The Chinese AI Startup Rivaling OpenAI & Trump Fires Tariffs at Colombia?

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0:29Good Morning Brew Daily Show. I'm Neil Fryman. And I'm Toby Howell. today, a small Chinese lab may have upended the world of AI as we know it. Then Trump threatened the first trade war of his presidency, but not against the country you'd expect. It's Monday, January 27th. Let's ride.

0:51All righty, the Super Bowl is set. My Philadelphia Eagles will take on the Kansas City Chiefs two Sundays from now in a rematch from 2023. The Chiefs won that game, and then they won the title again last year. So this year they're seeking to become the first team in NFL history to pull off a Super Bowl three-peat. And only the Eagles and Saquon Barkley can stop them. Neil, I am not afraid to say it. The Chiefs are the most unlikable team in NFL history. You got the refs blatantly stealing games for them. You got Patrick Mahomes and Travis Kelsey flopping left and right. You know the fact that they are so good and they won't stop winning games.

1:29So needless to say, I am going to start pronouncing it Wooter, frequenting Wawa's, and getting a Saquon back tattoo because let's go, birds. You are our only hope. I love what I hear, Toby. Go off. Go off and go, birds. Now a word from our sponsor, Yahoo Finance. Neil, permission to tell everyone listening about my favorite Yahoo Finance feature. Permission granted, Toby. Well, this is an ad for Yahoo Finance. Thank you, Neil. Still, my favorite Yahoo Finance feature is this subtle design decision where they show how a stock is trading if it is mentioned in a headline. For instance, take the headline, Wall Street bets Tesla's 2025 sales will miss Elon Musk's target.

2:08Just below that headline, you can see how Tesla is doing in pre-market trading. It's down 1.4%. I see why you like it. You get context from the headline and the reaction of the market all in one glance. And that's just a single headline, a full scan of Yahoo Finance's homepage. and you'll learn all the storylines that are driving the market for the day. Then if you want to go deeper, boom, click the article and get the context you need to make informed investing decisions. If you want to check out my favorite feature, head to yahoofinance.com and start perusing. That's yahoofinance.com. Raise the rudders.

2:40Raise the sails. Raise the sails. Captain, an unidentified ship is approaching. Over. Roger. Wait, is that an enterprise sales solution? Reach sales professionals, not professional sailors. With LinkedIn ads, you can target the right people by industry, job title, and more. Start converting your B2B audience today. Spend$250 on your first campaign and get a free$250 credit for the next one. Get started today at linkedin.com slash campaign. Terms and conditions apply. American AI dominance is under serious threat after a Chinese company dropped a powerful new model that can go toe-to-toe with the very best open AI has to offer, but at a fraction of the cost.

3:20DeepSeek is a relatively unknown AI research lab from China that dropped an open source model last week that flipped the AI industry on its head. According to a paper from the company, its top of the line R1 model matches or beats competitors like OpenAI's O1 on most math and reasoning benchmarks. But it's not just DeepSeek's performance that has the U.S. spooked. It's the fact that it was able to develop such a model in the face of U.S. export controls that severely limit the amount of chips Chinese companies can buy. Given the restraints, Chinese research labs like DeepSeek have been forced to do more with less and thus found a way to train their models much more efficiently using limited compute they have available.

4:02But here's the real kicker. R1 is open source and free to use, which will seriously hurt subscriber only models like OpenAI's$200 a month ChatGPT Pro subscription. Neil, ScaleAI CEO Alexander Wang, one of the more notable founders in the industry, put it best. He called the models coming out of DeepSeek earth shattering. This is a literal earthquake. And as of this morning, it is toppling the stock market. As of 5 a.m., NASDAQ futures were down nearly 4%. S &P 500 was down more than 2%. NVIDIA stock is down 10%. There's a total tech wipeout. So I encourage you to maybe just hold off on looking at your stock portfolio today because it is a massive collapse.

4:48And it is all due to DeepSeek, which is so insane because this news has been percolating out over the past week. It has been all the talk in Silicon Valley. You have huge AI players like Marc Andreessen, who leads a big venture capital firm that invests in AI, just absolutely gushing about it, saying this is the best thing I've seen since sliced spread. So there's a very huge impact that we're seeing from DeepSeek on the stock market right now. Now, you said it upends the AI industry. It certainly upends the investment case for these large tech companies. The idea was that you have to spend hundreds of billions, tens of billions of dollars to build AI models.

