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Executive Summary

Futures markets were in a tailspin early Monday due to Chinese AI tool called DeepSeek. Many investors have flocked to AI computing related companies, sending their shares soaring. As of this writing, AI company equities are tumbling as much as 17% on the day. Below is a summary from Charles Hugh Smith outlining how DeepSeek improves on AI for much less money/capital, energy, and computing resources. So, the questions are: Is DeepSeek a gamechanger or a DeepFake? Is it real? What will be the longer-term impact on AI related stocks? Time will tell what its impact is, and what the trickle-down effect will be.

Please proceed to read The Details below for more information.

“Disruptive innovations create jobs; efficiency innovations destroy them.”
–Clayton M. Christensen

The Details

Early this morning, Monday, January 27, the futures markets were in a tailspin. X was full of chatter about the new Chinese AI tools called DeepSeek. Everyone was attempting to unravel the potential disruption in markets as a result of this new and unexpected entrant. Is this the real deal? Are their claims truthful or is there more to the story that is being hidden?

As a disclaimer, I do not profess to be an expert on AI (artificial intelligence). However, I will provide a brief summary of what is unsettling the markets today. Until now, AI chip makers have been the rage. AI chips are highly specialized and allow deep learning, parallel processing and other tasks. Demand for AI has been soaring, with potential untapped uses only limited by one’s imagination. With the increase in demand, players such as Nvidia, Intel, AMD, Google and others have jumped into the AI chip market.

Investors, as is typical when a new “industry” is born, flocked to AI stocks sending them skyrocketing. However, with the introduction of DeepSeek, AI stocks are plunging, some down as much as 17% as of this writing.

Why would AI stocks plummet on the entrance of a new player? I thought Charles Hugh Smith of oftwominds.com summarized it best. Below are some of his points.

  • China’s DeepSeek appears to meet the same benchmarks as those issued by OpenAI and others but requires far fewer computing resources.
  • It achieves its capabilities not from expensive processors but from software advances that can be used on smartphones.
  • DeepSeek seems to eliminate the need for super-energy-hungry, and super expensive processors. This evaporates the need for vast quantities of electricity.
  • DeepSeek runs on standard processors and is being released as open-source software which can be downloaded and run offline on local devices, such as PCs or smartphones.
  • Effectively, the AI hardware monopoly and quasi-monopoly of AI software has been broken and can’t be put back together again.

If Charles is correct, this could have a devastating impact on the value of companies which have invested billions into AI research. Overvalued AI related stocks will plunge in value, trickling over to the broad market. However, some are speculating that China secretly has 50,000 Nvidia H100 chips running DeepSeek. At the present time no one knows what the truth is behind DeepSeek. Hundreds of billions of dollars have been invested in the U.S. in the AI industry. And that is what is disrupting the market. It is claimed that DeepSeek can achieve comparable performance at a fraction of the cost. According to The Kobeissi Letter, “It competes with ChatGPT and cost less than $10 million to develop. It was developed with chips that are considered to be FAR less advanced than those used by U.S. AI companies. […]

To put this into perspective, OpenAI, the parent company of ChatGPT, has raised $17.9 BILLION in capital over 10 rounds. The company was valued at ~$157 BILLION in October 2024. OpenAI has ~22 TIMES more employees than DeepSeek. This is why markets have been blindsided.”

So, is DeepSeek a gamechanger or a DeepFake? At present we don’t know. But the market will sort it out as days go by. Currently, the market must believe there is “something there.”

The S&P 500 Index closed at 6,101, up 1.7% for the week. The yield on the 10-year Treasury Note rose to 4.62%. Oil prices decreased to $75 per barrel, and the national average price of gasoline according to AAA remained at $3.12 per gallon.

The current low unemployment rate is deceiving, in that one would expect low and falling delinquency rates on mortgages. In fact, the added cost of deferred loans combined with a significant jump in the cost of living has created problems for many households struggling to make ends meet. Also, the jump in mortgage rates, and skyrocketing of home prices in 2021 and 2022, led some to bite-off more than they could chew. This was detailed in last week’s newsletter. Look at the chart below from RedFin showing homebuyers need to make $115,000 just to purchase a median priced home.


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