards that help keep them responsible to the environment and communities they operate in (having to deal with regulations is an additional expense they don’t want). The standard of living for the middle class in the US continues going down because of all of this since it is the wealthy reaping most of the rewards.
Nvidia (and other tech stocks that were considered AI plays) took a shellacking on Monday. Nvidia fell nearly 17% wiping out over $589 billion in market capitalization. Myself, I own Broadcom (AVGO). But that was way before it’s chip designs were designated as an AI play (I bought/accumulated the stock years ago because they have been a key supplier of chips for wireless devices; I never added more shares once it became an AI chip stock though). AVGO tanked by over 17.4% today amounting to a paper loss of over $127K. My reaction to that was BFD because it’s still way up over 300%. Additionally, my portfolio on that account still finished in the green for the day because of Apple; the majority of my AAPL in this ROTH IRA brokerage account is from ESOP and RSU’s plus retail shares bought in 1997; I covered that journey before (even after all of the subsequent accumulation of retail shares, I’m still up over 2000% ROI for AAPL in this account).
Many of us have been through worse in the past though. The “dot.com” bubble really saw the air come out with 30%+ losses/stocks becoming worthless when companies shutdown followed by a multiyear recession after the 2001 WTC attacks. Once one time internet darling Cisco (which makes the core routers and networking equipment), lost nearly 80% of its value in the subsequent years. The lesson many learned (self included), was keeping it simple (long term buy and hold of equities with good growth potential that paid out a dividend; this dividend is passive income which I initially reinvested into other dividend bearing stocks but now just keep as cash. If I had listened to people like Jim Cramer (with his over hyped buy/sell recommendations), I’d still be working full-time. Similarly with these cycles of market bubbles, all of these reports and recommendations on these financial sites are no different in getting the average person to make decisions long after the smart money has already taken a position. Thus the posturing and what/if scenarios for AI plays (because they still want to pump and dump this thing).
With that said, is the AI bubble deflating? IMHO, not quite yet. Today’s selloff was just what the market does with taking money from those who buy into the hype (buying high), and panic selling (selling low). This is how the average persons money is “stolen” from them. When you hear that phrase “they are coming for your money”, it’s not like they simply raid the money in your bank account (because that would be too obvious + also highly illegal). Instead, it comes in the form of taking actual realized losses in the equities markets, having your purchasing power diminished (inflation + wage stagnation), having you put your money into low interest savings (which doesn’t keep pace with the rate of inflation), having your other equity reduced (like what happened in the housing market), getting loaded with debt from credit cards and loans from buying stuff you don’t need/can’t afford (consumerism gone wild).
The stock market is sentiment based so any negativity surrounding OpenAI’s model versus DeepSeek’s model, is just going to reset what gets hyped up next in this space. On device AI plays might end up getting pushed (the lack of noise is because the smart money wants to get into those stocks first so that they can repeat the ride up). It’s a game the big money has played from the get go. And no, you cannot beat that big institutional money because they have the means to move the market the way they want to (more so with computerized algorithms) in order to drive sentiment. And the financial “news” media that covers this? They are mostly useless (speaking in simplified and over generalized terms because speaking the truth would amount to a death sentence to their operations).
Every company playing in this AI space (with their generative tools), will be looking into the R1 model. Companies like AMD and Nvidia that are leveraging their chips in all of this, are going to be under pressure to justify the costs for that compute. Basically, this is all a reactionary move to R&D that companies in China have been doing for years (and it should not be surprising when more advancements are released from Chinese based companies as the US plays catch up. You can blame the corporate executives (part of that wealthy elite club the rest of us are not a part of) who sold out the US a long time ago because it was required by the financial markets (at the expense of the working class). And with the new regime in the US antagonizing allies (where more countries will end up aligning with the BRICS as the US becomes more isolationist/less reliable partner), it’s just more signs of late stage capitalism destroying the US (where the ultrawealthy gain at the expense of everyone else).