5:31If you can just do it with$5.6 million like DeepSeek did, then maybe more people could get involved. And these tech companies don't have the big moat that we thought they did. And I do just want to give some context on who is DeepSeek? Where did DeepSeek even come from? It has a very unconventional story. It actually started out as an AI model that was built for a Chinese quant hedge fund. They were literally building it as a side project. The CEO, the founder of the hedge fund was like, I was just curious about AI. Obviously, it was helping with the trading aspect, but they were taking the funds and the profits they were making from the hedge fund and putting it into this AI side research project.

6:07But because the AI or just because the US has these pretty strict export controls about the amount of high-end NVIDIA chips that can go over to China. They were working with basically a tenth of the compute power that someone like a meta or someone like an open AI is working with. So those constraints kind of built or forced DeepSeq to come up with way more efficient methods to train its models. They didn't necessarily come up with a brand new method. They just combined a bunch of different ones together, and it led to these greater efficiency gains. So now this is out in the open. It is open source.

6:45So other companies can start copying their approach, which will lead to efficiency gains, which could topple NVIDIA from being one of the most valuable companies. Because if you need less of their chips, then maybe NVIDIA is a little bit overvalued right now. So there's a lot of second order, third order effects that come from DeepSeek releasing this model. What do you think the big CEOs of the tech companies are thinking right now? We just had Mark Zuckerberg, who leads Meta, come out on Friday with a big post on Thread saying how they were going to invest so much money into AI. He pegged that this year at anywhere from like$55 billion to$60 billion.

7:22They're building huge data centers. So much money has been poured into AI infrastructure. We had SoftBank and OpenAI do that big announcement of$100 billion that could go up to$500 billion. That is what they've put the price tag on building a world-class AI model. And Deepsea comes along and says, no, we can do it for a 20th of that price. You know, this is insane. And that's why you see the market absolutely, you know, clobbering these tech giants right now is because maybe you don't need all this money to build a world-class AI model. The one, I mean, you can call it cope. I'm going to use the word cope that I was seeing from around the industry is that in economics, there's this thing called Javon's paradox, which occurs when tech progress increases the efficiency with which a resource is used.

8:13So think about maybe back this. This was coined back in 1865. It was about coal power plants becoming a lot more efficient. And the government thought like, oh, coal power plants are much more efficient. That means we're going to need less coal. The exact opposite happens when efficiency gains are reached. Actually, more of that resource ends up being used. So that is what I've been kind of seeing from some tech leaders. Like, hey, this is not Armageddon. What's actually going to happen is we're going to even see more demand for AI chips because of these efficiency gains. So there's a couple ways to look at it.

8:44You can look at it that it is going to be a bloodbath that will wipe out NVIDIA's dominance. Or NVIDIA could just become more entrenched than ever due to these efficiencies. And we have to mention the geopolitical angle, too, because the U.S. and China are locked in this huge arms race for AI supremacy. And we thought the U.S. had the lead because we have OpenAI and Microsoft and Meta and these other tech giants, NVIDIA. But now this Chinese company comes along and shows that it has parity with the U.S. So it looks like whatever export controls we had to keep China from competing with the U.S.

9:18have not been working. Let's stay on the topic of geopolitical tension. Trump issued a barrage of tariffs over the weekend, but not at a country you'd expect like Mexico or China. Instead, it was Colombia, a longtime U.S. ally in Latin America, that was in Trump's crosshairs. On Sunday, President Trump said he would impose tariffs and sanctions against Colombia after its president, Gustavo Petro, refused to accept two U.S. flights carrying deported migrants. As a result, the president said he would slap a 25 % tariff on all Colombian imports, which include commodities like crude oil and coffee, promising to raise them again to 50 % in one week.

9:58If the tariffs weren't enough, Trump also said he would fully impose financial sanctions against Colombia, tossing in a travel ban for good measure. By the end of the day, though, Colombia had given in to Trump's demands, averting a costly trade war. But the show of force was likely meant to dissuade other countries from getting similar ideas. Quote, it sends a powerful message to the world that not even old political allies are safe if they do not cooperate, Bloomberg wrote. Neil, this is the first, but certainly not the last time that we will see Trump using economic pressure to force a country to bend to an American first policy.

