Winners and Losers After DeepSeek — ft. Robert Armstrong

28:09Do you find any other sort of historical analogies or economic history that you think can be applied to what's going on here? Well, one thing we might say is that if it is in fact true that what we have discovered is that AI models are much cheaper to build and even run than we thought before. The people who are on the right side of this trade is everyone. Olivier Blanchard, the economist, tweeted this morning or yesterday that this may have been the largest one-day increase in the future value of total factor productivity in the history of the world. right so and you know that's very optimistic and it may not you know it may not turn out to be as good as that but so the the the analogy i would point to is something like the airline industry which is an incredible industry in terms of what it gives us and what it can do for us the fact it moves all these people around the world you know tens or hundreds of thousands every day through the air very quickly.

29:23Very few of them die, right? It's like an amazing thing. And it is a terrible industry economically because all the value of it has been captured by the passengers, basically, because the business has very low barriers to entry. And, you know, it's like, you know, I think of the grocery market. I mean, like grocery stores are amazing things too, and it's a terrible business, you know? So anyway, so I think that's one thing I would say. But to get to your question, what companies are the winners? Just speculating. If you are a company that builds applications really well, and AI could be useful in those applications, in the world we lived in last Friday, having a great AI model behind your applications either involved building your own, having your own data centers at incredible expense, or going to ask OpenAI or whoever the dominant player turned out to be pretty please, can I run my application on top of your brilliantly good AI model?

30:39Now maybe you can run your applications and you can run the AI model on your own computers. You don't have to ask somebody else for their help. And it's not that expensive. So maybe this is great for Google, right? Maybe this is great for Microsoft, who were shoveling money on the assumption that they had to build it themselves at great expense. And then they wake up on Tuesday morning and they say, maybe we don't have to own it at all. It won't be at great expense. So that maybe their CapEx budget, their basically investment budget just went down and their revenues did not. That's possible. It will be fascinating.

31:21This week, we start to get the quarterly results from the big techs and they go on into next week. And what I'll be listening for, and I think a lot of people will be listening for, is what do they say about their investment budget? The first question on the analyst call is going to be, given what we have seen, Google, Microsoft, Amazon, whatever, from DeepSeek, does this change your plans for capital expenditure? And it'll be fascinating to see what they answer. Two companies that haven't been affected by this are Apple and Meta. Apple's stock actually increased when the market opened. Meta's fell a little bit, but then it interestingly kind of rebounded and climbed back up.

32:06Meanwhile, all of the peers in AI and AI-related stocks, they all tanked. Give us the rundown. Why are Apple and Meta not implicated in any of this? Well, Apple was, of the great big techs, it was the one that wasn't shoveling money at AI. And last week, I mean, I wrote about Apple last week and comments I got back were like, you know, Apple is overvalued because it doesn't have an AI strategy. It's not building up this capacity. It's not spending enough. And like, is anybody saying that this week? Maybe they are saying like, maybe Tim Cook had the right idea. Like, let these other dummies get in a big money fight with this new technology.

32:51I'll just wait to see what happens. And then when the winner, when the smoke clears and there's a winner, then I'll pick my strategy. Right. And maybe, maybe that was a cagey approach. I keep saying maybe, and I know that's frustrating probably for you and for listeners, but I think Ed, you know, you nailed it, that this, this has happened very quickly. And there's necessarily an element of speculation in all of this. And where does this leave Stargate? That was the big news from a week ago, half a trillion dollar investment over four years. Is that now just null? Yeah, maybe it's like, can I have my money back?

33:31I was interested that Oracle stock fell a lot yesterday, which I wouldn't normally have expected. But maybe Oracle was a major funder and supporter of this, maybe, frankly, I didn't quite understand that because they haven't spent the money yet, right? So if it turns out they don't need to spend the money, what's the harm?

33:56So maybe there's something I don't know here, but I was surprised to see Oracle stock get hit the way that it was. It's an interesting thesis that if you went one layer down to the companies that were allocating a significant amount of money to develop their own AI applications. I think of a company like an Expedia or Airbnb who are going to have to probably put aside$50,$100,$200,$300 million over the next three or four years in CapEx if they might come out and say, we're going to be able to build this stuff and we think we'll get all of the great taste without the calories of this huge CapEx.

