So long Marianne, it’s time we began,
To laugh and cry, to laugh and cry, about it all again
Leonard Cohen
A quick farewell to Marianne Faithful: musician, artist, actress. Mick’s Muse, Lady Jane, Ruby Tuesday, the girl, who, once had him down. She was (I just learned) also the inspiration for the Hollies’ Carrie Anne, and she left us this past Thursday.
****
Not that I had any intention of doing so, but the week’s headline market news is impossible to ignore. In the early hours of Monday morning, a near-panic emerged based on a heretofore unknown Chinese startup called DeepSeek’s having replicated, or bested, on a corroborated basis, some of the industry’s most fully rendered Artificial Intelligence models. Producing similar, if not superior results to its largest competitors — at a (purported) fraction of the cost in terms of time and investment, relative to the outlays issuing from the behemoths that were destined to lead us into the AI promised land.
The primary victim was NVDA, who, of a sudden, may see the up-till-now insatiable demand for its most expensive Graphics Processing Units (GPUs), driven as they have been lately by the needs of AI model developers, diminish materially. Contemporaneously, Monday’s selloff caused the largest one-day valuation loss — +/- $1 trillion, in market history, with over half of it being borne by NVDA itself.
Friends, we are, to the best of my knowledge, in uncharted territory here. Never in my long experience had any previously anonymous enterprise dropped news of a paradigm-shifting productivity advancement, seemingly out of nowhere, and causing such a dramatic rethink of the investment models driving the current Global Capital Markets risk allocation assumptions. There were other puzzling aspects as well, notably that the news of the new model was a week old ere the market reacted, and that the entire project was nothing more than a side gig for an energetic quant whose main job is to run an $8B hedge fund.
So, my first reaction was one of significant skepticism, because this here development, extravagantly extrapolated, is the equivalent of announcing, say, in the late 19th Century, that not only had someone developed a flying machine, but had put in place a framework that would, in the veritable blink of an eye, substantially replace the commuter rail system as the preferred means of long-distance travel. Plus, not to be xenophobic or anything, but the breakthrough originated in China, where it pays to allot some suspicion in anything to do with investment, causing me to look at the whole thing with a jaundiced eye.
But by all accounts, these dudes are on to something, and thus, while part of me would really like to run with our titular antithetical nomenclature of ShallowHide (which an internet search indicates belongs to me), I must also disclaim that this may be anything but applicable to the current tidings.
It is important to home in with precision on what caused the big Monday puke. Nobody is legitimately concerned that DeepSeek, which is not a chip manufacturer but rather a crafty user of same, is destined to displace the likes of GOOOOOOG, META, AAPL or AMZN as premium purveyors of the Artificial Intelligence services to the masses. Rather, the notion that instead of spending hundreds of millions or billions thought to be required to create said services, they can instead be developed for a paltry few million – an amount of capital to which virtually any schmuck on the street can access – is one that suggests maybe our chip foundries are not worth the lofty valuations with which the wisdom of the markets has honored them.
Longer term, the closer Monday’s tape bomb is to the truth, the better off we’ll all be. If one believes in even 1/4th of the promise that AI acolytes insist awaits us, then we’re, by my judgment, less than 5% of the way to our destiny of Artificial Nirvana (Nirvartificial?). And if so: a) we’re gonna need all the GPUs upon which we can lay our hands, and b) the cheaper this input becomes, the quicker and more comprehensive the transformation will be. Though the DS models are Open Source, I don’t expect the Chinese to simply gift us this bounty. But our own engineers are bound to figure out what they did – perhaps sooner than we can imagine — and will act accordingly.
All of which has caused the Financial Press to dust off one of the more obscure (but nonetheless essential) tidbits from the economic textbooks – called Jevon’s Paradox, which posits that tech advancements which add efficiency to the use of finite supply input cause the overall demand to increase:
I was never sure why this was ever considered a Paradox. It strikes me that in a competitive market, reduced production costs catalyze lower prices, which, of course, goose demand.
I reckon, though, that’s beside the point. That we consume more at lower prices is a rule on the first tablet of the 10 Economic Commandments. But are the producers better off as a result? Only if the area defined by the length of Lines B and D is greater of that of A*C. And in the case of those powerful GPUs, we just don’t know. Yet.
So, these things were bound to take an annoying bite out of the price of NVDA and its lesser peers – under the plausible hypothesis that it may take some time before Area BD exceeds that of AC. Jevon suggests we’ll get there, and I believe we will. But I am observing many portfolios, including my own, which, having feasted so long on this name, may now have to go on an NVDA diet.