10:34I don't think anyone woke up yesterday morning thinking that we would be in a full-blown trade war with Colombia, which you mentioned is one of our top allies in Latin America. But that is exactly what happened. Looks like the Colombian president refused to accept these flights. Now, he has accepted many hundreds of migrant deportations coming from the United States over the past few years. he objected to the use of the military aircraft and we sent two military aircraft carrying migrants there and he said no we don't want that you have to treat them humanely and with dignity and then he got into a war of words with Trump on social media and then Trump said you know what well I've had it we're going to do 25 percent tariffs that are going up to 50 percent next week and as you mentioned we have we have a lot of leverage over Columbia's economy because they We are their top trading partner.

11:29They send coffee and crude oil and all of these goods to the United States. Trump identified this as a point of leverage because if 25 percent tariffs go into effect, that makes those goods cost a lot more to ship into the United States. There goes the American consumer market. Fifty percent is almost impossible to overcome. Colombian exporters get hurt. U.S. consumers also get hurt. But the fact is that Colombia's economy is fragile. Trump identified the point of leverage and Colombia back down by the end of the day. And on the flip side, the U.S. imports about$16 billion of goods from Colombia in 2023.

12:05That ranked 26th on our list of import partners. So it's not like it's going to really affect too much in the U.S. economy if we lose Colombia. Maybe coffee. Except for coffee. Coffee is one of those big commodities. It makes up about a quarter of U.S. coffee imports. So Starbucks CEO Brian Nichol was probably looking at this going, are you kidding me right now? Columbia of all places. But I think it does show you are right that even though there is not a ton of policy overlap between immigration policy and economic and trade policies, Trump is planning to use them both in tandem to get what he wants.

12:40So I said it was the first time that we saw him doing this. We're only two weeks into his presidency, but it likely will not be the last. And it's January 27th now. We know there's a February 1st deadline. That is Saturday for these big tariffs to go into effect on Mexico, Canada and China. And the Wall Street Journal reported just this morning that momentum is growing among Trump advisors that, you know, let's not that they're going to forego the negotiation process and just slap Mexico and Canada with tariffs. That would be on an economic impact of of orders of magnitude bigger than what we'd see on Colombia.

13:15So the clock is ticking for the February 1st tariff deadline. If your claim to fame as a chef is making omelets, you might want to pick up a few new recipes. The prices of eggs have gone from, wow, that's pretty expensive, to that's almost a quarter of my rent in recent months, and they're not expected to go down any time soon. Pricey eggs may be the new normal. The reasons are a noxious mix of record demand and constrained supply. On the supply side, the bird flu that's been devastating flocks for two years now has only intensified. About 10 percent of the U.S.'s egg-laying population, more than 30 million chickens, have been killed in the last three months alone to prevent the spread of the disease.

13:5510 percent of the supply poof. Then on the demand side, you're all eating way more eggs than you used to. Higher prices be darned. The industry has seen more than 20 consecutive months, nearly two years worth of record high demand, perhaps because eggs are increasingly seen as an affordable vehicle for protein. And as I said before, new normal, you might want to get used to this. With the end of bird flu nowhere in sight, egg prices are projected to jump another 20 percent in 2025, far above the 2.2 percent inflation for food prices in general. I mean, eggs are the poster child of what people have been struggling with and hate about the elevated prices we've been seeing over the last few years.

14:35One of the reasons is you buy them very regularly, so you're actually pretty familiar with their price point, and you can tell when they go up or down. They're ingredients in a lot of food. I mean, bakers out there use them. Breakfast lovers out there use them. They are just one of the more ubiquitous ingredients. And then you're right. There's been this kind of rise in healthier eating and protein kicks and eggs are this supposedly affordable source of protein, except they're not so affordable anymore. The problem with this bird flu epidemic is that you have to cull basically an entire flock if one chicken, if one bird is infected, because that's how infective this disease is, that it can take down an entire flock.

