Dropping like wet SOXX on a Chicken?
The Blind Squirrel's Monday Morning Notes. Year 3; Edition 5.
The appearance of The HeatSeeker™ (that is DeepSeek R1 to the uninitiated) has everyone rethinking the AI trade. Is The Highlander™ fatally wounded and could he take the SOXX (semis) with him?
The 🐿️ gives some thought to winners and
Sam Altmanlosers. Cash alone is not a moat!Section 2 brings 2 new acorns - one an AI derivative, the other my favorite new asymmetric tariff idea in the precious metals space.
In case you missed it, I sat down with Ben
Brey and Nadine Terman again last week. Lots of BUSHY™ discussion and other fun stuff. Check it out via clicking the image below (also on YouTube and all the pod apps):
Dropping like wet SOXX on a Chicken?
I usually start to write this note at some point on Thursday afternoon each week in the hope that the world does not change too much between then and Sunday evening when I hit publish. Not much chance of that happening these days!
I am finally sitting down to put pen to paper in the middle of Saturday afternoon. For this topic, the research rabbit holes were seemingly never-ending. Your 🐿️ has already consumed tens of hours of expert podcasts and videos and read tens of thousands of words of news and opinion (frankly mainly the latter, hard facts are less easy to establish!) on the topic of last week’s DeepSeek AI moment in markets.
The editorial on the topic - from the sensational via the frankly disingenuous to the outright conspiratorial - keeps pouring into this poor rodent’s inbox but it’s time to draw the line. Here we go!
I thought I would start by asking DeepSeek R1 itself to identify the epithet that best caught the zeitgeist of collective awareness of its existence on markets.
Not bad, but I think could be improved upon (even after the 40 lines of ‘reasoning’ that I had to cut out of the screenshot above). I was pretty partial to Brent Donnelly’s ‘DeepSeek Freak’ and Peter Atwater’s ‘DeepSh#t’. But for AC/DC’s sake, I was pretty disappointed that the 🐿️’s own attempt, the 'Mag7 HeatSeeker’, did not go viral over the Australia Day weekend. I am making the assumption that knowledge of the Ozzie rock legends’ lesser-known back catalog did not form part of R1’s training run.
A week on, it is becoming clearer to me that the R1 HeatSeeker™ (yes, the 🐿️ is ™-ing it now!) was not necessarily targeting the Mag7, rather aimed at general valuation exceptionalism in other corners of the (public and private) equity markets.
Only that legendary arsonist of other people’s money, Softbank’s Masa could think that now would be a good time to double down on Sam Altman’s OpenAI.
As my friend,
points out, the idea of leading a fresh round at OpenAI with a headline valuation of more than 2 times the $157bn printed only a few weeks ago makes Masa’s financing of Adam Neumann’s WeWork adventure look almost reasonable.The Drey (the 🐿️’s membership Discord server) has been very active on this topic over the past few days. One of the most valuable contributions came from a subscriber who elegantly summed up the news this week as a validation of the ‘zero moat thesis’:
“In the past I thought about it as this: At the point where someone has an AI that does all things, the next person comes along and says "hey AI, build me an AI that does all these things (or some particular thing). kthxbai" - ‘Josh’ in The Drey.
Josh went on to observe that “AI has always been the snake that would eat itself in tech”. In their rush to create ‘digital God’, have the hyper-scalers compromised the value of their own network moats?
I can see how a companies like Facebook and Amazon can now harness AI to auction off our attention and eyeballs to advertisers in an ever more effective manner. Less certain that this can be the case for Google (RIP conventional search? - I know that I barely use regular search anymore) …
For OpenAI, the only moat appeared to be Star Wars Stargate-style spending on galactic-scale compute capacity.
Data center and compute capacity, while admittedly facing near-term supply bottlenecks, is a utility. Ultimately, this rodent suspects that they will be valued like one.
We will get to land and power later, but first we have to talk about The Highlander™, the 🐿️’s nickname for Nvidia that also (unjustly IMO) failed to go viral last March.
