“Distillation”

“Distillation”

So today is the first time many tech illiterates like myself are learning how the term “distillation” applies to something other than making adult beverages.

The news is that OpenAI, the company behind ChatGPT, is accusing the Chinese upstart DeepSeek of poaching its work to develop the AI model that’s set the U.S. tech giants reeling.

Just to recap the whirlwind of events that began over the weekend: DeepSeek claims to have developed a large language model using only 2,048 Nvidia H800 graphics cards for the paltry cost of $5.6 million.

If DeepSeek is as efficient as it claims to be, all of Big Tech’s assumptions about AI are thrown into a cocked hat. The billions of dollars they’re spending for data centers, electricity generation and development personnel might be a waste.

Perhaps not surprisingly, OpenAI is crying foul — telling the Financial Times it detects evidence of “distillation” on the part of DeepSeek.

“There’s a technique in AI called distillation,” explains Donald Trump’s AI and crypto “czar” David Sacks — “when one model learns from another model [and] kind of sucks the knowledge out of the parent model.

“And there’s substantial evidence that what DeepSeek did here is they distilled the knowledge out of OpenAI models, and I don’t think OpenAI is very happy about this,” Sacks tells Fox News.

No it is not. In an official statement, OpenAI complains that Chinese and other companies are “constantly trying to distill the models of leading U.S. AI companies.”

So OpenAI is complaining that its “intellectual property” is being purloined? Pot, meet kettle.

OpenAI’s entire business model rests on its ability to hoover up any and all content that’s ever been posted online — and a lot of offline content, too. Otherwise, there’s no “language” with which to build a large language model that plausibly mimics human expression.

Indeed, everyone from The New York Times to leading authors like John Grisham are suing OpenAI for copyright infringement. Last year an OpenAI researcher-turned-whistleblower named Suchir Balaji accused the company of outright violating U.S. copyright law. (Balaji turned up dead last November in what San Francisco police said was a suicide.)

Oh, but now when the proverbial shoe is on the other foot, OpenAI starts to whine and moan? Boo-freakin’-hoo.

Intellectual property for me, but not for thee. That’s OpenAI’s attitude.

The reaction so far from the Trump administration is… measured. Refreshingly so.

Take another look at David Sacks’ remarks above. Very neutral, impartial, calling balls and strikes.

There’s no chest-beating nationalism, no outrage about the dastardly ChiComs.

➢ Background: Sacks is an impressive figure. Part of the original “PayPal mafia” in the late ’90s along with Peter Thiel and Elon Musk, he came on your editor’s radar in 2021 when he stood up against the censorship-industrial complex — condemning the deplatforming and demonetization of social media users who stood accused of “hate speech” or “misinformation.”

OpenAI’s statement includes a line about how “it is critically important that we are working closely with the U.S. government to best protect the most capable models from efforts by adversaries and competitors to take U.S. technology.”

But in his Fox News interview, Sacks seems to suggest the onus for security is on American companies and not the government.

Note the neutral tone once more: "I think one of the things you're going to see over the next few months is our leading AI companies taking steps to try and prevent distillation,” he said. “That would definitely slow down some of these copycat models."

Perhaps Sacks understands that in the end, “intellectual property” is a squishy concept — and much human progress can be chalked up to its “theft.”

New England’s storied textile industry of the early 19th century was built almost entirely on “stolen intellectual property.” It just so happened that guys like Samuel Slater and Francis Cabot Lowell had more or less photographic memories; after observing England’s textile mills up close, they came to America and improved on what they’d seen in the old country.

The Patent Act of 1793 gave nearly carte blanche to Americans who “stole intellectual property” from other countries. “America thus became, by national policy and legislative act, the world’s premier legal sanctuary for industrial pirates,” wrote economist Pat Choate in his book Hot Property: The Stealing of Ideas in an Age of Globalization. “Any American could bring a foreign innovation to the United States and commercialize the idea, all with total legal immunity.”