15:16So you are seeing just these really large culling events where they're killing these birds because of single infections, which is just devastating the supply side of the industry. And my eighth grade teacher, Mrs. Roy, would actually not be happy with me because I didn't provide any evidence to say that the egg prices were going up. So I don't want you to just believe me. I have the numbers. A dozen large grade A eggs was$4.15 in December. That's up from$3.65 in November. just one month before, and then egg prices year over year have jumped 36 % in December. So we are seeing some truly skyrocketing prices.

15:56The thing is, it's not totally filtering down to the retail level because wholesale prices have skyrocketed even more than what you'd find at the grocery store. They've gone from about$2.50 to above$7. But grocery stores and restaurants use eggs as a loss leader. They say, we're not going to make so much money on eggs. Maybe we're going to even lose money, but we're going to use it to get you in the door to buy more expensive items. So they're paying over$7 for a dozen eggs, and they're discounting it for us. But who knows how much longer they're willing to absorb those price hikes. And you know what's coming around the corner?

16:31Easter, which is a quite egg-heavy holiday, so it doesn't look like there's going to be a loss in demand any time soon. Up next, it is time for our winners of the weekend. The Jack Welch Management Institute at Strayer University helps you go from I know the way to I've arrived with our top 10 ranked online MBA. Gain skills you can learn today and apply tomorrow. Get ready to go from make it happen to made it happen and keep striving. Visit Strayer.edu slash Jack Welch MBA to learn more. Strayer University is certified to operate in Virginia by Shev and as many campuses, including at 2121 15th Street North in Arlington, Virginia.

17:13Change is always happening. But no matter what changes in five years, there's one thing that will stay the same. The price of your internet. With the Xfinity five-year price guarantee, you get five years of the most reliable Wi-Fi with our best equipment included for a price that stays exactly the same. Restrictions apply. New residential customers only. Taxes and fees extra and subject to change. Most reliable Wi-Fi based on OpenSignal Awards USA. Fixed broadband experience report, August 2024. Welcome to Winners of the Weekend, the segment where Toby and I pick two things that just earned a place in the Morning Brew Daily Super Bowl.

17:51Toby, you won the pre-show lip-syncing competition. Toxic was a great choice, so you get to go first. My winner of the weekend is sports betting parlays. No, not because I hit on a big multi-leg bet this weekend, but because they are fast becoming Sportsbooks' chief moneymaker. Parlay's accounted for 27 % of all sports betting in Illinois, New Jersey, and Colorado last year, up from 22 % in 2021. These types of bets are popular with sports fans because they represent the tantalizing opportunity to turn small wagers into big winnings, thanks to long odds that arise when you link multiple bets together.

18:30And sportsbooks love them because they get a bigger cut from parlays than single bets. Parlays contributed about 56 % of sports betting revenue after payouts in those same states during those same periods. Gambling companies are also relying on them to bring in more casual newcomers into the sports betting world. Instead of dropping$5 on a Chiefs Super Bowl win, customers who bet small are increasingly favoring parlays. parlays. FanDuel said that 90 % of its same game parlay have bets of$30 or less, while over half are$5 or less. Neil tossed in a mass of influencers, big and small, putting their names and follower accounts behind pushing parlays, and you have a potent money-making machine for gambling sites.

19:12The economics of these are great for the gambling sites. As you mentioned, they accounted for 27 % of the money wagered in those three states, but they delivered 56 % of total revenue, and that's because parlays are really hard to win. But as the Wall Street Journal calls them, they're the new American lottery ticket. You can bet anywhere from one to five dollars and stand to make hundreds of dollars. The odds are long, but you know, that big pot at the end of the rainbow does sound pretty tantalizing. And sportsbooks know this. So they are promoting the heck out of parlays. About 20 percent of all money spent by DraftKings on national TV ads hyped parlays.

19:51They're leveraging influencers like Bill Simmons and Charles Barkley. They're putting fun names around these parlays. They're packaging them up into particular themes. So, for example, on Christmas Day, the Chiefs were playing. They had a parlay called Merry Chiefsmas, and you can bet on many different types of Chiefs bets all linked together. And I should mention, you are likely to lose a parlay because you have to hit on every single one. They're all interconnected. So if you lose one leg, you lose all of your money. But the reason why parlays are so exciting is because if that does hit, it's pretty good.

