Ray Dalio: AI is forming a high-risk bubble, but it may not burst until after the Federal Reserve tightens its policy
During an interview with the media at the "Future Investment Initiative Conference" held in Riyadh, Saudi Arabia, Ray Dalio stated that there are indeed many signs of bubbles in the market right now. However, bubbles do not burst on their own; they usually wait until monetary policy tightens before being pierced. He believes that it is more likely to see interest rate cuts rather than hikes
Ray Dalio, the founder of Bridgewater Associates, warned on Tuesday that as the artificial intelligence (AI) craze continues, U.S. mega-cap tech stocks may be forming a bubble. However, he also stated that this bubble may not burst unless the Federal Reserve reverses its current easing policies.
In an interview with the media at the Future Investment Initiative conference held in Riyadh, Saudi Arabia, Dalio said:
There are indeed many signs of bubbles in the market right now. But bubbles do not burst on their own; they are usually pierced only after monetary policy tightens.
We are more likely to cut rates than to raise them.
Dalio revealed that he has a personal "bubble indicator," which currently shows a "relatively high" level.
Dalio also pointed out that, aside from AI-related stocks, the overall market performance is "relatively weak" and exhibits a high degree of concentration. He noted that currently, 80% of the market's gains are concentrated in large tech stocks.
Dalio stated that the current U.S. economy exhibits a "dual-track structure": on one hand, due to weakness in certain sectors, interest rates are declining; on the other hand, some sectors are forming bubbles.
He indicated that due to this divergence, monetary policy cannot simultaneously address both ends, which means that bubbles may continue to expand. Dalio believes this situation may be similar to the internet bubble period of 1998-1999, or even the market conditions of 1927-1928.
Whether or not it is a bubble, and when the bubble will burst, we may not be able to predict accurately. But one thing is certain—risks are accumulating.
Dalio's views align with an increasing number of well-known market figures who have issued warnings about the potential bubble driven by AI investments.
"Cathie Wood," known as "Wood the stock picker," recently warned that there are adjustment risks in AI. Unlike Dalio, she mentioned the scenario of interest rate hikes. She stated that as the market focus shifts from rate cuts to rate hikes, the market will face a "chilling" adjustment, and valuations in the AI sector will undergo a "reality check." However, she denied the existence of an AI bubble, believing that the world is at the beginning of an AI technology revolution and that the long-term valuations of large tech companies are reasonable.
The Federal Reserve is expected to cut rates for the second time this year on Wednesday, and many investors anticipate that the Fed will cut rates again at its final meeting in December.
This week, the three major U.S. stock indices reached historic closing highs, driven by tech stocks, as investors expect more positive news related to AI in the earnings reports of several tech giants to be released this week
