DeepSeek is a Chinese AI lab that has rocked the world of artificial intelligence (AI) by developing a competitive Large Language Model, or LLM, that reportedly outperforms ChatGPT but was developed at a fraction of the cost with much less time required to “teach” the program. It also functions with cheaper and less powerful Nvidia GPU chips. And it is available on an open-source basis.
Will DeepSeek cause a bear market? Since the late 1920s, there have been 22 bear markets in the S&P 500 (Fig. 1 below). Over the same period, there have been 17 recessions (Fig. 2 below). In other words, more often than not, bear markets are caused by recessions. And more often than not, bear markets and recessions are caused by the tightening of monetary policy—not because tightening eventually curbs demand, as often assumed, but because tightening triggers a financial crisis that balloons into an economy-wide credit crunch, and that causes a recession (Fig. 3 below and Fig. 4 below).
DeepSeek won’t cause the Fed to tighten monetary policy. It won’t cause a financial crisis or a credit crunch. It won’t cause a recession even if it causes American AI companies to reduce their capital spending on AI infrastructure. Of course, it might have a negative wealth effect on Nvidia’s shareholders.
