Did Chinese AI just Ruin America's Economy?

Hello investors,

This week produced shockwaves in the world of artificial intelligence all thanks to Chinese AI firm DeepSeek. 

Here's the Borex TL;DR on DeepSeek: 

• Chinese firm DeepSeek just created an open source AI model that outperforms ChatGPT, Meta's and Google's models
• The total cost to develop this was under $6 million USD
• DeepSeek's tokens are 97% cheaper than OpenAI's
• They did this without Nvidia chips (allegedly) as China has limited access to these cutting edge chips

This is a lot to unwind. To draw a parallel to real life, this is essentially a company releasing a phone on par with the latest and greatest iPhone, but selling it for $30 instead of $1000. It's a dramatic turn of events I was not expecting. 

Is DeepSeek a better AI model?

I'm a heavy ChatGPT user. I subscribe to ChatGPT Plus and use it to run and analyze financial models, diagnose problems, perform research, create powerpoint decks, draft emails, summarize documents, literally most tasks which I used to have to outsource. For the past 3 days I have been exclusively using  DeepSeek and... I'm impressed with it. 

But it's not just me, I'm reading that DeepSeek has rapidly become the preferred tool for researchers at respected institutions like Stanford and MIT, essentially becoming their model of choice virtually overnight. 

Artificial Analysis ran some benchmarking tests against other models, and... it was just as good as OpenAI's godtier, extremely expensive and limited o1 model. It outperformed every other OpenAI, Google, Meta, and Amazon AI model. Impressive. 

What's more, they're releasing it open-source so you even have the option (which OpenAI doesn't offer btw) of not using their API at all and running the model for "free" yourself. Essentially what they have done is reveal the "secret sauce" behind these LLM. 

Why are they doing this? Well apparently DeepSeek is the side project of one of China's top hedge funds. And well, if there's any stereotype on Wall Street that's mostly true, it's probably that Chinese finance guys are really good at math. So I'm sure they ran the numbers and still see opportunities to make money here somehow. Or maybe they can quantify the long term effects of the social impact here for China and see worth there.

Token Cost

Okay, on to the money side. You have to pay to use OpenAI models with tokens if you want to incorporate them into your business to perform tasks.  

A typical enterprise codebase might be 1 million lines of code, or roughly 4 million tokens. That would cost $60 with OpenAI versus just $2.20 with DeepSeek. At OpenAI's prices, doing daily security scans would cost $21,900 per year per codebase; with DeepSeek it's $803.

So if you're an OpenAI customer today you're obviously going to start asking yourself some questions, like "why exactly should I be paying 30x more for a worse product?". This is pretty transformational stuff, it fundamentally challenges the economics of the market. And it's great for China and bad for US tech giants. 

What does this mean for the markets?

DeepSeek reportedly developed their entire platform for less than $6 million (not billion), a stark contrast to Microsoft's $14 billion investment in OpenAI and the recent announcement by President Trump of a $500 billion AI initiative. This disparity raises questions about whether the costs of AI development are being overstated in the West, potentially inflating Nasdaq valuations.

This situation could pose a significant risk to U.S. equity markets, particularly given that DeepSeek's success was achieved without the use of Nvidia chips. Previously deemed essential for AI progress, the necessity of these chips was a key driver behind Nvidia's stock surge last year. The efficiency and cost-effectiveness of DeepSeek's model challenge the justification for the extensive capital expenditures currently flowing into the AI sector. 

Or does it?

The success of DeepSeek could potentially challenge U.S. dominance in technology, positioning China as a frontrunner in the global AI landscape.

However, there's room for skepticism regarding DeepSeek's claims. What if the company isn't being fully transparent about its operations? There's a possibility that DeepSeek might actually be using Nvidia chips, acquired through indirect means from a third-party country like Singapore. This scenario would question the validity of their reported low development costs and the supposed independence from established tech infrastructures, adding a layer of complexity to the narrative surrounding global AI development and its geopolitical implications.

If you're inclined to believe China's newfound innovation capabilities as demonstrated by DeepSeek, it might be wise to reconsider your investment strategy—perhaps by divesting from Nvidia and directing your funds into CQQQ, betting on China's ascendency in AI. However, if you harbor any doubts about the authenticity of these claims, a more prudent approach would be to wait out the initial flurry of reactions. Allow the situation to stabilize before making any significant changes to your QQQ-focused investment strategy.

For those interested in exploring this topic further, below is a CNBC video that delves into the matter, providing additional insights. Enjoy!

QQQ: The Easiest & Safest Investment for Wealth Building

Hello fellow investors,

Happy New Year! It has been a wild start to the year with a chunky pullback and volatility in full swing. For me, I personally enjoy the market drama and the opportunity to sit by screens all day and purchase stocks on sale... but that's not everybody's cup of tea. Some investors can't stomach this volatility and that's totally fine. The good news? There is still a fairly easy & safe way to invest and build wealth off of big tech without these wild swings.

How? With QQQ.

This is one of my favorite investment picks, and I've been a consistent buyer for over a decade. My enthusiasm for big tech remains as strong as ever, given that nearly every major technological breakthrough or innovative product seems to originate from the tech behemoths like Google, Apple, Amazon, Meta, Nvidia, and others.

So what exactly is QQQ?

QQQ is an exchange-traded fund (ETF) that primarily aims to track the performance of the Nasdaq-100 Index. This index includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The ETF is managed by Invesco Capital Management and is popular for its exposure to large technology companies, making it a superb choice for investors looking to capitalize on the growth of the tech sector.

Here are the top 10 holdings of QQQ as of late 2024, which collectively make up a substantial portion of the ETF's total assets:

Apple Inc. (AAPL): 9.23%

Nvidia Corporation (NVDA): 7.88%

Microsoft Corporation (MSFT): 7.74%

Broadcom Inc. (AVGO): 6.31%

Amazon.com Inc. (AMZN): 5.63%

Tesla Inc. (TSLA): 4.86%

Meta Platforms Inc. (META): 4.85%

Alphabet Inc. Class A (GOOGL): 2.68%

Costco Wholesale Corporation (COST): 2.61%

Alphabet Inc. Class C (GOOG): 2.57%

These holdings reflect QQQ's heavy emphasis on technology and consumer services, showcasing its role as a tech-heavy fund. This composition makes QQQ an attractive option for investors looking to gain broad exposure to major technology firms and other high-growth sectors, such as consumer electronics and e-commerce, which are pivotal in today's (and tomorrow's) digital economy.

It's also worth mentioning that QQQ's composition is dynamically rebalanced every quarter. This ensures that rising studs in the tech sector, such as Palantir or MicroStrategy, are integrated into the ETF once they make significant waves on the Nasdaq—a recent adjustment influenced by the heat surrounding these companies exemplifies this process.

In essence, investing in QQQ is like having a stake in all the major tech giants by purchasing this one symbol. This diversification not only spreads out your risk but also aligns your portfolio with the pulse of technological innovation.

Why is QQQ worth investing in?

Its my strong opinion that tech firms continue to be attractive investment opportunities for three compelling reasons:

1. Innovation and Research & Development (R&D): Technology companies are at the forefront of innovation, consistently pushing the boundaries of what's possible. They invest heavily in research and development to create new products and improve existing ones, driving growth through technological advancements. This continual innovation cycle helps maintain their competitive edge and opens up new markets, from advancements in artificial intelligence and machine learning to breakthroughs in quantum computing and biotechnology. Let's face it, the big tech companies have the capital and the money that small firms don't. Even if there is some new tech breakthrough, if its developed by a small firm outside of big tech then it will likely be big tech that buy them up before you hear about it. 

2. Digital Transformation: The ongoing digital transformation across all sectors of the economy presents significant growth opportunities for tech companies. As more businesses and services move online—from cloud computing and digital payments to telehealth and remote work solutions—tech companies that provide these enabling technologies are poised to benefit. This trend is likely to accelerate, with technology becoming increasingly integral to operations in sectors like finance, healthcare, education, and manufacturing.

