Over the last week, we have seen two events that shook the short-term thinking of many market participants. The first was the “overnight” success of DeepSeek, the Chinese AI bot allegedly built for $6MM with very few, older NVDA chips. The second event happened over the weekend when President Trump stood by his campaign promise to levy tariffs on Canada and Mexico. As we witnessed, both events caused substantial market volatility (and much panicked and/or political punditry), and both proved to have been great buying opportunities for those with liquidity, with the stomach to invest, and with eyes to see the bigger picture.
If we zoom out and think more about the DeepSeek news—notwithstanding subsequent analyses showing very substantial investment of renminbi and time by DeepSeek’s hedge fund sponsors (and ignoring a credulous media believing a press release from a Chinese entity in an area of Great Power conflict such as AI) —their highly inventive software code utilizing scarce, expensive and energy-consumptive GPU chips with much more efficacy in an open source model will likely only spur faster growth and consumption of AI infrastructure within the US and globally. Indeed, NVDA was publicly not worried about the development of the Chinese AI, taking it as a huge opportunity to continue developing advancements in their chipsets, for they know the technology thesis around ubiquitous AI did not change. Also, it is safe to assume we are not going back to become neanderthals where nobody is going to use the internet or AI again, meaning technology investment is going up. Last, and more important, this is a technological war the US cannot afford to lose.
If we next zoom out on the threat of tariffs—ignoring reports that less than 24 hours later the levies on Mexican and Canadian goods were rescinded in light of discussions with their respective government about promised progress on illegal migration and drug smuggling—we might expect short term pain in the marketplace from one-time price hikes. Nota bene: the magnitude of the price bumps would be more like 10% as the 25% tariffs are applied to the value of the goods at a US entry point, i.e. the shippers cost, after which 60% of the final cost is added on by the US retailer/seller for marketing, shipping, labor and profit which is not subject to the fee. However, longer-term vision of On-Shoring manufacturing and assembly operations to the US, creating real jobs and real wages, is a very attractive option instead of the continued loss of jobs overseas. Indeed, in the longer run, this may actually lead to lower inflation, even deflation.
Last, we zoom out to the bigger picture which is that the FED has to roll over / refinance trillions of dollars in US debt this year. The best kept secret in the world is the FED does not want to roll those over at 4 -5% interest rates as the country cannot afford to pay in excess of $1 Trillion a year in interest expense, jeopardizing every other Federal spending priority and indeed our national security. The Fed is looking for any opportunity to lower rates and restart QE (quantitative easing) to assist in the upcoming refinance cycle as European and other nations have done these past 2 weeks. Lower rates would allow the dollar to fall in value relative to other currencies. This might allow China to print money again to kick-start their moribund economy. New liquidity from increased borrowing at lower rates and from Government spending will support risk assets, especially Crypto, into 2026. Unfortunately, this will not happen overnight, and we will experience some valuation pain and increased volatility in the markets in the near term.
Bottom line, we are focused on the big picture, looking to focus on the signal and not the noise. If and when our big picture thesis changes, we will too, but so far this is playing out as we expect.
Warmest regards,
Jeff & Biff
February 4, 2025
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CrossGrain Family Investments
2213 Loreines Landing Court
Henrico, VA 23233
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