But the way this all unfolded – seemingly out of nowhere — makes me wonder, and, perhaps unsurprisingly, by mid-week, the markets had regained, if not their vigor, then at least their equanimity. The informed consensus, including that of NVDA management, is that this breakthrough is a joyful event. Do they believe this? Are they just talking their books? Is the whole thing real? Tough to say.
Meantime, the Fed held steady. Powell was kinda mean. Q4 GDP came in a titch light. MSFT, AAPL (and others) reported, and the former got smacked – ironically because of a dilutive shortage of the storage capacity it sells. The earnings season is in mid-crescendo, and does not appear as though, when finished, it will have moved the needle over-much in either direction.
I have not been made aware of any direct focus on DeepSeek in CEO podium star-turns, which is probably a good thing. One pending implication that puzzles me though is the potential impact on crypto. As I write this out, the asset class is down a few percent from its lofty highs. And I wonder: is it susceptible to the AI-driven Jevon’s Paradox? After all, BTC coins are created through algorithms, which might very well be incrementally empowered by uber-efficient applications of GPUs, in that case causing an increase in supply that won’t be accretive to those buying in at 6-digits. Same with other tokens – new or existing. No clue here, but thought I’d share….
Beyond all the above, the Washingtonian psychodrama is in high gear. The new administration is in whirling dervish mode, and as time marches forward, the key Trumpian question emerges with greater clarity. Having won a second astonishing victory, he could then adopt one of two subsequent attitudes. Channeling Dr. Jekyll, he could find some serenity in the realization that he had nothing left to prove, and proceed, lessons learnt, with his agenda in wisdom and probity. In Hydeian Converse, he could go off halfcocked, determined to perpetually remind everyone concerned just who’s in charge of this here joint.
This past week was, from this perspective, far from encouraging, as, rather than slowing his Big Orange Roll, he, chose to quicken it. Examples abound, including his clumsy Executive Order blocking about $3T of Federal Grants, which, as was perhaps inevitable, a judge suspended in Usain Bolt speed, forcing our Leader to rescind it. Lots of what he blocked deserved said blocking, but doing so in one fell swoop, less than a fortnight into his tenure, was about as effective as it ought to be. He’s making menacing gestures towards Panama, blaming that unfortunate DC air crash on DEI.
Capping off the week was his make-good of his tariff threat, slapping 25% on our neighbors north and south and 10% on China. In trademark, statesmanlike fashion, he informed us that we don’t need the stuff that we buy from Mexico and Canada anyway. But I suspect we’re still gonna buy that Canadian Bacon and those Mexican Tamales, paying an extra two bits to the dollar for the privilege of doing so.
No doubt he feels empowered by his successful saber-rattling at Columbia, from whom we import 20% of our Coffee. Yes, they backed down, but Java/Joe is nonetheless nearly a double over the last rolling year, and up > 10% since our Diet-Coke-preferring Leader took office.
I can probably afford the incremental levies on these imported dainties, which I consume with moderation at any rate (except Coffee, which I chug by the gallon). And the market will probably roll on as well. But I say that 47 is giving aid and comfort to his political enemies, who will extract a price, not from him but rather from us.
And I encourage anyone believing that the world was taking a turn to the authentic should bear in mind that this past weekend, the LA Lakers traded their oft-injured, 31-year-old Power Forward Anthony Davis for the NBA Scoring Champ, 5-time 1st Team All Pro Luka Doncic, who, at 25 years, carried his Dallas team to last year’s finals. This smacks of the doofuses in the NBA Home Office, engineering yet another one-sided transaction, in the hopes of boosting their ossifying product with yet another cycle of putrid Lakers-Celtics finals, replete with LeBron swansong motifs. They always pull this shit, but this ain’t Wilt vs. Russ, and the NBA, save for providing yet another reason to root against the Lakers, just, somehow became even more unwatchable. If it doesn’t work, they can always increase the number of steps allowed before a travelling whistle is contemplated from 8 to, say, 10.
Or eliminate the dribbling requirement altogether.
All of which proves both how shallow everything sometimes is, and how few places there are to hide from the madness.
Maybe the answer resides in those newfangled DeepSeek AI models. But you won’t find me looking there. Because, sometimes, the greatest comfort I take in this world is to operate under my well-earned status as a curmudgeon.
TIMSHEL