3. Global Reach and Scalability: Many tech firms operate on business models that allow them to scale rapidly and efficiently across global markets. With the internet and cloud-based services, a tech company can expand its reach without the substantial capital expenditures that traditional businesses might incur. This scalability not only boosts growth prospects but also allows tech companies to adapt quickly to global demands and changing market conditions. A lot of tech revolves around software. Once software is developed, selling it to customers is far easier to scale as it requires less effort to produce. It's one of the reasons I'm so bullish on PLTR, because its very easy for them to sell an already developed software to new clients. 

These factors collectively suggest that technology companies could continue to experience robust growth over the next decade, making them compelling candidates for investment.

How has QQQ performed historically?

Let's crunch some numbers on QQQ's performance over the last decade.

Think back to about 10 years ago when QQQ was priced at around $100 per share. Fast forward to today, and that price has skyrocketed to roughly $515 per share.

So, if you'd dropped $10,000 into QQQ 10 years back, you'd have picked up about 100 shares. Those 100 shares are now worth around $51,500. That’s a 400% increase—not bad, right?

If you're currently holding 100 shares of QQQ, valued at about $515 each, your stash is worth about $51,500. Wondering what the next 10 years might look like? If QQQ pulls off another 400% gain like it did in the last decade, you could be looking at an investment worth around $206,000. No guarantees, of course—it could go higher or it might dip. But if the past can teach us anything, it's that QQQ has some serious potential.

Keep in mind, though, that past performance doesn’t always predict the future. There will be pullbacks and panic on the market from time to time. But overall, I trust in the general tech sector to always bounce back and reach new highs. 

Why do I think QQQ is fairly safe?

First and foremost, QQQ's focus on the Nasdaq-100—a collection of some of the largest and most innovative companies in the world—provides a level of security. These companies are not only leaders in their fields but also have substantial financial resources, making them more resilient to economic downturns compared to smaller entities.

Additionally, the tech sector's robust growth trajectory helps cushion against market volatility. Despite occasional downturns, technology as a sector has shown remarkable resilience and an ability to outperform the broader market over the long term. The consistent demand for technological advancements and digital services provides a steady stream of revenue that supports these companies through various market conditions.

Lastly, the diversification within the tech giants included in QQQ means you're not putting all your eggs in one basket. While it's true that QQQ is tech-heavy, it also includes companies from various sub-sectors within technology, like cloud computing, artificial intelligence, digital payments, and more. This diversification helps mitigate the risk if one particular area faces challenges.

In summary, the combination of being invested in leading companies, the inherent growth potential of the tech sector, and the diversification across different technology domains makes QQQ a fairly safe bet for those looking to invest in technology without the extreme volatility that can come with individual tech stocks. It's a cornerstone in my portfolio, offering both the excitement of tech and the stability of established, high-performing companies. This balance is why I continue to trust and recommend QQQ as a sound investment vehicle.

Closing Thoughts

Alright. QQQ offers a compelling alternative to traditional saving and investment methods, especially when you consider the types of returns it has generated over the past decade. Keeping your money in a bank or investing in real estate simply wouldn't yield anywhere near the same level of return. Do you know anybody that bought a house in 2015 for $100,000, did nothing for 10 years then sold it for $500,000? I doubt it. 

Furthermore, as I have have previously written, with governments around the world continuing to print money, leading to currency debasement, inflation becomes a tangible threat to the purchasing power of our savings. In such an environment, QQQ stands out as a strategic tool to safeguard against inflation and help maintain the value of our investments. By focusing on high-growth technology companies that are often less affected by inflationary pressures than more traditional industries, QQQ provides a robust platform for growth and a hedge against the erosion of value caused by global financial policies.

So for those looking to both protect and grow their wealth in uncertain times, QQQ represents not just an investment in some of the most dynamic companies on the planet, but also an investment in the future of technology and innovation. 

Fin.