DeepSeek Echo: Trump’s Tariffs Hit The S&P

“Booms start with some tie-in to reality, some reason which justifies the increase in asset values, and then — and this is the critical feature of speculative mood — the market loses touch with reality.”

— John Kenneth Galbraith

February 3, 2025— If the last week has shown us anything, it’s that this market is walking on eggshells. So what should you do?

Let’s take a look.

Nvidia, the golden child of the AI revolution, just took a historic beating — wiping out nearly $600 billion in market cap — because one guy in Brooklyn with a blog post dared to suggest the obvious: AI giants might not be as untouchable as Wall Street would like us to believe.

DeepSeek, with its alleged $6 million cost, drove the point home for those who didn’t have time to read a few thousand words.

Of course, the timing couldn’t be worse.

Investors were already skittish about sky-high valuations, and now, with Trump lobbing a fresh batch of tariffs into the mix – 25% on Canada and Mexico, 10% on all Chinese goods – the market is reacting as you’d expect. It fell.

The last time Trump initiated a “trade war,” the market recoiled like it had been slapped with a cold fish.

Back in 2018, when the first wave of tariffs hit Chinese imports under Section 301, the Dow promptly shed 600 points in a single day.

Turn Your Images On

2025 is already a far cry from the calm market melt-up of 2024.

Tech and industrials — especially companies with global supply chains like Boeing and Caterpillar — took the worst of it. By the time the dust settled, U.S. farmers were caught in the crossfire of Chinese retaliatory tariffs.

Inflation surged because, despite all the political chest-thumping about making China pay, the reality was that tariffs functioned as an invisible tax on American consumers. Prices went up across the board — everything from washing machines to canned beer — and manufacturers passed the costs along.

Fast-forward to today, and we’re staring at a nearly identical setup, but this time, the stakes are even higher.

The AI boom has driven the market’s optimism for the last two years, with Nvidia leading the charge. But now we’ve got two major threats converging: first, the revelation that China’s DeepSeek has developed top-tier AI (allegedly) without Nvidia’s expensive chips, exposing a weakness in the market’s assumptions about Nvidia’s future dominance.

If Nvidia was already looking fragile, what happens when supply chain costs rise, and Chinese demand for American tech dwindles? Or if products manufactured in China cost American consumers more and eat into margins?

These are fresh unknowns.

But investors aren’t waiting around to see what happens.

The market’s reaction today mirrors the panic we saw in 2018 — tech stocks are taking the hardest hit, with Nvidia tumbling over 5% and Tesla close behind. The Dow is down another 600 points, and we haven’t even seen the full impact of these tariffs play out yet.

Last time around, Wall Street eventually calmed down, betting that Trump’s “erratic” trade policy would be softened through negotiations with China. And as Trump would often tweet that a proposed tariff was being held off … for now.

But if history is any guide, the real victims won’t be politicians or corporate execs — it’ll be the American consumer, once again footing the bill for a trade war that does nothing but make everyday goods more expensive.

Strangely, the tariffs are not unlike the pandemic lockdowns.

The virus hit. The government panicked and shut down the economy. Economic and market mayhem followed. We’re still dealing with the residual inflation and government debt accumulated during that period.

Tariffs today are intended to shut down the flow of illegals and fentanyl into the country.

Most consumers have no interaction with either. But they do buy food, energy, cars and electronics. So now tariff policies will harm consumers to… what? It’s not likely cartels engaged in the trafficking of humans or drugs are worried about the price of eggs.

Economic and market mayhem will follow.

But that’s not really our beat. The knock-on effect we’re most concerned with is a sluggish stock market at the end of an extended and frothy boom.

If Nvidia can lose half a trillion dollars from one viral blog post, what happens when tariffs hit the S&P more broadly? The question is pertinent to many a 401(k) and IRA holder… even if they’re not aware.

High stock valuations, particularly in the tech space, pose a systemic risk higher than any of the booms and busts we’ve covered in our lifetime. As recently as our January monthly bulletin, we demonstrated that Nvidia was valued much higher than dotcom darling Cisco was at the peak of the dotcom bubble.

Our portfolio strategist Andrew Packer gives some urgent guidance: “Investors could shift from an ETF based on the market, with its high weightings on tech (28% to the Mag 7 stocks alone), to an equally weighted one.

“For instance, investors in the Invesco S&P 500 Equal Weight ETF (RSP), get 1/500th of each of the 500 stocks in the S&P 500. That’s been an underperforming trade while tech has soared, but with a shift underway, it may be a better way to play the market index in 2025.”

And, of course, gold has been holding up well today, eking out a gain amid the market mayhem. Have you reviewed our latest research yet? It’s not too late…

Regards,

Addison Wiggin,
Grey Swan

P.S. The S&P 500 is having its worst week since October, thanks to a perfect storm of trade fears, tech volatility, and interest rate uncertainty. Is this the start of a market correction or even a bear market? Time will tell.

The index has shed over 3% in just five days, with over 80% of stocks in the red. The real kicker? Nvidia alone has been responsible for nearly half of those losses, proving just how fragile the AI-driven rally really is.

