Robert Armstrong
Appearances
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
It's really great to be back. And what a great day to be talking about markets.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
First thing we can say is that it is notable that none of the people who are on the wrong end of all that lost money are saying that this is a fraud or indeed anything less than a major breakthrough in AI. So people who own AI startups, people who run open AI and all these other companies, they are all saying in one voice, this technology is for real. This is different.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
The people at DeepSeek have made a step forward. They're not saying this isn't all it's cracked up to be. It's a, it's a wicked communist party trick or whatever else they might say. So that's important. I would put the issue like this. We had a certain vision on Friday of what the future economic structure of the AI industry would be.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
And that vision of that economic structure is significantly changed as of now. So I would say the price changes are warranted because in short, We were living in hope, fear, or anticipation that this would be an industry with a competitive structure that looks like other big tech industries. In other words, very much winner take all. One company dominating.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
And now we have a vision of the AI industry where it is much more competitive and the profits are shared. And indeed, much of the value might be captured by consumers rather than companies. So that changes the picture a lot.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
I mean, you might summarize comments like that as saying that the cost to train up this model is was not as low as the company claimed. So a lot of the excitement is they say they trained this thing up for 6 million bucks or whatever, which is like several orders of magnitude less than what we were told it costs to train up a competitive AI model. That is a very big deal.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
And indeed, something like that could be true. I can only speculate along with anyone else. But what we do know is that this model has now been released And people are running it on their own computers and really liking the results. And it's just out there now, right? And the principles behind it.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
As one person in the industry put it to me yesterday, they've released enough information so that you can run it yourself, use it yourself, not necessarily build it yourself, build a competitive model, but enough that you can really operate this thing yourself. In a way, a genie has been let out of the bottle that cannot be put back in.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. And that's very optimistic, and it may not turn out to be as good as that. But so the analogy I would point to
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. It moves all these people around the world, tens or hundreds of thousands every day. through the air very quickly. Very few of them die, right? It's like amazing thing.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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, it's all, 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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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 team
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
model behind your applications either involved building your own, having your own data centers at incredible expense, or going to ask open AI or whoever the dominant player turned out to be, pretty please, can I run my application on top of your brilliantly good AI model? Now maybe, You can run your applications and you can run the AMI model on your own computers.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. This 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?
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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, it's not building up this capacity. It's not spending enough. Nah, nah, nah. And like, is anybody saying that this week?
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. I'll just wait to see what happens. And then when the smoke clears and there's a winner, then I'll pick my strategy. And maybe that was a cagey approach. I keep saying maybe, and I know that's frustrating probably for you and for listeners.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
But I think, Ed, you nailed it, that this has happened very quickly. And there's necessarily an element of speculation in all of this.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Yeah, maybe it's like, can I have my money back? I 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?
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
So maybe there's something I don't know here, but I was surprised to see Oracle stock hit the way that it was.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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, you know?
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
It's not the bubble popping.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
We did not see a bubble pop yesterday.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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...
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. So... 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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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, our FT writers have been writing about this for months, that something like this would happen. So everybody knows...
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
that exciting things are happening within the Chinese corporate economy that doesn't fix any of the structural problems with outsiders investing there.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. There would have been cats and dogs living together. It would have been chaos.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. And there's cases of this in history.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Lyndon Johnson basically threatening to physically harm the chair of the Fed if he didn't line up. But 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. Because now I'm scared whether the Fed can do its job without the president fiddling around.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Meaning we're going at like two and a half, 3%, 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 feds target. So.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
economy growing faster than trend, inflation still above target, and you're telling me the Fed should cut? Why exactly? Now, you could say unemployment is going up. You could make an argument, but it's not a very easy argument to make. These numbers, you can always have a fight about what the employment numbers are telling you and et cetera.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
But right now, it looks like a perfect time not to do anything to interest rates, as far as I could tell.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Okay, point number one. There's no question that the US market deserves a premium. What we're 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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
It is an open capital market that outside capital is always gagging to get into. So you have the most availability of capital for like young companies with good ideas. There's a reason where the innovation economy, all of this is true.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
But, uh, and so, you know, 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 U S for the same dollar. Cause it's going to grow more in the future, right? That dollar is going to get bigger at a faster rate. Has this gone too far? Probably.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
however 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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. And this has happened to me.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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 US-dominated portfolio because the US stuff has done so much better.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
And now I'm looking at it and I'm saying, in retrospect, I wish I was 100% US 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. Uh... Now you say, do you like European or UK markets? Very interesting question.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. There's not a lot of kind of, as it were, sexy growth companies over there. And so you have to look a little bit hard. And in the column, we have been looking.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
And the thing is, the European companies, the UK companies that do have America-like growth multiples are priced almost like American companies. The The 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, you know, companies that people all follow anyway.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
But, you know, 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? They're in a terrible situation where their inflation situation and their growth situation is worse than ours.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Can they break out of that cycle? I just feel like everybody hates Europe so much right now that it has to have upside. Yeah. To read the newspaper, even the FT, you'd think Europe was about to disappear from the map.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
I mean, pharma is interesting, right? Because pharma is an area where Europe has always had great companies, not only Novo Nordisk, but Novartis, the big British ones, AstraZeneca, et cetera, et cetera. Those are really product stories. So it's not like you have a view on the individual products of the individual companies. But what about the industrial stocks over there?
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Who's going to win 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, that's an interesting question.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Uh, so, uh, you know, there's, there's, you know, very good defense contractors in the UK, like all of these, you know, if, if, uh, if Europe is going to rebuild its military capacity with some encouragement from our president over here, who's going to benefit from that. Right. That's an interesting question.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. Plus, 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
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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 the, 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 like everybody's worried about whether tariffs are inflationary.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Maybe, maybe not. It's tricky to say. A hundred different variables. If 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?
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
hospitality, agriculture, and home building. And at the same time, by the way, for home building, that Trump doesn't want to let any Canadian lumber into the country.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Yeah, groceries and housing. Now, there's already stories coming out of California that nobody's showing up to pick the oranges. It'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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Uh, but that seems significant to me, but I don't know. Like the, what's interesting from my point of view is that the market is not really reacting to this stuff. Homebuilder stocks have not have stopped going up. They had a great couple of years and they've stopped going up, but they haven't fallen. Uh, you know, The market doesn't know how far this stuff is going to go.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
And 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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Yeah, I agree. That's exactly the point I was making. Talking that way makes it go up.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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. So now we turn to the other two factors. Another is uncertainty.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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 cover, to ensure 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,
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
over the next five or 10 years, or even two years, uh, that, that pushes, uh, 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. I think a lot of what we've seen in the rate is people really are increasing their growth expectations. I would say that's part of it.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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 US economy. So that may be part of the story here. But I agree with you.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
Inflation is the thing that moves it fastest and could potentially move it the most, as we just learned in the last couple of years. So that's the one you've got to think about first. But you can't think about it in isolation from the other two.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.
Prof G Markets
Winners and Losers After DeepSeek — ft. Robert Armstrong
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.