34:29I wonder if there's a layer down a little benefit. Yeah. Or they would have had to basically rent capacity from somebody else. So whether it's OPEX or CAPEX, either way, that's money going out the door. I would argue the market has come to the recognition that it's no longer – the market used to be about innovation as opposed to investment. And then since Amazon and Netflix, it's just prioritized who can invest the most. And this feels to me like somewhat of a swing back towards, no, it really is about innovation, not just who has the most money. But if that, in fact, is true, and the big guys are really going to get hurt here, their drawdowns, as dramatic as they were, because they're talking about the gross dollar amount,$600 billion shed from NVIDIA.

35:11But it just kind of takes them back to where they were in October. It's like a little bit, call me when they're down 80%. Yeah. It's not the bubble popping. It's not. It's not. It's taking a break. We did not see a bubble pop yesterday. It just kind of went back to where it was a few minutes ago in the world of this party. I mean, I defer to you guys again on the technology, but one thing a lot of people are saying this morning is NVIDIA's chips are still the best. So however good this model is, it's even better if you run it on the best chips, right? You know what I mean? It's like, if you have the technological edge in kind of processing power per unit of energy, whether it's in general computing or AI or whatever, that's still a hell of a good business at the end of the day.

36:01What kind of effect do you think this could have on Chinese stocks and the Chinese stock market? I mean, that market has been pretty lackluster in the past year. We had this little bump in September when we thought we were going to see some serious stimulus. It's kind of since fallen back down a little bit. Does this mean good things for China? Is this going to sort of revive investor interest in China, do you think? Well, what I've long said about Chinese stocks, and by the way, this is a belief that I have that I really hope I am proven wrong on, is that they're uninvestable. Because the overlap between what the companies are trying to achieve and their relationship with investors abroad and what the government wants and what policy is and so forth, you just don't really own the thing, especially if you're a foreigner.

36:58So I just, I mean, it's like an asset, it's one of these asset classes you can gamble on, but not invest in. So I don't know. I mean, what this certainly proves, and which, by the way, people were saying a lot of this before Monday is that the Chinese AI startups are doing amazing stuff. I mean, we had our FT writers were writing about, have been writing about this for months, months, that something like this would happen. So everybody knows that exciting things are happening within the Chinese corporate economy. That doesn't fix any of the structural problems with outsiders investing there. Stay with us.

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38:57We're back with Profty Markets. I'm going to pivot us to what's happening in Washington. We've had Trump talking a lot about interest rates, which is quite relevant as we have this Fed meeting this week. Trump is demanding interest rates come down. He's made some kind of wild comments last week. He said that he knows interest rates better than they do, they being the Federal Reserve. Does he have a point in any way? Should interest rates be coming down or should the Fed be holding steady on rates right now? Okay, let me make a preliminary comment about this. If any other president in the last 40 years had said in public, I am going to demand that interest rates come down, and I'm going to talk to that stupid chair of the Federal Reserve about it, the bond market would have freaked out.

39:53There would have been cats and dogs living together. It would have been chaos. It would have been the front page story of every newspaper in the world. And when Trump says this, we get a shrug because nobody knows, is it true? Is it not true? Is the old man just talking again? You know, can he do this? Will he do it? And you just, it's such a wild comment that the market didn't know how to respond, so it did nothing. Right. Now, should interest rates come down, you might argue that that very comment means that interest rates should go up. because if you have a president who is meddling with the independence of the Federal Reserve, maybe the president can get short-term interest rates down.

40:46And there's cases of this in history, Lyndon Johnson basically threatening to physically harm the chair of the Fed if he didn't line up. And, you know, president, you know, but if if rates are artificially pushed down at the short end, it makes all the sense in the world that at the business end, the long end, they should go up. Right. Because now I'm scared whether the Fed can do its job without the president fiddling around. Right. So if anything, the comment itself makes interest rates go up. Now, are interest rates where they should be? the U.S. economy by every indication we can, that I know of, almost every indication I should say, indicator I can think of, is growing above its long-term trend rate.

