The Journal: How DeepSeek Sunk The Stock Market

Released on January 29, 2025, "The Journal" podcast—co-produced by Spotify and The Wall Street Journal—dives deep into the unprecedented stock market crash triggered by the emergence of DeepSeek, a Chinese artificial intelligence (AI) company. Hosted by Jessica Mendoza, along with contributions from Gunjan Banerjee and Stu Wu, this episode unpacks the intricate dynamics between AI advancements and financial markets.

1. A Day Like No Other: The Market Crash Begins

The episode opens with Gunjan Banerjee recounting the initial signs of the impending market turmoil.

• Gunjan Banerjee [00:05]: "I was commuting in from Long Island... and I saw that futures contracts tied to the NASDAQ composite were down more than 4%."
  (00:11)

As the market opened, the decline intensified, marking the start of one of the most significant drops in stock market history.

• Gunjan Banerjee [00:56]: "All three major indexes are down a bunch. Nvidia, of course, is down double digits."
  (00:56)

2. Nvidia's Historic Downfall

Nvidia, a leading AI chip manufacturer, experienced an unprecedented decline.

• Gunjan Banerjee [01:25]: "Nvidia was down more than 10% shortly after the opening bell. It ended the day down 17%, resulting in a market value loss of almost $600 billion."
  (01:25)

By the end of the day, roughly $1 trillion had been wiped from the stock market, marking the biggest one-day market value drop on record.

3. Enter DeepSeek: The Unanticipated Disruptor

The catalyst behind the crash was identified as DeepSeek, a Chinese AI firm whose innovative chatbot rivaled Western counterparts.

• Stu Wu [03:53]: "Deep Seek is an AI chatbot... it's just like ChatGPT. You go to the website, you log in, and ask it a question."
  (03:53)

Stu Wu explains how DeepSeek's advancements were catching the attention of Silicon Valley and Wall Street alike.

4. DeepSeek’s Innovative Approach to AI Development

DeepSeek distinguished itself through unconventional methodologies, challenging established AI development norms.

• Stu Wu [04:52]: "Liang wants creative people, but he doesn't really care that much about experience. His hiring principle is hire people with the least amount of experience."
  (04:52)

This strategy fostered a workforce of fresh graduates and individuals with minimal work experience, promoting novel problem-solving techniques.

5. Undermining Conventional AI Assumptions

DeepSeek disrupted key beliefs about AI development, particularly regarding hardware reliance and geopolitical limitations.

• Stu Wu [07:13]: "Deep Seek spent a fraction of the money developing its advanced chatbot and used less advanced chips."
  (07:13)

a. Reducing Dependence on High-End Chips

Contrary to the prevailing notion that cutting-edge AI requires the most advanced (and expensive) chips, DeepSeek achieved comparable performance with fewer resources.

• Stu Wu [08:24]: "Deep Seek doesn't have those resources, so it tried a new approach... It's focused on being really good at figuring out what book has the answer after you ask it the question."
  (08:24)

b. Overcoming US-China Chip Export Restrictions

Despite US government restrictions aimed at limiting China's access to advanced AI chips, DeepSeek navigated these barriers effectively.

• Stu Wu [09:41]: "In 2022, the Biden administration put restrictions on the kinds of chips US companies could sell to China."
  (09:41)

Nvidia initially complied with these restrictions but later found workarounds, temporarily giving DeepSeek access to powerful chips.

• Stu Wu [10:21]: "They increased performance in other parts of the car engine to compensate... DeepSeek used about 2,000 of these powerful China-only chips from Nvidia."
  (10:21)

6. The AI Investment Boom Pre-DeepSeek

Prior to DeepSeek's emergence, AI stocks were soaring, driven by optimism about AI's transformative potential.

• Gunjan Banerjee [11:41]: "Investors had latched onto this idea that artificial intelligence was going to unleash this wave of productivity... including Nvidia."
  (11:41)

Major tech companies like Meta and Microsoft were also seen as primary beneficiaries of the AI boom, with Nvidia's valuation peaking at over $3 trillion.

7. DeepSeek's Impact on Investor Confidence

The introduction of DeepSeek forced investors to reassess their AI-centric portfolios.

• Gunjan Banerjee [14:29]: "It seemed like Deepseek needed a lot less computing power. So that would mean that the AI models of the future might not require as many high-end Nvidia chips as investors have been counting on."
  (14:29)

Questions arose about the sustainability of previous AI investments, with concerns that companies like Nvidia might be facing disruption from new entrants like DeepSeek.

8. Nvidia’s Response and Market Stabilization

In response to the turmoil, Nvidia acknowledged DeepSeek's advancements but maintained its critical role in AI infrastructure.

• Nvidia [Statement]: Praised DeepSeek's progress and emphasized that serving advanced AI models still necessitates a significant number of its chips.

Subsequently, the market began to stabilize, with tech stocks rebounding by Tuesday, exemplified by Nvidia's 9% stock increase.

9. Lingering Questions and Future Implications

Despite DeepSeek's public research, many details about its AI model remain undisclosed, leaving industry experts curious and cautious.

• Stu Wu [15:29]: "Deep Seek hasn't revealed all of its secrets. We don't know exactly what the training data it used looks like."
  (15:29)

Speculations include whether DeepSeek might have utilized even more powerful Nvidia chips than disclosed or accessed proprietary data from competitors like OpenAI.

• OpenAI's Response: Announced intentions to investigate potential data usage by DeepSeek, though DeepSeek did not respond to inquiries.

10. Underestimating China's Technological Prowess

The episode concludes by reflecting on how DeepSeek's rise highlighted a broader underestimation of China's advancements in technology.

• Stu Wu [17:16]: "A lot of people are in general surprised at how far China has come in technology... When Deepseek came out, anybody could download it and see the answer in English, and they're like, wow, this wasn't supposed to happen."
  (17:16)

This revelation underscores the dynamic and competitive nature of global AI development, challenging Western dominance narratives.

Conclusion

The episode "How DeepSeek Sunk The Stock Market" serves as a comprehensive exploration of how a breakthrough from a relatively unheralded Chinese AI firm can ripple through global financial markets. By challenging established technological and economic assumptions, DeepSeek not only precipitated the largest single-day market value loss but also sparked a critical reevaluation of AI investment strategies worldwide. As the AI landscape continues to evolve, the episode underscores the importance of adaptability and vigilance in the face of rapid technological advancements.

Notable Quotes:

• Gunjan Banerjee [01:25]: "That is just an insane amount of wealth and amount of value that evaporated within hours."
• Stu Wu [04:52]: "Liang's a pretty smart guy... hire people with the least amount of experience."
• Gunjan Banerjee [14:29]: "Are they being disrupted now?"

Additional reporting in this episode was provided by Asa Fitch, Rafael Huang, Karen Langley, and Sam Schechner.