“In the midst of chaos, there is also opportunity” – Sun Tzu, The Art of War – 5th Century BCE
Today marks a significant milestone in the AI as DeepSeek, a Chinese AI startup, announced the release of its revolutionary R1 Open-Source large language model (LLM) rivalling OpenAI’s ChatGPT. This DeepSeek RI model has been designed to excel in complex reasoning tasks, rivaling the performance of OpenAI’s latest models while reportedly being developed at a fraction of the training & implementation cost. It is being widely reported that this R1 LLM was trained with Reinforcement Learning (RL) for a relatively shoestring Cost-Effective Budget of ~$ 6 Million while costs for comparative LLMs have been many times more. This breakthrough underscores DeepSeek’s commitment to pushing the boundaries of AI technology, offering a cost-effective solution that reportedly does not compromise on performance.
Reports are emerging this R1 model was trained in a very efficient manner with only ~7 Billion Parameters as opposed to ~700 Billion Parameters which normal LLMs have been trained on -and- using supposedly less powerful GPU Chips other than NVidia based Hyperscalers, since China does not have access to US Chips, due to current US export restrictions. By providing businesses with a powerful tool for optimizing operations, DeepSeek R1 is set to become an invaluable asset for companies looking to enhance efficiency and adaptability. This achievement not only showcases DeepSeek’s innovative approach but also signals a shift in the AI landscape, where advanced capabilities are becoming more accessible and affordable. It is also emerging that this LLM has been developed with Mainland China’s Homegrown Talent since DeepSeek does not appear to have any overseas presence outside China
The Impact on US Financial Markets Today
Today, the US financial markets experienced a notable shift as Wall Street edged back from its record highs. The S&P 500 fell by 0.3%, following a day of record-setting performance. This fluctuation is indicative of the market’s sensitivity to economic indicators and investor sentiment. While the decline was modest, it highlights the ongoing uncertainty and volatility that characterizes the current financial landscape.
The US Stock Market saw significant value drop in semiconductor sector for powerful chips as there was recalibration of TAM (Total Addressable Market) for new GPUs by Analysts in Wall Street. In this sector, NVidia is one of the most widely bought and speculated (?) shares with large volumes of shares, options and leveraged options outstanding in the market. Due to this breaking news about DeepSeek, there was huge unwinding of speculative positions today, which caused NVidia shares to drop around 20% in trading along with tremendous downward pressure in most sectors of the market. On a related note, had OpenAI been a Publicly Traded Company, we may have seen a significant drop is its share price and one wonders what impact this event will have on OpenAI’s valuation now!
However, we always maintain a level of Healthy skepticism when it comes to events in the Financial Markets, and in particular, when it comes from overseas markets which are not tightly regulated as our Financial Markets where US GAAP (Generally Accepted Accounting Principles) or International Financial Reporting Standards (IFRS) are followed. It makes us wonder if there was any “creative accounting” behind the very low $6 Million Number such as classifying most of costs as “Research Costs”? It may be noted that it may be a while (if at all) before DeepSeek’s Financials supporting the assertion of $6 Million will made available! Could this be a factor in supporting our DeepFake argument?
Despite the dip, the broader trend remains positive, with the S&P 500 still up significantly over the past year. Investors continue to monitor the Federal Reserve’s actions closely, as any hints of interest rate changes can cause significant market movements1. Today’s performance serves as a reminder of the delicate balance between economic growth and inflation concerns, and the impact these factors have on investor confidence and market stability
Geopolitical Implications of the US-China Relationship
Moreover, the geopolitical ramifications of DeepSeek’s achievement extend beyond the tech industry. The US and China are already engaged in a broader strategic competition, and advancements in AI are seen as critical to national security and economic dominance. DeepSeek’s breakthrough could prompt the US to reassess its policies on technology exports and collaborations with China, as well as its own investment in AI research. This announcement may also influence other countries’ strategies, as they navigate the complex dynamics of aligning with either the US or China in the race for technological supremacy. The political implications of this development are profound, as it underscores the importance of AI in shaping the future of global power dynamics.
