Authored by Peter Tchir via Academy Securities,

At the start of the year, we are always asked about “Black Swan” events. Given Academy Securities’ Geopolitical Intelligence Group and the number of “hot spots” around the globe, it probably comes up more frequently for us. For the record, I expect more opportunities than risks from Russia/Ukraine and Iran/Israel – see Geopolitical Risks and Opportunities in 2025 if you missed it.

Less discussed are so-called “Gray Rhino” events. Highly probable, highly impactful, yet neglected threats.

The subject of “gray rhinos” came up in our Geopolitical Outlook Webinar, though not in the context of cheap AI. Similarly, we started this month’s Around the World with some “black swan” risks and a deeper dive into the cyber threat from China. Not exactly about cheap AI, but quantum was discussed and with all the cyber issues, we were at least in the vicinity of what has become the subject du jour.

While we only listed DeepSeek as intriguing (rather than outright fearful) in this weekend’s T-Report – Crank Your Amps to 11, that section (if not the entire report) is worth a quick read.

Whether “cheap AI” is a black swan event, a gray rhino event, or pure hype (which is possible), the possibility of it existing is the big question we are all now faced with.

Given privacy concerns (and whatever is going on with TikTok) it is difficult to imagine multinational companies embracing this Chinese technology (if it truly exists), but I suspect (since it is open source) that it will be replicated domestically (maybe even by AI itself) rather quickly.

There have been a lot of questions around current valuations, especially in the AI space. We’ve been part of that crowd. But the questions have been more or less mundane, until today. The typical questions were:

What we didn’t foresee was the potential for “cheap AI” upsetting the apple cart.

In addition to valuation and positioning concerns, we keep coming back to our concerns about the current structure of our markets. These are things that in and of themselves don’t do much, but can accelerate moves when triggered by a catalyst – which is what we might be facing now.

Our usual suspects on the market structure side:

For all the fear, I think down almost 4% on the Nasdaq 100 warrants some small buying.

There has been a large overnight move, and many are sure to question the validity of the claims being made. But make no mistake: if true, this could change the main narrative around the stock market. It may also be a catalyst to help Chinese stocks, which haven’t had a great couple of months (some serious stimulus would also help, if we ever get that).

As a “side note,” President Trump “suddenly” slapping tariffs on Colombia (then coming to a deal) doesn’t help things either. It can be viewed as a confirmation that there is still a reactive nature to some of his decision making, which is not what the markets are currently betting on, especially when it comes to tariffs. Seriously, the Colombia tariff story would normally be “top of the fold” but will be relegated to the back pages as investors try to figure out what is going on with AI.

I remain skeptical (or maybe dubious is a better word) of some of the “cheap AI” claims, but this moment could be as important to the markets as the unveiling of ChatGPT. Though presumably in the opposite direction, aided and abetted by a market structure conducive to sharp (overdone) declines.

At least DeepSeek has taken my mind off another season where the Bills have solidified their reputation as the best team never to win anything.