41:37Meaning we're growing at like two and a half, three percent. Given the population and productivity and everything else, trend growth is like one and a half to two. So economy running hot, inflation, and you can argue how you want to cook your inflation numbers till you're blue in the face, but inflation pretty clearly above the Fed's target. So economy growing faster than trend, inflation still above target. And you're telling me the Fed should cut? Why exactly? Right? Now you could say, you know, unemployment is going up. You could make an argument, but it's not a very easy argument to make, right?

42:18These numbers, you can always have a fight about what the employment numbers are telling you and et cetera. But right now, it looks like a perfect time not to do anything to interest rates, as far as I could tell. So the US, 5 % of the world's population, a quarter of its GDP. And right now, it's about half the value of all stocks globally, or the S &P. The US stock market represents 50 % of all stocks globally. And if you use that, And I think it's a safe bet to say that's a proxy for private market valuations. It's saying that the U.S. is worth as much as the rest of the world. And I want to bring this down to an investment strategy and get some stock recommendations.

42:58I am, when faced with this question, if someone offered me one share in the U.S. or one share in the rest of the world, and they were both priced the same, as much as I love the U.S., as bullish as I am, I would pick the rest of the world to outperform at the same price as the U.S. And so I am slowly but surely rotating out of U.S. stocks into international stocks. You've written a lot about European stocks and stocks in the U.K. Do you think that's a rotation or a reversal of the flows of capital is here? And specifically, what do you think of European and UK markets? Okay, point number one. There's no question that the US market deserves a premium.

43:41What we were discussing is how big that premium ought to be. So the US is growing faster than any other advanced economy and seems to be growing sustainably faster than any other US economy. Its workers are the most productive. It has tremendous energy resources. It is an open capital market that outside capital is always gagging to get into. So you have the most availability of capital for young companies with good ideas. There's a reason we're the innovation economy. All of this is true. too. And so, the price you pay for a dollar of European profits today and the price you pay for a dollar of US profits, you should be paying more for the US for the same dollar because it's going to grow more in the future.

44:30That dollar is going to get bigger at a faster rate. Has this gone too far? Probably.

44:39However you measure US asset valuations, they are at the very, very top of their historical range. Whether you want to talk about the equity risk premium, price to earnings multiples, the size of corporate valuations versus the size of the whole economy, everything is at the top. So the question you have to ask, is America's lead against the rest of the world really that much bigger than it was 10 years ago when these valuations were lower, the US was ahead then too, right? So I think your strategy is a good one. I would never, in my own case, or telling my mom what to do, I would never say, get out of the United States.

45:22And this has happened to me. So I think I've said this on the show before, but this is the anecdote in my own case. I had a globally rebalanced, a globally balanced portfolio when I started investing seriously 15 or 20 years ago. Over the last 15 to 20 years, it's become a U.S. dominated portfolio because the U.S. stuff has done so much better. And now I'm looking at it and I'm saying, in retrospect, I wish I was 100 % U.S. at the beginning. It's natural to think that. You know, you want to stick with your winners. But rebalancing out of the asset that is wildly outperformed into the asset that's underperformed, that probably makes sense.

46:07Now, you say, do you like European or UK markets? Very interesting question. uh one feature of those markets is that they are very their mix is very much towards what we call value stocks or value industries so you're talking about a lot of banks industrials companies energy oil and gas these you know there's not a lot of kind of um as it were sexy growth companies over there, right? And so you have to look a little bit hard. And in the column, we have been looking. And the thing is, the European companies, the UK companies that do have America-like growth multiples are priced almost like American companies, right?

46:59The difference in valuation between a really growthy European and UK stock and a US growthy stock is really not that great. This is for big caps, companies that people all follow anyway. But so alas, the market, when it comes to individual stocks, it's pretty efficient. So what you're betting on then is a kind of like European or UK comeback. Can these economies get over the trouble that they're in right now? the persistently low growth, the, you know, they're in a terrible situation where their inflation situation and their growth situation is worse than ours. You know, can they break out of that cycle?

47:47I just feel like everybody hates Europe so much right now that it has to have upside. You know, to read the newspaper, even the FT, you'd think Europe was about to disappear from the map. Totally agree. You know, I mean, it's like, can it be this bad? Are there specifics? I'm a fan of Fallen Angels. I was looking at Novo Nordisk, which has been cut in half. Are there specific sectors or names that you're looking at in Europe or the UK? I mean, pharma is interesting, right? Because pharma is an area where Europe has always had great companies, not only Novo Nordisk, but Novartis, you know, the big British ones, AstraZeneca, etc., etc.

48:32You know, that's really, those are really product stories, you know, so it's not like the, there's a, you know, you have a view on the individual products of the individual companies. But what about the industrial stocks over there? You know, who's going to, when this horrible time in Ukraine is behind us and may it end well, who's going to rebuild that country? You know, I think that's an interesting question. So, you know, there's very good defense contractors in the UK. Like all of these, you know, if Europe is going to rebuild its military capacity with some encouragement from our president over here, who's going to benefit from that?

49:18Right? That's an interesting question. I want to get your thoughts on what's happening with immigration. Trump is making good on his promise of this very strict immigration policy. He's suspended the asylum process. He's starting to actually deport people. in some, it's happening. What does that do? What does that mean for us as investors? What does a large immigration crackdown mean for the economy and how might that translate to the markets? This is a tricky question and I will address it with the famously arcane theory of supply and demand. Illegal immigrants are some 5 % of the American workforce.

50:07Plus, I mean, the thing about undocumented immigrants is they tend to be undocumented. So they're a bit hard to count. But let's say it's 5 % of the workforce. Now, let's say you're going to either scare or move half of them out of the country. Now you've reduced the workforce by two and a half percent. Supply of labor down. Cost of labor up, says I learned back in supply and demand school. And I also learned in inflation school that the kind of inflation that tends to be self-perpetuating is wage inflation. So everybody's worried about whether tariffs are inflationary. Maybe, maybe not. It's tricky to say 100 different variables.

50:59If you do real, not just throwing out the criminals, but throwing out a significant proportion of the illegal workers in this country, that does sound a bit inflationary to me. And that will matter. The other thing is the labor cost will not be distributed equally across the workforce. What businesses are we talking about? Hospitality, agriculture, and home building. Right? You know? And so, and at the same time, by the way, for home building, that Trump doesn't want to let any Canadian lumber into the country. In other words, groceries and housing. Yeah. Groceries and housing. Now there's already stories coming out of California that nobody's showing up to pick the oranges.

51:42It's orange season in California. I don't know how true these stories are. I wait to find out. But in a week like this, maybe you don't show up for work just in case. Right? And so is somebody going to pick all the oranges? Well, in a couple of weeks, we'll know. But that seems significant to me. But I don't know. What's interesting, from my point of view, is that the market is not really reacting to this stuff. Homebuilder stocks have stopped going up. They had a great couple of years, and they've stopped going up, but they haven't fallen. you know, the market doesn't know how far this stuff is going to go.

52:19And this is the incredible, the persistent theme with all things Trump and markets. Markets don't know which of the things he says are true and which are just talk. And in general, the market is dealing with that uncertainty by just kind of being a deer in the headlights. So final question, Robert. The 10 years at about, I've said on this show that I think the adult in the administration is the 10 year. Yes, that's correct. It's at 4.6 % today. Everything we've been talking about, and I bring some bias here, but immigration policy, what you said, people think agriculture is dominated by immigrants or undocumented workers.

53:05That's 14%. It's 17 % in construction. So you look at the cost of rebuild or places like Los Angeles or just general, we need a lot more housing in the country. You talk about deficits, which I think are inflationary. I would argue that tariffs are ultimately inflationary. It just feels as if, well, I'll ask you. I think the 10 years going over, I think we might see a 5.5 % tenure by the end of the year. I think the notion that he's demanding that interest rates come down, I think the bond market says, hold my beard. Yeah, I agree. That's exactly the point I was making. Talking that way makes it go up.

