Trade war has begun
Trump has implemented 25% import tariffs from Mexico and Canada and 10% on Chinese imports. Honestly, there is no way to know the outcome, but one thing for sure is that commodity and asset prices will be volatile as we price in the "Tariff Uncertainty".
Interestingly, all of Canada's $200B trade surplus with the U.S. comes from oil coming from Alberta. This heavy-grade crude is mixed with U.S. crude and refined. I read that if you strip out oil, there would be no trade surplus.
Tariff Economics
Tariffs are initially paid by importers, but who ultimately absorbs the cost depends on how easily they can find alternative suppliers.
If alternatives are readily available, suppliers may lower their prices, minimizing the impact on importers.
However, if finding substitutes is difficult, suppliers have little incentive to reduce costs, forcing importers to absorb the tariff burden.
During the tariff increases of 2018 and 2019, U.S. importers struggled to secure alternative suppliers, leading them to bear most of the costs (lower margins).
In the short term, businesses reliant on affected imports face higher production expenses and must decide whether to pass these costs onto consumers or absorb them by reducing profit margins.
=> Trump Angle: If corporate taxes are lowered I'm the U.S. (being discussed), companies will have some financial wiggle room to absorb any cost increases from higher tariffs.
DeepSeek
This is disruptive (on the surface) to AI as it appears to require less computing power (less GPUs) to achieve the same outcome, and clearly, the market will need to rethink its forecasts across the entire AI vertical. This "increases" the need for NVDA chips as more players will be able to get into the space with less capital. This will lead to a faster commoditised AI-information world (Singularity).
AI is currently in the training phase, which means we are only at the stage of AI that takes data - known as Large Language Models (LLM) - and "trains" it to answer questions – mostly search-related. The next stage of AI is the Inference Phase, which makes conclusions and decisions – not there yet, but not far away.
To me, AI is like a fast food restaurant. Each company has the same ingredients, but each is trying different sequences to create the fastest, cheapest and most delicious burger. McDonalds can put ketchup on the bread before the lettuce, and Burger King may put pickles before the ketchup, then patty before lettuce, etc.
This is what DeepSeek has done.
OpenAI used the sequence of both "Supervised Fine-tuning" then "Reinforcement Learning".
What DeepSeek did was take various sources of data but eventually only used "Reinforcement Learning" to skip steps (and lower costs).
Another misconception is "Open Code" and "Open Sourced".
DeepSeek is an Open Code, which means they publish a whitepaper and show models and model weights, BUT they DO NOT show the data, so it's not actually Open Sourced.
There has been a big selloff across the AI vertical - Software, LLM, chips and Nuclear are all being sold off. While the timing of this is peculiar, with the origins of DeepSeek being from a quant hedge fund, you can't ignore its implications.
I personally think it's too early to bottom-fish, given there are clearly some geo-political issues here, and the market will be focused on the trade wars happening, and chips will be a sensitive topic.
Rates
Fed unchanged, and long-term yields did not move during the FOMC meeting.
The 10-year moved up a little on the tariff announcement, and we saw some lenders raise mortgage rates, but we lowered our rates slightly last week. Honestly, I am surprised at the inactivity of the bond market – I suspect yields were kept under wraps with some AI selloff flow moving into bonds.
It will take a while to see how the tariffs will affect the economy, prices, and rates, but if we look at what happened in 2019, rates moved lower despite the trade war.
This time around is more serious, but the bottom line is rates are determined by inflation and growth expectations, to name a few – that is where we need to focus on.
On the other hand, after the Smoot Hawley Act in 1930, the last across-the-board tariff increases, the stock market suffered major losses, and the economy went into a deep recession.
My big bet on a weaker USD has not transpired yet which is the main wildcard for any growth to happen in the U.S. We need a weaker USD.
The Real Asia Show
Finally, I have started a YouTube channel called The Real Asia Show, where I interview interesting people across Asia on their journey to where they are now, the challenges they faced, and things they can teach us. Hopefully, there are some meaningful takeaways. Please subscribe.
I have also launched 2 Instagram channels:
Happy Hunting!
Donald Klip, Co-Founder
Global Mortgage Group
Mobile: +65 9773-0273
Email: [email protected]