Unlocking Opportunities: What DeepSeek & Tariff Moments Teach Investors

February 4, 2025

?John Browning, MBA and CSA? | CEO, Principal

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?In the early 1950s, computers were the size of buildings and used fragile vacuum tubes that consumed enormous amounts of power and generated a lot of heat. A former IBM Chairman once said, “I think there is a world market for about five computers.”??? Semiconductor chips were invented by the mid-1950s, which were smaller, faster, more efficient, and performed calculations faster. From there, things paused a bit until the first PC that could sit on your desk was invented, and from there, out of DARPA came the beginnings of the internet, email, etc.? In nearly every case, the rest of the world followed the United States, piggybacking as they do today on research and development, which seems to create things more cheaply and quickly than the U.S. could.??

Recent reports about a Chinese artificial intelligence company called DeepSeek evoke memories of the same thing continuing to happen today. Building AI models like those that power ChatGPT has been extremely expensive, and only a few companies worldwide have the resources to do it. Like the semiconductor revolution that dramatically reduced the size, cost, and power requirements of computing, DeepSeek has reportedly achieved a similar leap in AI efficiency.? Does this mean the U.S. is behind??? I am highly skeptical of that theory, almost as skeptical of the estimates that DeepSeek only cost $6 million to create.?? What does this mean for investors? According to reports from Google, Tesla, X, and Microsoft, the cost of training a large language model such as ChatGPT or DeepSeek has already been reduced by up to 95%, and any large company that would like its own already has one. ?The existing models are being improved daily.? All of this is to say that, in my opinion, the DeepSeek news is not really new; the only potential surprise is how China obtained the NVDA chips, which shows us how tariffs and sanctions can be circumvented when someone is determined to do so.? The bottom line is that we remain early in AI development despite how fast we have come thus far.? No one should not be shocked at the increasing pace of change.? While the markets reacted negatively to the news, this represents an opportunity for some and a lesson in portion control and risk management for others.? If portfolios were properly positioned to profit in any scenario and if the portfolios continued to produce the income needed for the investor, no sleep was lost.?

1. Technological advances drive long-term growth

The chart above illustrates that the real benefits of new technologies often take years or decades to manifest. As computer scientist Roy Amara said, we tend to overestimate technology's impact in the short term and underestimate its effect in the long run. We are likely still in the early stages of understanding how this technology will reshape the economy and our lives. For example, much of the latest market reaction is driven by the “supply side” of the AI story, i.e., those who provide chips. The other half of the story—the demand for AI capabilities—is still in its infancy. This is sometimes referred to as the Jevons Paradox, which states that increased efficiency can result in greater resource use, not less. For example, the invention of semiconductors did not result in just more efficient computers but the ability to use chips in all devices. This created consumer applications that were impossible to imagine in a world of vacuum tubes. Similarly, the possibility of small but powerful AI models could have transformative effects that require more, not less, computing power.

Are Stock market valuations getting too high?

Those of us who remember the dot-com levels of the market are well aware of the dangers overvaluation of company equity can bring.? As the chart above illustrates, valuations are historically high, especially among AI-related companies, reflecting the optimism surrounding potential future growth.?? Extreme optimism about future growth and profitability can result in moves such as we have seen surrounding DeepSeek and the Trump tariffs, and they should be expected and even embraced by the prudent investor, not as a tool for timing the market but for disciplined, consistent, time-tested strategic adjustments.?

Ultimately, investors should focus on positioning themselves to profit based on their own individual objectives and long-term outlook that matches their likely near- and long-term goals. A properly constructed and carefully adjusted portfolio should lead to a balanced approach that includes exposure to different sectors, asset classes, and income streams that can support and even profit investors during volatility.

Trump Trade Tariffs:

?We would be remiss not to mention the recent executive orders imposing significant new tariffs, including 25% on Canadian and Mexican imports and 10% on Chinese products. Canadian energy will also face a 10% tariff.

??????? These policies will likely lead to higher consumer prices (inflation), particularly for products like groceries, automobiles, and gasoline, since Canada supplies 60% of U.S. oil imports and Mexico supplies a considerable percentage of our fruits and vegetables, including 80% of our avocados, for the big game this weekend.?

??????? Trading partners are already planning retaliatory measures, with Canada announcing $100 billion in counter-tariffs on U.S. goods, including steel, aluminum, and aerospace products.

??????? It's essential to remember that investors feared trade wars during the first Trump administration, but markets generally performed well over time. In many cases, these were negotiating tools to achieve new trade deals, and arguably, the United States carries the bigger proverbial stick.?

The chart below shows the U.S. trade balance and the long-term impact of outsourcing overseas manufacturing. This disparity takes significant time to change if we want it to change. Trade policies can impact economic growth and market performance over time. While specific sectors are facing increased volatility, history shows that markets have generally adapted to shifting trade dynamics.

?Here again, we learn the lesson of portion control, consistency, and discipline in portfolio management.?

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