It’s Been One Week Since You Looked at Me

In Homage to Scarborough’s own The Barenaked Ladies, let’s take a quick look at what we learned in the first week or so of the second Trump Administration:

• There is apparently a giant faucet located in Northern California that can be turned on at any time providing ample water to Southern California. Since there does not exist a giant man (or woman for that matter) who possesses the strength to turn this faucet (they asked The Rock, but he was not available), a team of people is needed to get the water going and Donald Trump knows a guy, who knows a guy. Wildfires will no longer be an issue in California.
• Joe Biden was responsible for the high price of eggs. Now that he has left office, egg prices are the result of a complex market that factors in the supply of chickens, demand for eggs, the climate, and external factors such as avian flu. Donald Trump and his Administration have no impact on the price of eggs and prices may remain high for some time. Should a Democrat be elected in 2028, egg prices will be their fault, unless they are low, in which case that is thanks to Donald Trump and his Administration.
• The Ukraine War will not end in 24-hours. Or 48. Or 72. Or 96. Or …
• Cops are great unless they are beaten up in the hopes of overthrowing an Election. In that case, we won’t mention cops.
• The 2^nd Amendment shall never be questioned, but most of the others are open to debate – especially the 14^th. The following text – “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.” – does not in any way imply that if you were born in the U.S. that you are citizen of the U.S. It says something different – we are not sure exactly what it is supposed to say – but it doesn’t say THAT.
• Grabbing your heart and thrusting your arm out with a flattened hand toward the sky is not a salute of any kind, most notably the really, really awful kind, especially if you are the world’s richest man, who seems to support an awful lot of far right groups, many of which use that thrusting flat-hand to the sky gesture as an homage to that really, really awful group of people who first did that gesture thing.

DeepSeeking Missile

Markets had generally greeted the incoming Trump Administration with applause (as we have noted previously, markets tend to like deregulation and tax cuts, while caring little about humanity), but this was somewhat upended with the news that Chinese Artificial Intelligence firm DeepSeek had launched a groundbreaking new AI model that was as good or better than OpenAI’s latest model and at a fraction of the cost. Hundreds of billions of dollars have been invested in the AI ecosystem since ChatGPT went live in late 2023, but if the Chinese could develop a rival to ChatGPT and other Large Language Learning Models (LLM) at pennies on the dollar and apparently without using Nvidia’s powerful chip stacks, then maybe this money has been ill-spent.

Of course, no one actually knows if any of this is true. While the quality of DeepSeek’s model is not in question (it knows exactly how much wood a woodchuck chucks if a woodchuck could chuck wood), it is impossible to confirm how much it cost and if the Chinese were actually able to do it without Nvidia chips (which are embargoed, so probably best to deny their use). In any event, let’s start with a chart and then comment:

Shares of Nvidia fell nearly 20% on the DeepSeek news, wiping away nearly $600bn of market cap. To put that number in some perspective, Nvidia held the former high (or low) water mark for one-day market cap declines - ~$280bn in September of last year – which, in case your math is rusty, was less than half the decline on Monday. In fact, if we look at the ten biggest one-day market cap losses, you may notice something:

Nvidia now owns eight of the ten biggest one-day cap declines with all eight Nvidia declines occurring since April 19^th of last year. What is perhaps more remarkable is that Nvdia has suffered these record declines and yet is still ~40% higher than it was the day before the first such decline occurred. For fun, Nvidia’s latest decline represented:

• More than the combined market capitalization of all the Canadian banks;
• 2 ½ Walt Disneys;
• Almost three McDonalds;
• The equivalent of nine Big Macs for every person on earth assuming all of the Big Macs were bought in Switzerland, which is the most expensive place on earth to buy a Big Mac.

What does this all mean to Nvidia and the rest of the AI ecosystem?

We’d love to say we had all the answers, but our general impression would be that this was an overreaction. While DeepSeek appears to be the real deal as it relates to functionality, we (along with others) are skeptical that it was done without powerful processing chips or at such a low cost. Further, we have seen these sorts of knee-jerk reactions in the market many times before (although, we acknowledge the magnitude of the Nvidia reaction was astonishing) and they more often than not tend to be guided by fear as opposed to reality. Thus, while we own some Nvidia in our portfolios, we are comfortable with the levels that we have and might even look to add more should valuations provide an attractive reentry point.