We will find out eventually whether or not DeepSeek’s R1 model came into existence thanks to some clever procurement of Nvidia GPUs on the black market. Am not convinced that this really matters in the end. R1 appears to be already running inference on Huawei Ascend 910C chips. Will Huawei chips be able to handle model training runs next? Did we really think that Chinese engineering would fail to innovate when faced with the existential risk of chip export bans?
Is the 🐿️ calling time on The Highlander™? Not necessarily. Nvidia had the foresight to widen its moat via CUDA, it’s integrated (and bundled - very unpopular with many regulators (another risk!)) software ecosystem. It has also already locked in $210bn worth of Blackwell GPU sales to the hyper-scalers for 2025 alone (although the market is pricing in multiple years of these super-sized high margin sales).
However, when approximately 38% of the company’s revenues come from Microsoft, Meta, Alphabet and Amazon, the wealthiest companies on the planet, it is not unreasonable to assume that Nvidia’s margins will face customer scrutiny and a search for cheaper alternatives or ‘in house’ custom silicon options.
This might turn out to be even more the case if it emerges out that the high prices for Nvidia’s GPUs were really part of a (now presumably failed?) ploy by the US tech giants to corner the market in high-end compute and keep advanced AI models for themselves.
Call me a gobby rodent, but you would have thought that the risk of multiple compression at The Highlander™ (already noticeably dipping) might be quite high! Yet apparently, Monday’s record market cap drop for the chipmaker was just another ‘sale of the century’ for the retail dip buyers. Let’s see how that works out for them.
My perceptive reader Josh again:
“There's still some part of me that says "GPUs are (sort of) valuable". Say everyone does turn out to want a home GPU. NVDA up? But what if it's like more like a housing bubble: everyone builds a ton of houses and the Airbnb people / Blackrock all hoard them. The housing bubble pops, prices down, but those houses themselves are still an economically useful thing but at a smaller scale. If GPUs value (and hence Nvidia's margins) were based on the future ability to monetize those GPUs, the present value of that cashflow is now down substantially. You now (potentially) have huge oversupply. The tech bros don't know what to do. The future of abundance they promised has arrived. Suddenly it turns out that the value of the GPU is highest in the hands of the individual not the hyper-scaler.”
What does this mean? Happy to confess that the 🐿️ too had to remind myself what Jevon’s Paradox was last week. Yes, am happy to be persuaded that cheaper compute drives broader AI adoption. However, I am not sure that this was the intellectual ‘get out of jail free’ card for those big spending cloud hyper-scaler CEOs want us to believe.
The thing is, Jevon was talking about coal - a commodity - not a fresh opportunity for monopolistic rent seeking by the tech overlords. With the brains of AI now open-sourced, raw compute is also fast likely to feel like a commodity. Albeit a very expensive one…for now.
To give readers hope that there is still hope for us humans with this week’s backdrop of AI acceleration, I asked R1 to identify the source of the expression that inspired the title for this week’s piece. DeepSeek would appear to not to ‘do literal’! Surely everyone knew that wet socks struggle to stay up on (thin) rooster legs?
The important question for us to ponder is the path forward for the SOXX 0.00%↑of a non-clothing variety! Without the contribution of a few names (Broadcom, Nvidia, TSMC, Marvell and Qualcomm), the semiconductor complex (SOXX ETF) would have been under water over the past 12 months. If The Highlander™ is wounded, who takes over leadership in this sector? His distant cousin at AMD?
In Section Two this week the 🐿️ contemplates what the DeepSeek narrative shift means for semis and other beneficiaries of the AI capex boom of the past 2 years (such as energy and infrastructure). We also interrogate the validity of the claims of the supposed new opensource ‘low cost’ AI ‘winners’. Looking at you, SaaS boys!
‘S2’ also contains a bonus ‘mini’ acorn in the precious metals space. Left field, very analog but potentially rather interesting. A tariff idea I can get behind.
Join hundreds of smart investors (like Josh!), market watchers and upstanding citizens by becoming a paid subscriber to Blind Squirrel Macro and receiving the other 65% of 🐿️ content, members’ Discord access (The Drey) and even ‘limited edition’ merch!).