Yesterday’s Control Panel pointed out that the stock market is in a bubble but I didn’t see anything that would puncture it. The fact that the rise of SPX and NASDAQ indices is disproportionately driven by a few high-tech “magnificent 7” stocks makes them more vulnerable.
I was blindsided by Deepseek, the Chinese AI offering.
https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-01-27-2025
LIVE UPDATES
Stock Market Today: Nvidia Stock Sinks in AI Rout Sparked by China’s DeepSeek
Tech-heavy Nasdaq Composite falls more than 2.5%
Last Updated: Jan. 27, 2025
LIVE UPDATES
Stock Market Today: Nvidia Stock Sinks in AI Rout Sparked by China’s DeepSeek
Tech-heavy Nasdaq Composite falls more than 2.5%
Last Updated:
Jan. 27, 2025 at 10:58 AM EST
DeepSeek has sparked a deep freakout.
The Chinese artificial-intelligence upstart has trained high-performing artificial intelligence models cheaply—and without the most advanced gear provided by Nvidia and others. That has pulled the rug from under global companies riding the AI wave, including chip makers, infrastructure suppliers and power stocks, as investors question the outlook for AI spending… [end quote]
Dealbook with Andrew Ross Sorkin
The New York Times, 1/27/2025
Mark this week on your “History of Artificial Intelligence Timeline”: The creation of DeepSeek, the Chinese A.I. sensation that we told you about last week, is shaking the technology industry to its core.
The super-efficient, open-source software is raising questions about the valuations of tech giants, including the chip maker Nvidia, with their stocks getting crushed today. Has the entire industry been wildly overspending? It’s also raising profound questions about how China may have undercut America’s most critical economic advantage on A.I. by making its technology free.
Over the weekend, DeepSeek shot to the top of Apple’s App Store charts, rivaling ChatGPT. And DeepSeek is drastically undercutting OpenAI on price…
That raises a number of questions:
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Do leading A.I. companies like Google, Meta and the privately held OpenAI and Anthropic deserve their astronomical valuations?
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Do companies need to spend hundreds of billions on vast data centers powered by hugely expensive chips from Nvidia and others? Consider that OpenAI and its partners have promised to spend at least $100 billion on their Stargate project, or that Microsoft said it will spend $80 billion, or Meta $65 billion.
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Does America need the huge uptick in electricity generation that has fueled a run-up in utility stocks? [end quote]
The markets, which have only been open a couple of hours as I write, are already showing a flight to safety. SPX and COMPQ are down. The 10 year Treasury is up (yield is down). VIX is beginning to spike (though not yet near fearful levels).
If the markets perceive DeepSeek as a truly game-changing threat to U.S. AI-connected companies the rout could deepen. Debit Balances in Customers’ Securities Margin Accounts are at a record high going back to 1997, exceeded only by a peak in late 2021. Margin Debit Balances correlate closely with stock market moves. Note the previous peaks in 1999, 2007, 2017 and 2021. Experienced market watchers will recognize these as bubble peaks followed by routs in 2000 and 2008.
See how this correlates with the bubble peaks in 1999, 2021 and 2025 (the current bubble peak).
The borrowed margin money drives stock market prices by increasing demand.
Today’s market rout might be a flash in the pan. Or it might be the pin that bursts the bubble.
The METAR for this week has changed. Like the day that I noticed a black cloud on the horizon which caused my father to pull up the anchor of our small boat and head for the marina at top speed, this may blow up to a sudden dangerous squall. Markets supported by high margin can suddenly collapse when speculators receive margin calls. The damage can spread as they sell good securities to pay the margin calls.
The METAR for this week is squally. It’s hard to say at this early stage whether the squall will be sudden or whether it’s the leading edge of the perfect storm.
Wendy