8 minute read
AI’s Reckoning: Booming Innovation or a Race to the Bottom?
- China’s DeepSeek proves that AI can thrive without cutting-edge chips, threatening Nvidia and potentially forcing industry giants like OpenAI to slash prices, reshaping the market.
- China and the U.S. are fueling an AI arms race, with Beijing’s state-backed $8.2B fund and Washington’s $500B Stargate Project ramping up supply and competition.
Why it matters: DeepSeek’s breakthrough proves top-tier AI can thrive without cutting-edge chips or sky-high costs, shaking the belief that US tech giants have an unshakable lead. Investors panicked, triggering a market sell-off as Nvidia and other AI leaders braced for disruption, fearing their dominance may not be as certain as once thought.
Now the Dunham Deep Dive: I believe the AI boom was bound to trigger fierce competition, oversupply, and rapid innovation - it’s the natural cycle of economics.
But, as always, it’s a double-edged sword.
- Winners: Consumers and businesses stand to benefit as AI firms - including OpenAI - may be forced to slash prices to compete. This could accelerate AI adoption, boosting productivity across industries and households.
- Losers: Corporate giants that bet big on AI. Companies like Meta, Microsoft, Amazon, Oracle have each poured tens of billions into AI. And if prices plunge, much of that investment could turn into costly write-offs. Nvidia, a key AI chip supplier, may also take a deeper hit as efficient AI models won’t require better and better hardware. The risk? A brutal race to the bottom where only the leanest survive.
But what’s keeping my eyes open is that besides private firms investing in AI, governments are now also adding to the spending significantly.
For instance: President Donald Trump announced the Stargate Project - a U.S.-backed initiative led by OpenAI, SoftBank, Oracle, and MGX, aiming to invest up to $500 billion by 2029 to build advanced AI infrastructure2, with support from the U.S. government through funding incentives, regulatory facilitation, and strategic partnerships to maintain AI leadership.
Meanwhile, in January 2025, China launched a 60 billion yuan ($8.2 billion) AI investment fund, reinforcing its push to dominate AI and its own semiconductor production3. Much of China’s AI spending is directly backed by the government, giving its firms a strategic advantage.
History has seen this pattern before. A boom fuels prices, hype, and investment higher, only for prices to collapse under the weight of oversupply and added competition – remember the Dot-Com bubble in the ’90s, housing in the 2000s, gold and oil in the 2010s?
AI may be next in line. . .
Figure 1: Bloomberg, January 2025
Right When You Thought it was Over, “EggFlation” is Back with a Vengeance
- The avian flu outbreak is squeezing egg supply, causing prices to surge, potentially driving overall food inflation higher and straining household budgets.
- Unlike demand-driven inflation the Fed can better control, this supply shock mirrors past crises - like the 1973–74 oil embargo - where soaring prices persisted despite rate hikes.
What you need to know: Egg prices are soaring to record levels amid a severe outbreak of avian influenza (H5N1) that began in 2022. This outbreak has led to the culling of millions of egg-laying hens, significantly reducing supply.
Now the Dunham Deep Dive: Egg prices are surging again and may continue as avian flu keeps ravaging farmers, with some of the nation’s top egg producers – like Rose Acres Farms in Indiana - confirming cases.
Here’s a quick play-by-play of how this is causing “eggflation”. . .
- Hens infected with avian flu must be culled, and their eggs destroyed.
- Fewer hens + fewer eggs = lower supply.
- Lower supply + steady demand = higher prices.
Keep in mind that historically, prices tend to mean-revert - shortages push prices up until demand drops amid higher prices and supply rebounds as producers step in to capitalize on higher profits.
The reverse is also true: when there’s a glut, prices fall, demand rises because it’s cheaper to buy, and producers cut back as profits shrink. This helps maintain economic balance.
So where are we now?
Right now, we’re in the shortage phase for eggs. New flocks can’t be grown overnight, so ongoing outbreaks may keep prices high for an extended period, delaying any natural correction.
