Back in January, China revealed its own Artificial Intelligence program, DeepSeek. They claimed it was far more energy efficient to train and run than the Western AI programs. The news triggered a trillion-dollar meltdown in US AI stocks in a single day.
Since then, the story has gone a bit fuzzy. It’s not clear the claims made about DeepSeek were entirely truthful. It may have used Western computer chips in a way that can easily be mimicked by American AI companies, for example.
But what if this was just the beginning of China’s ambitions?
We’ll tackle that question today. But first, an important announcement…
This will be my last Fat Tail Daily article. Next week, we’ll be relaunching The Daily Reckoning Australia.
That’s more than a little nostalgic for me. Reading the “DR” each day as a student was what got me interested in the contrarian angles of the financial world.
Without it, I might’ve become a banker, or worse…
Instead, I invited The Daily Reckoning Australia’s publisher Dan Denning to give a speech at my university. And he hired me a few weeks later.
Since then, I’ve been writing newsletters like this one.
So, next week, we’ll get back to our roots. And that means publishing The Daily Reckoning’s founder Bill Bonner too.
The best thing is, as a Fat Tail Daily subscriber, you’ll be receiving the DR without lifting a finger… and absolutely free.
For now, back to our topic….
What if the Chinese are on the cusp of a far bigger attack on Western tech dominance than DeepSeek?
Not to mention robbing the US stock market of the only sector that has actually performed well over the past few years.
No doubt you’ve heard the statistics about AI companies dragging the stock market higher. Opening Bell Daily put it like this a few months ago:
The S&P 500 barely moves without the Magnificent 7
The benchmark index would have been flat for two years without Big Tech.
That contrasts starkly with the 24.2% and 23.3% gains the S&P500 actually posted in consecutive years.
But if it was only seven stocks from one sector dragging the entire index up, then the converse must also be true. If the Magnificent 7 bubble pops, the stock market would plunge.
The DeepSeek drama proved the potential, if only for a day.
But why might this happen again?
Copied in China
For decades, east-Asian economies have made it their business to copy and then marginally improve products developed by Western innovators.
It was the way of the Japanese car and computer manufacturers. Lately, the South Koreans are kicking bottoms in the nuclear power space.
The Chinese are the big fish though. They have a rather problematic record of pushing the boundaries of intellectual property law.
Western companies that entered the vast Chinese market to try and sell their products to a billion consumers soon discovered something strange. Their products were copied and sold to consumers in the company’s own domestic markets at far cheaper prices instead…
It’s worth noting this was wonderful news for us consumers. We got more and better stuff cheaper.
That’s what capitalism is supposed to do, ironically. But benefitting the consumer is a notoriously unpopular political position.
Allowing China to undercut Western manufacturing also dragged much of the world out of poverty and into astonishing prosperity. Just as Japanese cities amazed people two decades ago, Chinese cities do today. It’s like travelling to the future we were promised. Drone delivery, driverless cars and robots everywhere.
But what about the impact on stocks in the West?
China has hollowed us out there too. The evidence if everywhere…
US industrial stocks have underperformed. US car companies now trade astonishingly cheap thanks to competition.
German industry has fallen out of bed, down the stairs and into the Keller.
After a spectacular boom, Japan’s industrial might delivered decades of lost decades in the stock market.
My point is that it could all happen again in the tech space. The DeepSeek shenanigans in January was a taste of what’s to come.
And the industry China has chosen as its next victim is computer chips.
You don’t need to invade Taiwan if you undercut its economy
For years, geopolitical strategists have warned about what a Chinese invasion of Taiwan would mean for the global computer chip supply. The country produces about 90% of advanced semiconductors.
What if the real threat is a Chinese plan to outcompete the island instead?
Recent news is chilling.
China may have developed computer chips capable of outpacing NVIDIA’s.
And they may have developed superior manufacturing techniques too.
All this puts the dominance of US companies in the sector at risk. And that means trouble for the stock market too.
Computer chip maker NVIDIA is the darling of the Mag7, let alone the broader stock market. It has a stranglehold on the AI chip market of about 80%. The company recently agreed to set up manufacturing in the US to secure supply.
But if the media stories about new Chinese competition are confirmed, the stock market leaders of the past few years are about to go the way of Western industrials. Not out, but definitely down.
US tech will be the Nokia and Kodak of the future.
And history tells us that stock market bubbles like the Mag7 don’t pop slowly or mildly.
According to the International Business Times, the first Chinese chips are getting shipped this month. Some claim they’re better than NVIDIA. Others that they’re on par.
Of course, the speculation about China’s chips could prove to be questionable. Just as the DeepSeek story was, in the end.
But it’s very noticeable that China is targeting the one sector of the US economy and stock market that is actually performing well. And the sector that makes Taiwan so valuable to the West.
We’re about to find out the hard way whether China can outcompete in computer chips. There won’t be much left to invest in. Except, perhaps this.
The Stock Market Eugenicist
Not many stocks are robust to these sorts of risks. If China wants to undercut you, look out!
But my friend Callum Newman has made a career out of finding the sorts of stocks that do have a “moat”. That’s what the academics call it, anyway. A moat is a barrier which protects companies from competition by some unique characteristic.
There are lots of examples of moats. A secret recipe, an inherently monopolistic market like train lines, a vast initial investment needed to enter a business, brand name recognition, government support like national carrier airlines or access to cheap energy, …
But Callum has taken this idea further. He looks for stocks that have what he calls a ‘genetic advantage’. I’m calling him the ‘stock market eugenicist’.
Here’s why.
Until next time,
Nick Hubble,
Editor, Strategic Intelligence Australia
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