Photo by Solen Feyissa on Unsplash
Editor’s Note: In error, the incorrect version of My Gut Feeling was published. Below, reflects the correct version as of February 4, 2025 at 9:10pm PST.
To be honest, there have been a few shocks that the markets have dealt with the past two weeks: the DeepSeek (or as I refer to it as the DeepFake) sell-off and the Tariff scare. Both of them while different in nature, created two independent shocks to the markets.
DeepSeek and AI Chips
Let’s start with the DeepSeek issue as this created one of the worst single day events that I have experienced since the days of the Financial Crisis. Let’s not make light of what happened last Monday, but it was in no way shape or form a repeat of the Financial Crisis. News spread of the new release of a People’s Republic of Chinese-based (PRC) Alternative Intelligence (AI) program call DeepSeek. Apparently, this AI model did not utilize the high-end chips that are produced by Nvidia (NVDA), the leader in that field. It was a huge blow to NVDA stock with a dive of about 17% and market capitalization loss of nearly $600 billion. Of course NVDA took down other major chip companies like Broadcom (AVGO) and the tech-laden growth NASDAQ market as well. Closer inspection of DeepSeek over the next few days revealed several facts not taken into account on that dreadful day. First, DeepSeek still used NVDA chips, but the lower end models. Second, DeepSeek was able to obtain NVDA chips despite a ban on direct sales to China. Third, DeepSeek appeared to be a propaganda tool for the PRC. It’s likely that the PRC holds a Golden Share in DeepSeek. NVDA bounced back after that terrible sell-off, then backed down again but seems to have stabilized. Still it remains about 24% below its all-time high set last year. In the fullness of time, what is really important will be NVDA (February26) and related AI power company releases . I’m also on the lookout for the impact of Moore’s Law over the AI chip industry, as it will likely materialize and impact NVDA. Finally, DeepSeek is an open-source product which can be customizable, similar to Wikipedia.
Tariffs: Then and Now
The tariff situation is quite different. There is an historical way of looking at tariffs such as the Smoot-Hawley Tariff Act of 1930 which created a series of global retaliations, and many believe that the act was the cause of the Great Depression. On the one hand, it was seen as a way to combat the economics leading up to the depression; but in practice only made it worse. You can then go back forty years to the Tariff Act of 1890, sometimes referred to as the McKinley tariff, named for President William McKinley. However, back in the McKinley era, tariffs were the primary manner of raising federal revenues as the modern concept of income taxes was born later from the 16th Amendment in 1913. Tariffs are a frequently used tool to protect infant industries.
Today, tariffs are for the most part defined by the General Agreement on Tariffs and Trade (GATT) and modifications made by the establishment of the World Trade Organization. Most recently there have been updates by the Uruguay Round Agreement in 1994 (which I recall vividly) and the still to be finalized Doha Round. The PRC was not part of these agreements until 2001 and Russia until 2012. Iran is not a member. So you can see that Iran can be used as an intermediary to obfuscate trade and tariffs.
There are many industries for which tariffs are a real factor in international trade. The automobile industry is one. EU nations have a 10% duty rate on automobiles. So you won’t see many American-made cars in Europe. Many European and Asian automobile brands build their cars in the United States. In fact, because of lower costs in the US, some of those foreign branded cars are manufactured in the US and shipped to other nations. I recently saw automobiles in port waiting to be shipped from Charleston, .
Now along came “Trumpian” Tariffs. These tariffs come in two “styles.” The first is one which is directed at the PRC to protect US businesses from products being “dumped” into US markets. Dumping is where products are sold at such low prices (sometimes below cost) to eliminate competition. President Trump enacted these tariffs during his first term, and they were carried forward into the Biden administration.
The second of the Trumpian tariffs is meant to strong-arm a foreign nation into working with the US on matters of national security. Either you (foreign nation) do something, or the US own in retaliation. President Trump threatened Mexico and Canada with such tariffs, to begin in a few days. Then a few phone calls later and both Canada and Mexico agreed to put foreign troops at their borders with the US to stem the flow of illegal immigrants and dangerous drugs. Unfortunately, it took such tactics to get Canada and Mexico to work with the US on these important matters. You may not like his methods, but hey, it worked.
It's Just a Market of Stocks
At LakeView Asset Management, we build and manage portfolios of stocks. So, earnings are very important to our style of management. While the macro or index style managers have fussed with the DeepSeek or Tariffs events, we still rely on the performance of our stocks. Just Monday night, Palantir (PLTR), our third largest holding in the Growth Portfolio, delivered stellar results and full year’s guidance. So far this earnings season, Royal Caribbean (RCL) and Netflix (NFLX), both members of our Growth and Consumer strategies, also reported strong earnings. Not to be outdone, JP Morgan (JPM) and IBM (IBM), both components of our Dividend Value strategy, both traded up to all-time highs after their first quarter earnings reports. Just about the only earnings related this disappointment this season was Microsoft (MSFT) which reported soft cloud revenues and remains a laggard, but not enough to make me want to sell the stock.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long AVGO, IBM, JPM, MSFT, NFLX, NVDA, PLTR & RCL, - although positions can change at any time. The mention of stocks are not recommendations and may not be suitable investments for your individual situation.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor.
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