The full story of how DeepSeek pulled off its AI breakthrough is yet to emerge. Perhaps, as Elon Musk seems to believe, DeepSeek used a lot more Nvidia hardware than it let on.

But whatever the case, OpenAI’s poor me protests should fall on deaf ears.

The Fed Is Irrelevant

Whatever the Federal Reserve does today doesn’t matter: “As always, the Fed is behind the curve,” says Paradigm macro maven Jim Rickards.

Shortly after this edition of 5 Bullets hits your inbox, the Fed’s Open Market Committee will issue its latest proclamation on interest rates. Barring an immense shock, the FOMC will leave the benchmark fed funds rate where it’s been since mid-December — at 4.5%.

Thus, the Fed’s rate cutting cycle will be put on hold only 4½ months after it began last September.

That’s unprecedented — at least so far in this century. Previous rate-cutting cycles took at least eight months or as long as a year.

“The Fed is already behind the market,” says Jim — who points out other short-term interest rates are lower than the fed funds rate. A rate called SOFR that banks charge each other is 4.34%. A one-year Treasury bill yields 4.32%.

“This reveals that the Fed is not leading the markets to lower rates; they are following the markets,” says Jim. “Despite the drama and publicity surrounding Fed meetings, the Fed is irrelevant. Markets are driving rates lower with or without validation from the Fed.”

Those lower rates are a signal the economy is slowing; indeed, Jim anticipates a recession early in Trump’s second term.

For better or worse, the Fed will pause its rate-cutting cycle because it sees inflation moving in the wrong direction. As we’ve chronicled regularly, the official inflation rate jumped from 2.4% in September to 2.9% in December (the most recent figure available).

At the same time, the unemployment rate is also trending higher — which under ordinary circumstances would spur the Fed to continue cutting interest rates.

“The Fed now has to choose which threat to fight,” Jim says. “For now, it sees inflation as the bigger threat.”

Anyway, if there’s no drama from the rate decision itself, there’s always the possibility of something unexpected from Fed chair Jerome Powell’s press conference. We’ll follow up tomorrow…

As is often the case on these Fed meeting days, the stock market is treading water ahead of the announcement.

At last check, the Nasdaq is down about three-quarters of a percent — not unexpected after yesterday’s 2% gain, which itself was not unexpected after Monday’s 3% rout brought on by DeepSeek. The S&P 500 is still holding the line on 6,000; the Dow is flat.

Gold is losing ground at $2,751 but silver has rallied to $30.76. Crude is down a bit to $73.41 after the release of the Energy Department’s weekly inventory numbers. Bitcoin is a hair below $102,000.

After the close today, three of the “Magnificent 7” companies report their numbers — Microsoft, Facebook parent Meta and Tesla. A fourth, Apple, follows tomorrow.

RFK Jr.’s Biotech Bent

Assuming Robert F. Kennedy, Jr. makes it through his Senate confirmation hearings today, it could be a boon for small biotech stocks.

In covering his nomination for secretary of Health and Human Services, corporate media assume RFK Jr. is hostile to all things pharma. But the reality is that he’s “an enthusiastic biotech investor,” says Paradigm biotech specialist Ray Blanco.

“I learned this,” says Ray, “from the news that he is going to have to divest some of his investments in the sector to prevent any potential conflicts of interest should he be confirmed to head HHS.

“Apparently, RFK Jr. likes small breakthrough biotechs, including such leading-edge companies as gene editing pioneer CRISPR Therapeutics. I think that bodes well for future regulatory overhauls under RFK Jr.’s leadership. He loves to criticize Big Pharma, which is well known, but I was not aware that he liked investing in small biotech.

“Maybe we’ll get a more even playing field and an FDA that fosters innovation and helps speed development at small companies,” says Ray — which would certainly be a plus for the biotech names he recommends in his Catalyst Trader advisory.