53:44So what are your, if you had to try and play, you know, 10-year bingo, end of the year, end of 2025, any thoughts? Fuck. Yeah, again, if I knew the direction of interest rates, man, I would be a rich man, not a journalist. But let me put a framework around your question, at least, that some listeners might. There's three basic reasons that could explain, three basic factors that could explain why the 10-year has risen as much as it has and why it might rise more. One of them you just referred to, inflation expectations. Now, by a lot of measures, inflation expectations have risen, but not by as much as the 10-year.

54:29So now we turn to the other two factors. Another is uncertainty. If I don't know what is going on with monetary or fiscal policy over the years to come, I demand more yield from my treasury investment just to insure me against the uncertainty. So that's number two. How much of the raise is just not knowing and demanding more yield because I don't know? And the final one is growth expectations. If I think growth is going to rip over the next five or 10 years or even two years, that pushes long-term yields up. So there's a real growth component of yields. So you have to kind of think about of those three, which are dominating and which will continue to move.

55:13I think a lot of what we've seen is people really are increasing their growth expectations. I would say that's part of it, and you shouldn't look past it. If you look at surveys of things like business confidence, they're really coming up. Investor confidence, household confidence. So I think part of this is people, whatever else they may be expecting, are expecting a little bit more growth from the U.S. economy. So that may be part of the story here. But I agree with you. Inflation is the thing that moves it fastest and potentially move it the most, as we just learned in the last couple of years.

55:46So that's the one you've got to think about first. But you can't think about it in isolation from the other two. Robert Armstrong is the US commentator for the Financial Times and writes the Unhedged newsletter. Previously, he was the FT's US financial editor and chief editorial writer. Before becoming a journalist, he worked in finance and studied philosophy. Robert, thank you so much. We always learn a lot. when we have you on. You guys always ask great questions. So it's great to be here. I don't know if my answers are any good, but the questions are right on. We'll let the listeners decide.

56:16Okay. That's what we say in our dark nights of the soul in this business. We'll leave it to the reader to figure out. Exactly. Thanks for joining us. Thanks, guys. Thanks, Robert. Cheers.

56:36Scott, you and Robert both expressed this desire to rebalance your portfolios, to look outside of the U.S. for some more balance. More of a practical question. How often do you re-evaluate the overall balance of your holdings? And how often do you think listeners should be doing the same? So I think of rebalancing as the other side of the coin or the action from the reaction or the decision to diversify. And I didn't realize how powerful and important diversification was. I was always all in on one company thinking that's how you got really rich. And both in 2000 and 2008, that lack of diversification basically, you know, took me from someone who was wealthy to someone who was very much not wealthy.

57:22So now when I think of rebalancing, what I do is it's not that I sell stocks to get out. What I do is when I have a liquidity event, I think, okay, where should I invest where I'm not already really concentrated? Rebalancing when you're in your 20s and 30s, as soon as you have an asset base of, say, more than six figures and something, sometimes you have to go all in on a house because it's your first house you need to borrow from your in-laws, etc. Sometimes you have to go all in on a business to start a business. But once you have a decent or a nest egg or something resembling real capital, you need to think immediately, okay, I don't want to be that idiot Scott Galloway and go back to zero.

58:03Because it's not only financially stressful, it's emotionally and mentally really stressful. If you have a company that's doing well and it's raising money, take some money off the table. Ask your board if you can take some money in a secondary. If you have one stock that gets above 50 or 60 percent because it's NVIDIA and it's gone up tenfold, sell some of it in balance. Don't be an idiot like me. Don't end up with 70, 80, 90 percent of your net worth in one asset, no matter how attractive that asset may seem. Red envelope is going public on the NASDAQ. Credit Suisse First Boston and Freight Watrone are taking us public.

58:39It's going to be worth a billion dollars. Daddy's looking at Jets. And then he wasn't. take some money off the table the moment you have the opportunity to, and more than 50 % of your net worth is in any one asset. Do not be Prof G. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss, Mia Silverio is our research lead, Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

59:26Lifetimes

59:32You have me In kind reunion As the world turns And the dark flies In love, love, love, love