Jim Chanos Highlights DeepSeek and Unseen Risks as Major Threats to U.S. Stocks

Famed short-seller Jim Chanos warns that no one can foresee the biggest risks facing U.S. markets over the next six to twelve months because the challenges will emerge as unpredictable events, like last month's DeepSeek incident that wiped out roughly $1 trillion in market value from U.S. stocks.

Chanos believes that the true risks will come from unexpected areas, similar to DeepSeek, which will alter market perceptions before its nature is fully understood.

DeepSeek was developed at extremely low cost and produced a product whose quality is nearly on par with top-tier large models like ChatGPT. If this approach proves viable, it would suggest that vast amounts of capital expenditure have been wasted. For a long time, conventional wisdom held that creating a top-tier large language model required the most advanced GPUs and computing power—a key reason why Nvidia's GPUs have been in high demand. However, the emergence of DeepSeek indicates that the situation may be different.

There is little doubt that the global AI market will eventually reach a multi-trillion-dollar scale and continue to expand. If top-tier models can be built with much lower investment, future capital expenditures are likely to drop dramatically, which may explain the steep sell-offs in Nvidia and energy stocks.

ChatGPT is currently the leading, even the only, killer AI application, but that does not guarantee that OpenAI will come out on top. Consider the early days of search engines: before Google was founded in 1998, Yahoo and AltaVista were already providing services, with AltaVista once being the leader. Yet, AltaVista was eventually acquired by Yahoo, and today Yahoo is nearly obsolete.

In addition to DeepSeek, Chanos points out that the market remains underprepared for a U.S.-China tariff war. Less than a month into his presidency, Donald Trump announced an additional 10% tariff on China—a move that naturally triggered retaliatory measures from China. Chanos believes that if Trump is to fulfill his promise of reducing taxes, the federal government must significantly boost revenue, and increasing tariffs is one option; however, the current 10% tariff rate is far too low. He intends to wait patiently for Trump's next action to see whether the trade war escalates or eases.

Chanos also mentioned that he is observing signs of speculative froth in the stock market, though he noted that the levels have not yet reached those seen during the 2021 boom. He cautions that investors need to differentiate between companies that can sustain their current high valuations and those that are simply in a bubble.

Jim Chanos has a storied track record in short selling, having bet against Enron long before its financial fraud was revealed at the end of 2001. However, in recent years, his performance has been less impressive. He started shorting Tesla years before its stock surged, and in 2022, he believed data center stocks were in a bubble, yet data centers have emerged as major winners in the AI era.