It started with DeepSeek unveiling a cheaper, more efficient AI model. As a result, large segments of AI-related trades reeled, with everything from chip companies to data center REITs, utilities, and their downstream suppliers hit hard—no doubt exacerbated by the sharp run-up in these stocks prior to this development. This led to an interesting shift in market sentiment over the past few weeks.

A Familiar Story

Markets had been operating under the assumption that the U.S. was the dominant player in AI investment. Why? Because the economic strength of the U.S. enabled well-capitalized hyperscalers to invest the vast sums of capital necessary to build, train, and implement cutting-edge large language models (LLMs).

Then, the Chinese pulled a fast one—partly through initiative, insight, and creativity, and partly by leveraging someone else’s intellectual property. Sound familiar?

At the time, we said:

  • Like other software adoption cycles, this inflection was likely to create a two-tiered environment: (1) low/no-cost open-source models broadly available and sufficient for most needs; (2) closed-source premium models continuously pushing the cutting edge for the most sophisticated users.
  • Despite skepticism that the actual cost of launching DeepSeek’s model was as advertised, these apparent innovations will significantly lower the cost of training and inference, accelerating adoption (e.g., Jevons Paradox).
  • Finally, under no circumstances should anyone download the DeepSeek app onto their devices!

Admittedly, DeepSeek did introduce real innovations, most notably “distillation”—in simplistic terms, using a smaller (“student”) model to harness the insights and inferences of a larger (“teacher”) model without requiring original data access. Some might argue that this technique is fair play in a world where LLMs have scraped mountains of public, third-party content without attribution or compensation.

A King’s Ransom

At the very least, one must admit that the news was strategically timed for maximum effect. Since the DeepSeek announcement was widely embraced over the weekend prior to the market’s open on January 27th, U.S. tech stocks (as represented by the S&P 500 Information Technology Index (S5INFT)) fell -1.9%, while Chinese tech stocks (as represented by KraneShares CSI China Internet ETF (KWEB)) surged +20.0%*. Could you think of a better way to preemptively exact revenge on the U.S. ahead of another trade war? Well played, Sun Tzu.

On Friday, a CNBC pundit claimed that Chinese stocks were “safer” than U.S. stocks. It’s ironic that many so-called “sophisticated” investors would rather bet on Xi Jinping after he recently cozied up to Chinese business leaders in a show of support and encouragement. They argue that Trump is far more irrational, unpredictable, and prone to acting like a king. Have we forgotten that Xi has already made himself king—for life? For my part, I’m with Kyle Bass on this one: “China is not investable until Xi is no longer in power.”

I’ll Take America’s Hand All Day Long—And Twice on Sunday

Just listen to a few podcasts from Peter Zeihan about the unavoidable demographic storm approaching China. In contrast, one of the primary beneficiaries of deglobalization will be the U.S., provided it doesn’t squander the benefits of the USMCA (not a foregone conclusion under Trump).

These are exciting times in the market. That doesn’t mean investors are entitled to certainty and perfect predictability. The low-volatility, Fed-put world we’ve known since the Great Financial Crisis has made us soft and somewhat entitled.

Time for the coddled to ditch the training wheels.

*Source: Bloomberg Comparative Returns as of 2/24/25

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