John Carl,
Editor
Jan. 31, 2025
It’s official: America is in an all-out AI Arms Race with China.
Earlier this week a Chinese upstart named DeepSeek released an impressive new version of its AI platform, issuing a direct challenge to America’s AI superiority.
(If your email box looks anything like mine, it’s choked with headlines telling you exactly this, and so you’ve already heard the news.)
Wall Street reacted with shock and horror at the idea of some little Chinese startup threatening their AI cash cow — and over $1 trillion of market share disappeared as investors rushed to the exits.
- It was the largest single-day wipeout of wealth in history...
- Nvidia CEO Jensen Huang’s net worth fell $20.8 billion in a single day.
- And Oracle boss Larry Ellison lost $27.6 billion, falling from 3rd richest person in the world to 5th.
Even worse, it stole the thunder from Trump’s “Project Stargate,” the $500 billion AI project announced by the incoming President the very day after his inauguration.
You don’t need to be a conspiracy theorist to see that none of this is coincidental.
DeepSeek’s aim from the beginning was to be disruptive. The front page of the DeepSeek website even has a direct comparison of DeepSeek vs America’s beloved AI projects. Data scientists are still verifying the comparisons — but the point is obvious, that DeepSeek’s primary objective is not to innovate, but to intimidate.
DeepSeek’s desperate attempt at a data measuring contest.
Yes, DeepSeek does have some truly powerful features. Nobody is saying otherwise, myself included. But it’s here to brag.
It’s outdone its own previous lackluster performance, and it wants the entire bar to know that it’s stacked with pre-ban Nvidia chips and ready for action. It no longer has to rely on just the motion of the ocean — who’s ready to take it home and try out the power of its algorithm?
DeepSeek is a bid to steal the narrative, and it’s certainly accomplished that goal! Wall Street is sometimes a little too predictable, and they took the bait hook, line, and sinker.
But I’m not ultimately worried about this new development. In fact, I welcome it. It’s a sign that innovation is proceeding exactly as it should.
And we have history as a guide to how this is likely to play out.
I wrote to my Digital Dispatch readers that we’ve seen this before, and it was only a matter of time before we saw it again.
Let me share an excerpt...
The good news is that the fears stoked by DeepSeek (whether intentionally or not) are just a natural part of any adoption cycle.
The “Jevons Paradox” to the Rescue
History is a helpful guide to what’s happening now — and what’s likely going to happen next. And for that, we turn to what historians and economists call the “Jevons Paradox.”
In 1865 an English economist named William Stanley Jevons wrote a book called The Coal Question, which tackled a troubling question for the nation’s energy policy.
The coal-driven steam engine had just gone through a giant leap forward in efficiency. Unlike previous engines, new models used just a fraction of the coal to generate even more steam. Did this mean that coal demand was in for an enormous drop?
Not at all — and thus, the paradox. The increase in efficiency didn’t reduce coal demand, it sent it flying through the roof. Thanks to the lower costs brought by increased efficiency, steam engines were now practical enough to build by the hundreds. And then by the thousands. And then they were used in trains, ships, factories, and dozens of new industrial uses.
The Jevons Paradox has been seen countless times in modern history, explaining how efficiency paradoxically drives more demand...
- In everything from lightbulbs (you have so many more in your home today because they’re cheap)...
- To data storage (despite ever bigger hard drives and compression, the amount of data stored per user continues to only go up)...
- To water reservoirs and river management (we’re looking at you, Phoenix, where water efficiency has created a metropolis in the desert that only continues to grow)...
- To weight-loss calories (the more calories dieters burn, the more they’re going to gain if they suddenly stop).
But the Jevons Paradox began as an explanation for energy usage, and that remains where it’s most predictive. And that’s why we feel confident about what we’re going to see with AI. There’s going to be more of it, and everything that touches it will continue to grow. More AI chips and data centers. More electricity to power them. And more financial backing from governments, companies, and individuals.
Microsoft boss Satya Nadella reminded everyone about it this week on X (I was jealous he beat me to the punch on publishing it)...
So back to what matters the most for us as investors: letting these competing narratives play out, and sticking to the AI stocks that’ll continue to move forward on AI demand that isn’t going where.
And now there’s more reason than ever to pay attention.
This is a war, as America competes in an AI arms race with China, and we anticipate a national rally around our domestic AI innovators in the months ahead. The AI boom isn’t over — it’s only beginning.
And America’s biggest companies are already on the move. As you heard earlier, Nvidia CEO Jensen Huang, Oracle CEO Larry Ellison, and OpenAI CEO Sam Altman have just had their egos (and net worth) take a bruising.
Do you think these guys are willing to take a backseat to a small Chinese startup?
I see nothing here but opportunity. The biggest names in Big Tech are buying up all the small AI firms they can in a bid to catch back up.
America is in an all-out AI Arms Race — here’s why investors have a lot to gain from Big Tech’s new play for keeps.
Make it your own,
John Carl
Editor, Daily Profit Cycle