More importantly, this highlights inflation beyond the Fed’s control. See, while the Federal Reserve can raise interest rates to curb demand-driven inflation (aka make debt more expensive to try and curb excess spending), it can’t stop a virus from spreading among poultry.
- This dynamic mirrors the 1973–74 OPEC oil embargo when OPEC cut oil supplies to the U.S. for supporting Israel in the Yom Kippur War. Oil prices soared over 400%, triggering a severe supply shock that drove inflation from 3.4% in 1972 to 12.3% by 1974, despite Fed rate hikes. A similar crisis unfolded in 1979–80 during the Iranian Revolution, which further disrupted oil supply and fueled inflation once again.
Of course, oil prices have a much larger impact on the economy. However, eggs are a staple ingredient in countless products - like baked goods, pasta, ice cream, protein powders, and more - so their rising costs ripple through the entire food industry.
This persistent price pressure could keep overall inflation high, putting the Fed in an awkward position if it wants to justify further interest rate cuts
- Note that the Fed decided to hold rates unchanged this week.
And even if demand in other sectors cools, egg-driven food inflation may remain stubborn, proving that not all inflation is within the Fed’s reach.
Something to keep in mind.
Figure 2: TradingEconomics, Egg Tracker., January 2025
Stock Market on Credit: How High Leverage Fuels Booms and Busts
- Investors are borrowing at historic levels to trade stocks, inflating prices and fueling speculation - just like before the 2000 and 2007 crashes.
- Markets have sustained rising margin debt for over a decade, but history shows that when sentiment flips from greed to fear, the unwinding can be brutal.
What you need to know: The FINRA Investor Credit gauge - which tracks the gap between cash reserves and margin debt in equity investments - is near record negative levels. A negative value signals use of high leverage - betting on gains with borrowed money, like maxing out a credit card with no safety net and implies investors are exuberant.
Why this matters: High margin debt fuels bigger bubbles and investor complacency, but when markets decline, it worsens crashes. A sudden drop can trigger mass liquidations, forcing overleveraged investors to sell quickly to cover their debts—deepening the downturn.
Now the Dunham Deep Dive: The FINRA Investor Credit is a key tool for understanding market sentiment, especially how much investors are borrowing to buy stocks.
See, when optimism is high, investors often borrow more to buy assets, betting on rising prices. This extra leverage pushes stocks up even faster - like inflating a balloon.
But if the market turns, those same investors must sell very quickly to cover their loans before prices fall further, accelerating the drop - like a balloon popping.
- Imagine buying a house fully with a loan, but then the value drops. Now, your home is worth less than what you owe - leaving you "underwater", stuck with debt that’s bigger than your asset. And that’s not a good spot to be in especially if prices keep falling (talk about reverse wealth).
We’ve seen this rampant margin addiction before - before the crashes of 2000 and 2007 - and it didn’t end well. But today’s levels are unlike anything in recorded history.
Margin balances have hit record highs lately, fueled by easy credit, speculative trading, euphoric sentiment, and a surge in retail investors. And if history means anything, this could be a warning that markets are more fragile than they seem.
But - then again - margin debt has been rising for over a decade, and markets have continued to hold up and keep rising – and will likely do so until sentiment really changes from greed to fear.
Either way, it’s just something to think about.
Figure 3: MacroMicro, January 2025
Anyway, who knows what will happen?
This is Just some food for thought as we watch how these trends develop.
As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.
Sources:
- DeepSeek AI Platform Brings a $1 Trillion Market Reckoning on Cost - Bloomberg
- Stargate: Trump announces a $500 billion AI infrastructure investment in the US | CNN Business
- DeepSeek has rattled the AI industry. Here's a quick look at other Chinese AI models | AP News
- Egg prices may increase up to 20% as top farm tests positive for bird flu: USDA - ABC News
- FINRA Investor Credit | MacroMicro
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