“With the JPM Healthcare Conference setting an optimistic tone for 2025,” Ray concludes, “we're well positioned in both the technology transformation of drug development and the more traditional breakthrough therapeutic space.”

The Presidential (Meme)Coin, Continued…

Nearly everyone has already forgotten about the $TRUMP memecoin — but not Paradigm trading pro Enrique Abeyta.

As you might recall, less than 72 hours before inauguration, the incoming president issued a memecoin — a digital collector’s item if you want to be generous about it, a digital lottery ticket if you don’t. Either way, memecoins are pure speculations.

First problem as Enrique sees it: $TRUMP was introduced “in a way that only more knowledgeable crypto investors could accumulate it. The Trump-affiliated companies also kept 80% of the coins that were created.

“From a starting price of $7, $TRUMP quickly traded to above $70 by Sunday, Jan. 19. This gave the total project a value of almost $75 billion and Trump’s stake was worth more than $50 billion.”

Also on Sunday the 19th, “the same groups released another coin, this time themed around his wife, Melania. That coin is called $MELANIA. It also soared but quickly took away from the value of $TRUMP, which got cut in half.

“The way the projects are built, they now can sell these coins over a three-year period.

“In theory, the value of the coins held by the Trump-affiliated organization is tens of billions. If they were able to sell them at or near these values, then this would be the single-biggest moneymaking endeavor of Trump's career by far.

“What do I think of these crypto ventures? I think they are disgusting and gross,” Enrique says. [Don’t hold back!]

“I don’t begrudge any individual American the opportunity to go out and introduce a meme coin. If you can do it and make a lot of money, great. I do, however, think that our public officials — especially the president — should be held to certain standards of behavior.

“Maybe that makes me naive and not built for the current world, but I don’t care.” [Spoken like my fellow Xer!]

The trading and investing angle, you wonder? A major factor behind the success of the U.S. stock market is that “we set the bar high for behavior and accomplishments,” Enrique says.

“If we stop holding ourselves accountable, then we risk slipping into corruption and the political malaise that has led to the relative decline of the rest of the world's economies.” [And he knows a thing or two about that from his mother’s side of the family.]

What’s more, “there will likely be millions of individual investors who are fans who will go out and buy these meme coins. Many (most) of them will lose almost everything by investing in them.

“If they did so by buying Dogecoin (or another recent favorite Fartcoin), then it’s buyer beware. We can’t stop people from making mistakes with their money. When they do so, however, [in] buying a worthless coin officially backed by our president they are made vulnerable to manipulation.

“It is the duty of those of us who understand the markets to put this out in the public forum and try to protect those who don’t have this knowledge.”

After all, Enrique concludes, “Those people are also the people who can least likely afford to lose the money.”

Best Time to Buy Gold?

“What is the best timing to buy some gold?” says a reader’s brief inquiry.

The answer is there’s no truly bad time to buy gold as a hedge to preserve your purchasing power.

That’s even though at $2,751 today, the Midas metal sits within 30 bucks of an all-time high.

Obviously a better time to buy gold was six months ago and an even better time than that was five years ago — but I get the drift from your question that you might be buying for the first time.

If that’s the case, don’t hesitate to take the plunge now. Just don’t do it all at once.

Decide how much you want to accumulate — Jim Rickards recommends 10% of your total portfolio — and start building your position over time. Use “dollar-cost averaging.” Buy every month or two and keep stacking.

That way, you take advantage of pullbacks in the price.

It’s entirely possible that gold will drop to, say, $2,600 in the coming weeks — that’s only a 5.5% drop from current levels. If that happens and you use dollar-cost averaging, you’ll acquire some of your stash at that lower price.

If you don’t have a dealer in mind, we always recommend Hard Assets Alliance. To be sure, we own a stake of HAA and as such we’ll take a small cut once you fund your account. But we acquired that stake only after seven years of proof that they do well by our customers!

Best regards,

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets