I am going to keep sharing the CAPE Ratio, also known as the Shiller PE Ratio, because I know somewhere the professor who taught me the importance of this metric is smiling. It is a simple equation anyone can understand—the ten-year average of inflation-adjusted earnings in the denominator, and the share price in the numerator. The ratio that produces tells you what the value of stocks are compared to past points in history, and is a handy way to tell if markets are expensive to buy relative to their fundamentals.
And China may have just poked a big ‘ol hole in our gigantic AI bubble that has driven this market to these historic highs.
In July, I wrote about Goldman Sachs pouring a lot of cold water on the AI hype, as they highlighted the immense capital expenditures required to build this stuff that doesn’t make companies any real money yet. There’s a reason that all those leaks and statements from businesses like OpenAI focus on revenue and not profit. They don’t profit much! If at all!
Nvidia is the poster child of this AI bubble, as measured from the stone bottom of the 2022 bear market, it went up nearly 1,300 percent to the pico top, a move twice as big as the one that Bitcoin made over the same period. As I write this, Nvidia is currently down a whopping 16 percent today, a shitcoin-like move from what was the second largest company in the world by market cap, now down to third behind Apple and Microsoft.
But it’s not just Nvidia having an existential crisis today, as other AI companies dependent on the U.S. market, like Taiwan Semiconductor Manufacturing Company, is down a little less than 14 percent, while Broadcom, who also manufactures semiconductors, is down over 17 percent as of this writing. Certainty in markets is verboten in financial-speak, but it is crystal clear that this is an AI event unfolding in markets that otherwise are up, like Apple who is up just over three percent right now.
So what the fuck happened?
DeepSeek is a name that everyone should familiarize themselves with, as this Chinese AI startup has become the most popular app in the American Apple App Store over the past week. Marina Zhang, an associate professor at the University of Technology Sydney, explained why this is such a big earth-shattering moment in the AI race to Wired.
“Unlike many Chinese AI firms that rely heavily on access to advanced hardware, DeepSeek has focused on maximizing software-driven resource optimization. DeepSeek has embraced open-source methods, pooling collective expertise and fostering collaborative innovation. This approach not only mitigates resource constraints but also accelerates the development of cutting-edge technologies, setting DeepSeek apart from more insular competitors.”
In short, DeepSeek built a better AI that uses far less computing power (so it doesn’t need Nvidia’s chips) and proved that the moat supposedly built around American companies like Nvidia or OpenAI is not much of one at all. America’s AI is just incredibly costly to train and maintain, and compared to what China just did, now looks like a dinosaur in the AI race.
This bubble has been driven by AI, and now the entire theoretical basis of the AI bubble has been challenged by DeepSeek. This has forced many to reckon with the fundamental structural issues in this hype-based industry that folks ranging from Ed Zitron to Goldman Sachs have been sounding the alarm over for quite some time. The four largest stocks hit by the AI collapse today, the aforementioned three plus Oracle, all currently have market caps of a combined 5.33 trillion, or about 20 percent of the annual GDP of the United States. They rose to these lofty heights on the back of AI hype telling us that these companies would lead us into the future that DeepSeek just built, and it’s fair to question how far they could fall without that hype, and what kind of damage that scale of wealth destruction could do to an already frail economy flashing warning signs. China is now forcing the market to ponder that question today, and given on how expensive this stock market is compared to past ones, it still has a very long way it could fall.
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