The timing of this announcement is very curious as it has come just as President Trump has taken office and has started instituting an America First Agenda to counter illegal and overall immigration policy. He is using Tariffs very effectively to nudge action by recalcitrant countries who will not “play ball”! It is also expected that POTUS will tighten the export restrictions regime of Technology Sharing of High-Tech components in fields of GPU / Hyperscalar and Quantum Technology where we are ahead of anybody else in the World. Hence, one wonders if this is China’s response to Tariffs and oncoming Export restrictions, as a counter measure to demonstrate that their capability without the aid of American Technology, and set the stage for tit-for-tat restrictions of their advances in AI?
Implications to National Security
The implementation of DeepSeek R1 in the US raises significant national security concerns. DeepSeek’s rapid advancements in AI technology have already sent shockwaves through Wall Street and Washington. The Pentagon is particularly worried about the potential military applications of such technology, as it could give the China’s People’s Liberation Army (PLA) an edge in warfare. The US Department of Defense has been investing heavily in AI to enhance strategic decision-making and situational awareness, and the emergence of a powerful AI model from China could disrupt these efforts.
Coming on the heels of issues with TikTok, there are concerns about DeepSeek’s data security and privacy. It has been reported that DeepSeek’s privacy policy indicates that user data collected through its services may be stored on servers in China and shared with Chinese authorities like TikTok. While the users of TikTok have generally been younger demographic, who have been primarily using it for personal engagement on social media, R1 if implemented in US will be used by American Business and even probably Government Applications, which leaves open the potential for this data being stored in China, used to gather our critical information with National Security Implications, along with R1 being trained on “American Data”, which could be weaponized against American Interests.
This raises the risk of sensitive information being accessed by the Chinese government, which could have serious implications for national security. The US may need to reassess its policies on technology imports and collaborations to mitigate these risks and ensure the protection of critical data
Navigating the Future: Countermeasures to Address DeepSeek R1’s Implications
As indicated earlier, while the achievements of DeepSeek are commendable, they also raise significant national security concerns for the United States. To navigate this complex landscape, it is essential for the US to adopt a multifaceted approach that addresses the challenges posed by foreign AI technologies.
1. Strengthen Domestic AI Development: Investing in domestic AI research and development is crucial to maintaining a competitive edge. By fostering innovation and collaboration among US tech companies, universities, and government agencies, the US can ensure that it remains at the forefront of AI advancements. Incentivizing public-private partnerships and providing funding for cutting-edge research can help bridge the gap and promote the development of cost-effective and efficient AI solutions. It is very important that US Public Policy support educating US Citizens living in the US in domain of AI to ensure American superiority and prevent “deemed exports” when skilled overseas students take this knowledge to their countries
2. Implement Rigorous Security Measures: To safeguard national security, the US must implement stringent regulations on the use of foreign AI technologies. This includes conducting thorough security assessments of AI models like DeepSeek R1 before they are integrated into critical systems. Establishing clear guidelines and protocols for data protection and privacy will mitigate the risks associated with data breaches and unauthorized access.
3. Enhance International Cooperation: Addressing the global implications of AI requires cooperation with international allies and partners. The US can lead efforts to establish international norms and standards for AI development and use, ensuring that technological advancements are aligned with democratic values and human rights. By working together with like-minded nations, the US can promote responsible AI practices and counterbalance the influence of authoritarian regimes.
4. Encourage Talent Development: Ensuring a steady pipeline of skilled professionals, who are US Citizens, in AI is essential for long-term competitiveness. The US should invest in education and training programs to develop a workforce of US Citizens that is proficient in AI technologies. By supporting initiatives that promote STEM education and reskilling programs, the US can build a robust talent pool capable of driving innovation and addressing emerging challenges in the AI sector.
In conclusion, the rise of DeepSeek R1 highlights the need for a comprehensive strategy to address the political and security implications of AI advancements. It is our view that by strengthening domestic capabilities, implementing rigorous security measures, enhancing international cooperation, and encouraging talent development, the US can navigate the challenges posed by foreign AI technologies and ensure a secure and prosperous future.