DeepSeek: The Pin “No One” Saw Coming

“The internet bubble circa 2000 is the most extreme in modern capitalism.” [That is, until AI took its place].

— Charlie Munger

January 28, 2025 — We began our financial writing career in 1997, investigating the root cause of the dotcom bubble… and the subsequent bust that began in 2000.

If you’ve been following along for a decade or more, from the very founding of the email letter The Daily Reckoning in the late 1990s, you know we’ve written bestselling books on the subject. We try to share our insights daily; sometimes, they seem larger than life and hard to grapple with.

Booms thrive on the spark of technological innovation and the fuel of financial speculation, igniting visions of endless progress. In Financial Reckoning Day, we warned that cheap credit and wild bets inflate these dreams, convincing everyone “this time is different.”

Later, in Empire of Debt, we continued the work. We observed that the very innovations that inspire confidence — railroads, dot-coms, AI — become the fault lines when speculation cracks. Every boom and bust shows how greed, cloaked as progress, sets the stage for disaster.

The winds of political change get whipped up over the roiling tumult of the economy. Individual investors are subject to paradigm shifts in the economy and in politics. Those who aren’t aware or prepared become the unintended victims of change… the collateral damage.

It’s our mission at Grey Swan to identify the tectonic shifts that distinguish fortune from despair. The episode that began with DeepSeek a few short days ago seems like a moment we ought to pay attention to.

The dotcom era had its heroes — Amazon, eBay, and even Pets.com (briefly). The AI boom of today has Nvidia, Microsoft, and a host of startups promising to reshape the world.

But let me take you back to a spring morning in March 2000. The Nasdaq hit 5,132.52, and investors popped corks, certain the party would never end.

By April 17, the Nasdaq was down to 3,227. Over the next 30 months, it crashed 78% from its peak, bottoming out near 1,100. The pin? A sudden realization: growth projections were built on hype, not profits.

Fast forward to today, and you can’t help but feel the eerie parallels. AI mania has pushed tech stocks into the stratosphere. Nvidia, the darling of the moment, has seen valuations soar on the promise of chips that drive machine learning. And Nvidia’s valuation is now far in excess of dotcom-era darling Cisco:

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We’ve been tracking this move since the inception of Grey Swan, mindful of what happens when this bubble bursts.

But here’s the question keeping me up at night: Could DeepSeek, the AI-powered trading app, be the pin this time?

Back in 2000, investors weren’t just burned — they were blindsided.

Many had believed the hype until the very end. As someone who lived through it, I saw how quickly optimism turned to panic. The dotcom crash wiped out $5 trillion in market value, and the psychological toll was even greater. Investors didn’t just lose money; they lost faith.

DeepSeek’s arrival smacks of the fuzzy promises of those days.

The app is billed as a revolutionary tool capable of analyzing markets and predicting moves in real-time. In theory, it could give retail investors an edge. But history teaches us that the more powerful the disruptor, the more fragile the market it disrupts.

We’ve been writing about Nvidia’s vulnerability for months, even as it gathered accolades for driving the tech sector to new record closes… and “hoovering” up capital from investment funds around the global financial system.

Now comes the pin “no one saw coming” – another phrase popular when Cisco crashed early in the dotcom bust or Lehman Bros. followed suit less than a decade later.

“No one,” experience tells us includes the financial media pundits whose job it is to create soundbites so they can deliver eyeballs to advertisers. “No one” does not include anyone who is actually paying attention to how markets, manias and mayhem actually happen.

Imagine this scenario: DeepSeek users pile into AI stocks en masse, driving valuations even higher. Then, in a moment of market turbulence, the algorithms pivot, triggering automated sell-offs. Retail investors, caught off guard, panic and dump shares. The result? A domino effect reminiscent of 2000.

The fallout would be catastrophic. Pension funds, sovereign wealth funds, IRAs, and 401(k)s — many of which are heavily invested in tech, even if in passive vehicles like market index funds — could take devastating hits.

Consider pension funds, already teetering under unfunded liabilities. A collapse in AI valuations could send them into insolvency. Retirees relying on annuities might find their payouts slashed.

Sovereign wealth funds, particularly those in the Middle East, are betting heavily on AI as part of their diversification strategies. If the AI bubble bursts, these nations could face financial upheaval just as oil revenues continue to dwindle.

And let’s not forget individual investors. Many have poured their savings into tech ETFs, riding the AI wave with little thought to diversification. If the bubble bursts, it could take years — or decades — for them to recover.

The sideways movement in the markets right now feels like a warning sign. Markets are trying to shrug off the DeepSeek news as quickly as it moved in. But the AI rollout is here to stay – and now it’s clear there’s global competition. It won’t just be the big-cap U.S.-based tech giants that benefit.

DeepSeek, while innovative, adds a psychological twist: it amplifies market sentiment. If it works as advertised, it could drive prices to unsustainable highs. But if it falters, the ensuing panic could set off a chain reaction no algorithm can stop.