P.P.S. “The idea that the BRIC countries are trying to move away from the dollar is over,” President Trump declared during his tariff announcements last week, “they can say goodbye to selling in the wonderful U.S. Economy.”

That’s the political promise. The president also just signed an executive order creating a U.S. sovereign wealth fund.

Interesting, fast-moving developments.

Our friend, Jim Rickards, who’s more “in the tank” for Trump than we are, wrote to us over the weekend he thinks the “final phase” of the currency wars he’s been describing for over a decade “has just begun.”

We’ve been following up with Jim. We will have more to report as this tariff news cycle unfolds this week. Stay tuned.

Send your comments to addison@greyswanfraternity.com. We read all emails. Thanks in advance for your contribution.

— John Kenneth Galbraith

February 3, 2025— If the last week has shown us anything, it’s that this market is walking on eggshells. So what should you do?

Let’s take a look.

DeepSeek, with its alleged $6 million cost, drove the point home for those who didn’t have time to read a few thousand words.

Of course, the timing couldn’t be worse.

The last time Trump initiated a “trade war,” the market recoiled like it had been slapped with a cold fish.

Back in 2018, when the first wave of tariffs hit Chinese imports under Section 301, the Dow promptly shed 600 points in a single day.

Turn Your Images On

2025 is already a far cry from the calm market melt-up of 2024.

Fast-forward to today, and we’re staring at a nearly identical setup, but this time, the stakes are even higher.

These are fresh unknowns.

But investors aren’t waiting around to see what happens.

Strangely, the tariffs are not unlike the pandemic lockdowns.

Tariffs today are intended to shut down the flow of illegals and fentanyl into the country.

Economic and market mayhem will follow.

But that’s not really our beat. The knock-on effect we’re most concerned with is a sluggish stock market at the end of an extended and frothy boom.

And, of course, gold has been holding up well today, eking out a gain amid the market mayhem. Have you reviewed our latest research yet? It’s not too late…

Regards,

Addison Wiggin,
Grey Swan

That’s the political promise. The president also just signed an executive order creating a U.S. sovereign wealth fund.

Interesting, fast-moving developments.

We’ve been following up with Jim. We will have more to report as this tariff news cycle unfolds this week. Stay tuned.

Send your comments to addison@greyswanfraternity.com. We read all emails. Thanks in advance for your contribution.

Real assets in general tend to hold their value during inflationary periods — because they’re not just paper promises. They’re tangible. They’re productive. They’re the raw inputs the economy is actually built on.

One of the most obvious opportunities right now — possibly the most mispriced sector in the entire market — is energy.

The world does not exist without energy. Full stop. People have been fed a ridiculous lie that oil is going to disappear and we’re all going to drive solar-powered EVs and Exxon is going to go out of business.

In the U.S., stablecoin rules remain tangled between crypto exchanges eager for new customers and small banks afraid of losing deposits.

China’s Ant Group is filing trademarks for “Antcoin” while the Party debates whether digital dollars threaten national sovereignty. And in Singapore, StraitsX cofounder Samson Leo frets about regulatory fragmentation: “If every jurisdiction requires us to split reserves across their banking systems, customer protection will diminish.”

Stablecoins today are where email was when businesses still faxed each other printouts of their inbox goes an apt analogy suggested by Bloomberg’s Andy Mukherjee.

The rails are there — the habits aren’t. But the shift is coming. And when it does, it won’t just change how we pay — it’ll change who gets paid.

Anticipating a sluggish labor market, the Fed has cut rates twice this fall.

Unfortunately, you can’t fix a reorganization with cheaper money. AI will eat the easy tasks first, so the pain you see — pink slips — is only half the story. Those jobs will likely never return.

If you’re from New York—or know anyone there—you’ll probably agree: most New Yorkers are fed up with crime, the outrageous cost of living, government incompetence and corruption—and, yes, the rats.

But the fact that a hard-core socialist like Mamdani is their favorite pick to solve those problems tells you that most voters have no idea why any of it is happening.

Their hatred of Donald Trump—and a steady diet of MSNBC—has made them blind to the obvious: it’s the Left’s policies creating these problems. You have rent control shrinking supply by forcing landlords to pull units from the market, union giveaways jacking up the cost of transportation, zero-bail laws putting criminals back on the streets, and so on and so forth.

One of the most obvious opportunities right now — possibly the most mispriced sector in the entire market — is energy.

In the U.S., stablecoin rules remain tangled between crypto exchanges eager for new customers and small banks afraid of losing deposits.

Stablecoins today are where email was when businesses still faxed each other printouts of their inbox goes an apt analogy suggested by Bloomberg’s Andy Mukherjee.

The rails are there — the habits aren’t. But the shift is coming. And when it does, it won’t just change how we pay — it’ll change who gets paid.

Anticipating a sluggish labor market, the Fed has cut rates twice this fall.

But the fact that a hard-core socialist like Mamdani is their favorite pick to solve those problems tells you that most voters have no idea why any of it is happening.