DeepSeek Is Good News For The AI Gold Rush

•  In July and August of the past year, I explained the world had entered an AI and tech gold rush. Enormous amounts of money were pouring into building computer models that could extract and interpret golden data.

• Since that time, the number of AI miners and camp followers has exploded, making AI or Nvdia names that even your grandmother knows.

• In those articles, I cautioned that I believed the AI miners would find golden data, but how much of it they would find and how much investors would be willing to pay for it were big question marks.

• The other reality that I saw was that, with AI, we are in the mining phase, not the golden-products phase. No single product or service stands out at present as the game-changing prototype of things to come. 

This past week, a more ecnomical Chinese DeepSeek model caused lots of wild gyrations of most tech stocks. Net, net the tech market ended down only 3-4%. On the surface, DeepSeek, which costs a fraction of that of an NVDA, chip would seem to be a category crushing piece of software.

That many big techs rose sharply, such as GOOGL, AMZN, and Meta reminds us of what stage we are traversing in the gold rush. In short, those stocks rising clearly suggest that we are in the mining stage of the gold rush and not in the ingot stage. 

AMZN may be the biggest benefactor of the AI gold rush of any stock in America. They have millions of employees, millions of products, thousands of warehouses, millions of delivery miles worldwide, and billions of customers. If a better, more efficient, and less costly means of doing business is not in AMZN's future, AI will be the biggest bust since Beany Babies. 

Other giant benefactors of AI will be WMT, COST, the banking and insurance industries, and the industrial sector. If industrial sector companies like Raytheon, Caterpillar, Honeywell, 3M, and GE are to 'reshore', jobs from overseas, they must extract enormous costs from domestic manufacturing. My guess is they can do it, but it will take years, maybe decades, to get it done.

I believe DeepSeek will ultimately be viewed as a boon to the AI industry. It reduces the cost of participating in the AI gold rush and broadens the number of institutions and people who can afford to play.

Greg Donaldson has founded or co-founded four investment advisory firms and two families of mutual funds. He has authored two books, one on investing and a book of poetry published soon after he was out of college.  

This article is not intended as investment advice. You should seek an investment professional's views before making any investment. 

These views I have shared here are my own and not any company I am associated with.

Downshifting The Industrials

In today’s Investment Policy Committee (IPC) meeting, we focused on the sector weightings in our portfolio.  Industrial stocks were of particular interest.  The industrial sector faces several headwinds at this time.

1. Interest Rates

How can low interest rates be a headwind?  Our research shows that the relative performance of the Industrial sector is positively correlated to interest rates.  The chart below shows this relationship.

As you can see, 10-Year Interest Rate Yield (blue line) and Industrials Index relative to S&P 500 (orange line) move closely together.  This may not be immediately intuitive, but the relationship does make sense. 

When interest rates rise, that generally means the economic outlook is improving.  The Industrial sector is particularly sensitive to economic movements.  Therefore, an increase in interest rates indicates an improving economy, which is positive for industrials.

We believe interest rates will remain muted.  The industrial sector could underperform over the near-term, as a result.

2. Emerging markets

Many industrial companies have made huge investments in foreign economies, particularly emerging markets.  The decline in oil prices has really put a hurt on several foreign nations, particularly Brazil.  China’s economy has also slowed, which has not been favorable for the outlook of many industrials.

3. Energy prices

Low commodity prices represent another headwind.  Oil prices do not directly impact industrials, however, many of them manufacture supplies for the energy producers.  As the investment budgets for energy companies dry up, it means less demand for their suppliers.  If oil prices remain low, the energy divisions of many industrials will also suffer.

4. Competitiveness

Currency issues impact the industrial stocks in two ways:

1. Earnings translated back into U.S. dollars are worth 20% less than they were 6 months ago.  The market can overlook that, as we will explain more in coming weeks.  

2. Industrial companies who sell to foreign nations are much less competitive when the dollar strengthens.  That hurts competitiveness of U.S. suppliers.

What does it mean for you?

We continue to like the industrial sector for the long-term, but these headwinds will not go away in the near-term.  As a result, we have decided that it is prudent to cut back your exposure to the Industrial sector until these headwinds subside.