During the dotcom bust, the lesson was clear: bubbles don’t just destroy wealth; they redistribute it. Those who saw the crash coming and positioned themselves wisely emerged stronger. The dollar – the currency you calculate your own wealth in – is equally in jeopardy.

So what do you do now? Today, the same principle applies as it did in the early part of the millennium: Diversify your portfolio. Add hard assets like gold or real estate. Consider crypto. Focus on defensive sectors like dividend-paying consumer staples and energy utilities.

Most importantly, don’t chase the crowd. DeepSeek may be a marvel, but it could also be the pin that pops this AI bubble. And if it isn’t, today’s valuations – and historic concentration in a few companies at the top – suggest another pin is on its way.

In times like these, staying grounded is the best way to protect — and grow — your wealth.

Regards,

Addison Wiggin,
Grey Swan

P.S. If you’ve ever been to Times Square on New Year’s Eve, you know it’s all lights and confetti until the clock strikes midnight. The,n the cleanup crew arrives. That’s where we are in the market. The AI and tech bubbles have been the party, but the hangover is inevitable.

Investors love a good story, AI is (still) the hottest one in town. But as history teaches us, no story lasts forever. From the dot-com bust to the 2008 housing crisis, bubbles don’t pop quietly.

They burst.

The detritus doesn’t just land on Wall Street. The slime gets slathered all over Main Street, too.

As always, your cheerful reader feedback is welcome: addison@greyswanfraternity.com. (We read all emails. Thanks in advance for your contribution.)

“The internet bubble circa 2000 is the most extreme in modern capitalism.” [That is, until AI took its place].

— Charlie Munger

January 28, 2025 — We began our financial writing career in 1997, investigating the root cause of the dotcom bubble… and the subsequent bust that began in 2000.

The dotcom era had its heroes — Amazon, eBay, and even Pets.com (briefly). The AI boom of today has Nvidia, Microsoft, and a host of startups promising to reshape the world.

But let me take you back to a spring morning in March 2000. The Nasdaq hit 5,132.52, and investors popped corks, certain the party would never end.

Turn Your Images On

We’ve been tracking this move since the inception of Grey Swan, mindful of what happens when this bubble bursts.

But here’s the question keeping me up at night: Could DeepSeek, the AI-powered trading app, be the pin this time?

Back in 2000, investors weren’t just burned — they were blindsided.

DeepSeek’s arrival smacks of the fuzzy promises of those days.

Now comes the pin “no one saw coming” – another phrase popular when Cisco crashed early in the dotcom bust or Lehman Bros. followed suit less than a decade later.

Consider pension funds, already teetering under unfunded liabilities. A collapse in AI valuations could send them into insolvency. Retirees relying on annuities might find their payouts slashed.

In times like these, staying grounded is the best way to protect — and grow — your wealth.

Regards,

Addison Wiggin,
Grey Swan

Investors love a good story, AI is (still) the hottest one in town. But as history teaches us, no story lasts forever. From the dot-com bust to the 2008 housing crisis, bubbles don’t pop quietly.

They burst.

The detritus doesn’t just land on Wall Street. The slime gets slathered all over Main Street, too.

As always, your cheerful reader feedback is welcome: addison@greyswanfraternity.com. (We read all emails. Thanks in advance for your contribution.)

Back in April, when we published what we called the Trump Great Reset Strategy, we described the grand realignment we believed President Trump and his acolytes were embarking on in three phases.

At the time, it read like a conceptual map. As the months passed, it began to feel like a set of operating instructions written in advance of turbulence.

As you can expect, any grandiose plan would get all kinds of blowback… but this year exhibited all manner of Trump Derangement Syndrome on top of the difficulty of steering a sclerotic empire clear of the rocky shores.

The “phases” were never about optimism or pessimism. They were about sequencing — how stress surfaces, how systems adapt, and what must hold before confidence can regenerate. And in the end, what do we do with our money?!

Relative to GDP, the net international investment claim on the U.S. economy was 20% in 2003. It had swollen to 65% by 2023. Practically every type of American company, bond, or real estate asset now has some degree of foreign ownership.

But it’s even worse than that. As the federal deficit has pumped up the GDP figures, and made a larger share of the economy dependent on government spending, the quality and sustainability of GDP have deteriorated. So, foreigners, to the extent they are paying attention, are accumulating claims on an economy that has been eroded by inefficient, government-directed spending and “investments.” Why should foreign creditors maintain confidence in the integrity of these paper claims? Only to the extent that their economies are even worse off. And in the case of China, that’s probably true.

As global government interest expense climbed, gold quietly followed it higher. The IIF estimates that interest costs on government debt now run at nearly $4.9 trillion annually. Over the same span, gold prices have tracked that burden almost one-for-one.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

Over that same period, gold prices have surged about 135%, while silver is up roughly 175%. Zoom out two years, and the divergence becomes starker still: gold up 114%, silver up 178%, while the S&P 500 gained 44%.

According to the American Association of Individual Investors, the average retail investor has about a 70% allocation to stocks. That’s well over the traditional 60/40 split between stocks and bonds. Even a 60/40 allocation ignores real estate, gold, collectibles, and private assets.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.