DeepSeek Causes Deep Shit

What a way to start a week off!!! Wowsers, is it about to get interesting. After all the crap yesterday between the US and Columbia, I thought it would be pretty hard to top all of that – but that took a back seat to the overnight announcement from China. Let’s take a Deep Dive ( pun intended ) and see why what happened today could affect your mortgage business.

This morning was one hell of a day in the stock markets. In the wee hours of this morning, China’s High-Flyer hedge fund released its details about its new AI technology -DeepSeek . It is safe to say that DeepSeek has completely disrupted the AI game now. Up until now, the US was the main player in AI with companies like OpenAI and Microsoft and Nvidia leading the way. These US companies have tens of billions of dollars tied up in chips, processors, and research. The entire stock market run of 2024 was based on outrageous valuations for companies like Nvidia providing all the chips, tech, and speed needed to power AI.

Well, DeepSeek is now claiming, and it is being independently validated that the Chinese have a far superior AI engine that was developed in months instead of years, cost about 6 million, instead of hundreds of billions spent by US firms, provides much better results, and requires a lot less computing power. The news of this sent companies like Nvidia down almost 20% in one trading day. Nvidia is one of, or was at least, the largest publicly traded company in the world – and it lost 20% of its value in one day!!! Nvidia lost 600 BILLION dollars of market cap in one trading session which is the largest loss ever recorded in one trading day. Basically Nvidia lost about half of Canada entire debt load in 6.5 hours. I promise that if you have any investments – you own Nvidia in some way shape or form. How much of the 600 billion came of off your investment value?

Why should a mortgage broker care? Well, the reason you need to care is because everything is interconnected. What DeepSeek did today was completely changed the entire US stock market. Everything the market thought they knew about the latest game changing technology now has to be re priced. The market started re pricing Nvidia today, but it now has to re price all of the providers, all the chip suppliers, even the power companies that were building data and power centers to provide energy all have to be re priced based on the new information. This, at least in my opinion is going to set off a wave of ‘ risk off’ in markets. Risk off means you should expect to see a lot of re pricing of stocks, and a lot of stock market volatility. Stock market volatility starts to effect the wealth effect in peoples minds, and that can lead to them pulling back on everyday spending, and major purchases…..like houses.

Now, what is bad for stocks, is good for mortgage brokers. We saw a pretty big drops in rates today across the board as people scurried for cover into the safety of bonds. As people bid up the bond prices – the yield goes down. If we start to see a true risk off environment, or more instability in the stock market, this could lead to lower yields across the board. Remember, I have always maintained that volatility would rule the day, and so far on the Canada 5’s we have seen that. Just 10 short days ago the 5 year yield was right around 3.28% ,and today we are down at 2.90%. Oddly enough, Canadian lenders don’t seem quite as quick at dropping the fixed mortgage rates. We have always seen a slowed response to a drop in yields, but this time around it is seemingly taking a lot longer for lenders to drop. Ironically enough, it also coincides with all lenders seemingly jumping on the ‘ fixed is better’ bandwagon. Almost every banker, and economist that works for banks now thinks rates are going up, so fixed is the answer. Really? At the same time that spreads to banks are at ultra high peaks, those same bankers now feel it is the safest play? Hmmm, how interesting. Surely a bank wouldn’t give out self servicing advice, would they? A full 180 degree change from what we saw just 2 months ago, when everyone agreed that variable was better?

No matter the reason, I think brokers will take lower rates – but always be careful what you wish for, as the only way you get lower interest rates is if the sky is falling everywhere else.

Of course, what good is cheap money if you don’t have a job? In the last 72 hours, Canada has seen Amazon pull out of Quebec, Epicure has shut down all of its Canada Operations, Peavey Mart will shutter all of its Canadian locations within 90 days, and CN Rail is threatening to strike – again. Not exactly a great environment to buy a house in, now is it? Oh, and lets not forget how many businesses are claiming they will lay off if DJT brings tariffs into effect on Feb 1, 2025. Unemployment will quickly rise to the number 1 problem in Canada at the rate we are going. Of course, all of this is going on while there is no captain on the bridge deck, as the government remains in prorogation.

All of this leaves Tiff and Co in a weird position going forward. A 25 bp cut on Wednesday is almost assured ( even though core inflation and CPI trim were higher than the BOC is comfortable with, and the only reason headline really dropped was due to the GST/HST cut in Canada that will be short lived ). After Wednesday though I think it gets a bit trickier. If prices rise in the least due to a sinking Canadian dollar or tariffs, then the BOC won’t be able to push through more cuts. On the other hand, if deflation rears its ugly head, then BOC can cut cut cut, but what good is lower interest rates if you are unemployed? You can’t eat lower interest rates, you can’t heat your home with lower interest rates, and when the economy shits the bed, banks tighten up lending tighter than a bulls rear end during fly season – so borrowing to buy is almost impossible except for the rich.

The fly in the ointment is what is going to happen South of the border. With the US economy expected to have a fire lit under it, watch for inflation to rise a bit, bonds yield to go up, and I feel that the Federal Reserve will turn from ‘ how many cuts ‘ to ‘when do we need to raise rates’ fairly quickly, and I would prognosticate this latter question is asked well before the end of 2025. Since Canadian rates are closely tied to US ones, we could see a dystopian world where the Canadian economy is in deep trouble, but rates still go up due to US yields going higher.

What a time to be alive!!!!