20:27Yeah, I think that's the big point here is that they're very aspirational. I mean, you can call them lottery tickets because what happens when you kind of piece this parlay together, you see the odds just go up and you see the potential winnings. And in your mind, you're like, oh, that's what I'm staying to win. But it's really what you're standing to lose here because these are pretty small odds. the more bets you link together, the higher those odds become. So you can see why DraftKings, why FanDuel are kind of putting a ton of marketing spend behind it. DraftKings is actually also testing a subscription service out that would give customers access to better parlay odds.

21:03So they're just figuring out different ways to, you know, come up with narratives that push parlays, different ways to offer customers better odds with those parlays, because all it is is just this big attention grabber in the sports betting industry and a big moneymaker. The storytelling you can do with them, I think, is a big part. So as the Super Bowl comes up over these next few weeks, expect to see a lot of parlays packaged together in punny ways. My winner of the weekend is Coca-Cola because they just signed a lease for the best real estate around, the Costco food court. During Costco's earnings call last week, the CEO confirmed rumors that the retailer would be switching from Pepsi products to Coke products in its food court, ending a partnership that had been in place since 2013.

21:49It is a big win for Coke over its rival and will allow it to extend its market share dominance. Coke Classic had an estimated 19.2 % share of the U.S. carbonated soft drink market last year, more than double Pepsi's 8.3%. So what prompted the change? It is all about the$1.50 hot dog and a soda combo, of course. During the last switchover in 2013, Costco opted for Pepsi because it offered a better deal that would allow Costco to preserve the most sacrosanct promotion in business. So it's possible that Coke agreed to lower its price for Costco to win the new contract because as one exec said, it's our job to preserve the integrity of the price point.

22:30Toby, there was a lot of chatter online about this move. People are very passionate about it. I would say most people welcomed the change. Others were sad to see Pepsi go. This$1.50 hot dog price is holy. It is the most important marketing tool Costco has. It's just become very synonymous with the Costco brand. I mean, you already introduced the concept of a loss leader earlier in the A section of our show. Costco loses money on this deal. Let's be honest here. They cannot actually sell a hot dog and a Coke for$1.50. But because it brings people through the door, it gets them shopping on other things where they do make a profit on, they do continue to offer this deal.

23:09And yeah, so part of me thinks that this announcement is just to get that hot dog deal back in the news again. Costco has been facing some backlash on its DEI policy. So announcing that Coke is coming in instead of Pepsi, it's just another way to get that headline reading about the dollar and 50 cent deal. But I think people are excited because Coke classic is a larger share of the market. Pepsi's market share has been slowly falling since its peak in 1995. It used to be 15 % of the U S carbonated soft drink market. It's now right around 8%. So maybe it is something that is saving money. Maybe it is just something that they're like, Oh, more people like Coke.

23:46Let's go back to Coke. But I think people are happy in general yeah i mean if you go down the line though for fast food uh companies whether they use coke or pepsi coke definitely has the bigger hitters as mcdonald's and burger king but it doesn't have everyone taco bell uses pepsi buffalo wild wings uses pepsi panera uses pepsi and then subway last year announced it was switching from coke to pepsi so i would say coke has the bigger power players but pepsi has you know a few taco bell is a big it's a big uh contract. Where do you land on the Coke versus Pepsi? This is such a tired debate. I can't believe I'm asking.

24:21It is a very tired debate, Toby. I don't even want to indulge you, but I haven't had Pepsi in many years. I haven't had Coke in many years. Yeah, you're not a big soda person. I'm not a big soda guy, but I mean, actually, when I do drink a Coke like once a year, it's so good. Pepsi, I don't know about. If last week's head-spinning news felt like devouring a massive lunch at 2 p.m., then try to regain your appetite. We've got a 5.30 p.m. dinner reservation. Here's what you need to know about the busy week ahead. The Fed is going to meet on Wednesday for the first time this year and for the first time of the Trump presidency.

24:55The actual interest rate announcement won't be so exciting because the Fed is pretty much guaranteed to hold rates steady. But Chair Jerome Powell's press conference should be must-see TV. We're all going to be keen to learn how many rate hikes he thinks will be on the table this year and how he'll respond to Trump's recent threat at Davos that he demand rates come down. Yeah, I think that's going to be the exciting part. How is he going to navigate this relationship that he once again has with President Trump? If this is the first meeting, which it likely will be, that they don't raise interest rates, I don't think Donald Trump is going to like that.