DeepSeek’s Shockwave andLessons for Investors
Introduction
The emergence of DeepSeek, a Chinese artificial intelligence company, has sent shockwaves through global tech markets. With its innovative AI model developed at a fraction of the cost of its Western counterparts, DeepSeek has raised serious questions about the sustainability of U.S. tech dominance and the economic viability of AI investments. This comes just months after concerns about an AI bubble were highlighted in our November 2024 newsletter. In this edition, we revisit the risks of speculative investments in AI stocks and explore why tangible, asset-backed investments like First Trust Deeds offer a safer, more reliable alternative.
DeepSeek: A New AI Disruptor
DeepSeek’s release of its AI model, R1, has upended the narrative of AI dominance held by U.S. companies like OpenAI, Meta, and Microsoft. What makes DeepSeek’s innovation so disruptive is its cost-efficiency. Developed reportedly using just under $6 million, compared to the billions spent by its U.S. rivals, DeepSeek’s model challenges the assumption that cutting-edge AI requires massive capital investment.
This announcement sparked a major selloff in AI-related stocks. Nvidia, a key supplier of AI chips, suffered a 17% decline, losing a record $600 billion in market value in a single day. See the chart “NVIDIA Stock Price Drop” for details.
Other chipmakers, including ASML and Broadcom, also saw their shares tumble, while energy companies like GE Vernova and Vistra took significant hits on fears that DeepSeek’s energy-efficient AI could reduce electricity demand from data centers.
What makes DeepSeek different? DeepSeek’s R1 model utilizes a technique called “inference-time computing,” which activates only the most relevant portions of the AI model for each query. This approach reduces computing power and energy consumption, posing a stark contrast to the energy-hungry data centers used by U.S. AI giants.
While DeepSeek’s cost-efficiency is impressive, questions remain about its long-term scalability and its ability to attract major U.S. business clients, given geopolitical concerns and regulatory barriers.
Echoes of the AI Bubble
The DeepSeek disruption underscores the fragile nature of the AI bubble. As highlighted in our November 2024 newsletter, many U.S. tech companies have committed astronomical sums to AI development without delivering proportional returns. For example:
• OpenAI expects $3.7 billion in revenue in 2024 but projects $5 billion in losses.
• Meta has budgeted over $65 billion for AI development in 2024.
• Microsoft has targeted spending at $56 billion in 2024 on similar initiatives.
These expenditures, coupled with declining investor confidence, mirror the speculative frenzy of the dot-com bubble. DeepSeek’s low-cost breakthrough only intensifies concerns about the sustainability of AI spending in the U.S. If companies fail to justify their valuations, we could very soon see a major market correction.
Real Estate Trends: A Safe Haven Amid Market Turmoil
As the tech sector grapples with any volatility stemming from the AI bubble, real estate continues to stand out as a stable and reliable asset class. Despite higher interest rates and affordability challenges, demand for rental properties remains robust, driven by long-term demographic trends and economic realities.
Why Real Estate Stays Resilient
1. Rising Rental Demand: With mortgage rates remaining elevated, more Americans are choosing to rent rather than buy. This has created sustained demand for single family and multifamily properties, especially in regions experiencing strong job growth.
2. Inflation Hedge: Real estate has historically served as an effective hedge against inflation. As inflation rises, property values and rental income tend to increase, protecting investors’ purchasing power over time.
3. Demographic Trends Favoring Rental Demand: Younger generations, including Millennials and Gen Z, are delaying homeownership due to financial constraints, lifestyle preferences, and student debt. This has led to a long-term shift favoring rental demand across many markets.
4. Limited Supply: Construction of new housing has slowed in response to higher financing costs, exacerbating the housing shortage in many markets and driving rents higher.
These trends reinforce the case for First Trust Deeds as a secure, income-generating investment. By leveraging real estate as collateral, First Trust Deeds offer consistent returns while protecting against market volatility in other sectors.
What Does it Mean for Investors?
The DeepSeek shockwave and the ongoing risks in the AI sector highlight the dangers of speculative investing. While AI promises long-term transformational potential, the path forward is fraught with uncertainty, high costs, volatile markets, and a lack of interest from most consumers who still remain skeptical about the technology’s utility.
For investors seeking stability and predictable returns, First Trust Deed lending remains a compelling alternative. Secured by real estate collateral, First Trust Deeds offer:
• Tangible asset backing, minimizing risk.
• Consistent income streams, even in volatile markets.
• Protection from speculative bubbles.
At Safeguard, our first trust deed lending opportunities offer competitive rates starting at 10.5%, designed to help investors achieve consistent returns while minimizing risk. With over 20 years of experience, our team is here to help you navigate these turbulent markets. Contact us today at 877-280-5771 to learn more about available first trust deed lending opportunities.
