North American Equities: Examining DeepSeek and Tariff Implications

Transcript

Good morning. It is February 3^rd, 2025. What a morning. Pete Hofstra here with an update on North American equity markets. Wow, lots to talk about. Let's start with what became the minor story, was a major one for a while, and that was the result of an outfit called DeepSeek, which was going to completely overhaul the way artificial intelligence or LLM models were created and deployed, and claimed that they had done so at tremendous efficiency and you don't need anywhere near the hardware of what the Microsoft's, Amazons, Metas and Alphabets were spending.

It really rattled the tech world. And of course, what's being revealed as we dig into it is they probably used a lot more hardware and costs. They spent a lot more money than what was initially indicated, and while there's definitely some clever things that seem to have come out of their approach, there was also some trade-offs made, in particular around something called safety when it comes to these AI bots. There are safety protocols and a set of standard safety tests. Cisco Systems was actually the one running this bot through a bunch of safety tests and found it failed 100% of them. So definitely some compromises were made, and it was actually Cisco that was able to access a huge data set, that was used in their inferencing model, that should have been kept private and they actually alerted DeepSeek to this fact. And so, they've had to change sort of the coding and the infrastructure around the bot to make sure that data is protected. So certainly some, I don't know, let’s call it shortcuts, compromises needed to be made. While there was, I think we should assume some very clever things that were done and things that will like it that will continue to be done NVIDIA with their own software works extremely hard to bring greater efficiency to the GPU use cases and the overarching dimension to this is any commodity that ultimately supports a multitude of activities. When you think of oil. That if efficiency of the commodity improves the consumption of the commodity actually goes up. So, if the GPU, the commodity in this place, supporting a multitude of different activities, if the efficiency of that commodity the GPU is better, that consumption actually go higher. So I think from an investment case, it's not obvious that NVIDIA is negatively impacted by this, but I think what you could see is that our deploying use cases and are the sort of the ones that are trying to get these AI bots out in front of corporate customers, consumers, that the cost could go down. There could be a lot more efficient ways to do this, but you're going to see that continue to evolve. So I don’t think we ignore it. But you know, we didn't see it as quite the market-rattling event that it was initially perceived to be.

Anyway, let's move on to tariff. Certainly the topic today and the topic over the weekend. 1st I would say you know when building a portfolio or changing a portfolio, you don't want to anchor to one bet. Again, this is where you want to think probabilistically. Consider a multitude of different outcomes here, and what each of those might mean. And then protect yourself against extreme outcomes, but also be willing to be opportunistic. Where I mean a lot of things could get thrown out as we move through this. And the reason we say that is, who knows what the actual plan is here. I mean, what is Trump and this current administration trying to do? I mean, are they actually trying to prevent the inflow of fentanyl and illegal immigrants into the US? Yeah, it doesn't seem that that is the excuse, not the reason. Is it to get better trade deals with their partners around the world? Maybe. Is it a tax replacement where they want to cut taxes, eliminate taxes on tips, cut corporate income tax, whatever it is, but are gonna need a replacement? So are tariffs to be a permanent tax source. In the Canadian case, is this just the first of a foray to try to make us into the 51st state, or is this just a bunch of incoherence things that have been lobbed out through the campaign that helped get him elected, and now he's trying to follow through. But none of these things have any real staying power. And maybe he hasn't even read the details of most of the executive orders that he signed. So maybe there's a high degree of incoherence behind this. And of course now you get egos involved, so maybe it gets silly in where it goes from here anyway. So all that to say is you want to be very careful on anchoring to any one particular outcome and protect against a diversity of different things here, which is what we've done across the I quite broadly and prior to this as well. I mean, we've sort of seen a strong run in and narrow portion of the equity markets within balanced product and equity products, we've been actively repositioning into the end of last year and heading into this year and certainly had seen and we'd even alluded to on this podcast at the first six months of the Trump administration, could induce a lot of volatility. That they were probably going to come flying out of the gate and attempting all kinds of things and then sort of backing off where they needed to as they head into the midterm elections 2 years out, right? So they kind of have a period to implement different things. So we certainly anticipated some volatility across, I would say, a large suite of our products, it layered and protective puts or not just reposition not just be willing to raise cash, some cases moving into health care which has been in our view, oversold, doing a lot to actually and bring in about a lot of different protection levels. So we've been very active and all of the [inaudible].

Even in technology funds, we've been buying quite a bit of put. So we feel that, you know, anytime, you bet on your favorite team and they win you're gonna wish you bet more so you know, when things go one way and you're somewhat tilted to protect or benefit from that. You always wish you did more, but I think we've been very active in trying to ensure we're both positioned to get through this, but ultimately benefit from it. But look where I would think there is real concern here is what this does. How would how do we really walk back from this. What does this do with the United States relationship with Canada, with all the other geographies around the world. This feels like it's a big negative impact and I don't wanna get political here because… Let me put it this way. What I would wish for everyone in the world, everyone who's part of a democracy is always be a swing voter. Always be willing to vote against where you might traditionally you can be left-leaning or right leaning. That's fine and this is not about that. But in a democracy, there's an opportunity to hold leaders to account, and that's best done when you're willing to go against what you might traditionally, because you believe it's best for the country in that moment or it's important that this minimum could say quality of leader is in place to run. And I would say look for a lot of us that you know followed Trump throughout his life as a public figure, let's say he's been willing to participate in what many of us would consider low quality behaviors. And I think the way this is being done, even if the US is simply wanting a better trade relationship, there's better ways to do it. The way this is being done that seems a bullying. It seems to bring the hammer down 1st and then sort of be more rational post, is not a great way to get things done and I always look at Trump and say look is he a disease or is he the symptom of a disease? And you could probably make the case that he's more a symptom of a disease that the US has a large portion of the population that's sick of anything that resembles status quo. They have felt left behind and forgotten, and when I look at our Canadian system. There's a lot wrong like we have a lot that's wrong in Canada. We are overtaxed, certainly in in my opinion. And more because the use of that tax dollar is very inefficient, our productivity numbers are terrible. But you can certainly make a case for having a strong common good around things like health care and education, that you have a high probability that a large portion of your population gets to a minimum quality of life, that's quite acceptable. And I think that's what the US has not done. This is not to get socialist, but there is, I think, a reason for broader societal health and geopolitical stability that you want at least everyone in your population able to achieve a quality of life that they can appreciate and think beyond just their immediate needs. I think the US has not done a good job of that. That's a reason I think we probably don't want to maintain our sovereignty, but doesn't mean we shouldn't hold our leaders to account. They have been way too inefficient with the tax dollars. So all that to say as we head into our own federal election, really encourage everyone, be willing to be a swing voter, always do what's right, what's what we think is right for this country at this point in time and always make sure we have the best leaders possible that are able to properly negotiate, but be a good partner to others in the world. It is a global community and we need to be a partner within it and. So that's sort of the residual fear here is this ultimately could be achieved the exact opposite of what Trump and his cronies are trying to achieve which is to reinsert US dominance. This could actually trigger the unwind. This could ultimate result in trade alliances that exclude the US, with the rest of the world saying we all have a common enemy now, let’s all partnered together to try to reduce the strength of this common enemy, not improve it. This ultimately could bring the US dollar as the reserve currency back under threat, right? The US is much as they may feel, they've been abused by these trade relationships. They're also in a position of extreme privilege, being the reserved currency. And so there's a lot that can backfire from the way this is being done. But again, it just puts the emphasis on we are in a democracy, can be thankful for that, and let's use that privilege to make sure we do the best we can here anyway. Maybe that's too much for this type of call. We'll do our best to navigate through this and we'll talk to you in another month, be well.