How entrepreneurs, investors and currency buyers will feel it
For an entrepreneur or startup, the trajectory of the artificial intelligence (AI) market now looks like an endless opportunity. Capital arrives quickly and often in the form of borrowed money. An investor sees rising valuations and talks about billion-dollar portfolios, while a currency buyer watches exchange-rate fluctuations amid news of large investments.
But there is another side. When money is borrowed, the borrower can be forced to sell some assets to raise cash. It is in this, Ray Dalio warns, that the risk of a major market shock lies. Bloomberg writes about this here.
The mechanics of risk in the AI market
Dalio calls AI a classic bubble and draws attention to how projects are funded. Many initiatives are powered by large amounts of borrowed capital, and that makes them vulnerable to changes in market interest rates.
He explains that as rates rise there comes a point when debt servicing becomes more expensive. If investors want to convert paper gains into cash, or if taxes on large capital increase, pressure to sell assets will intensify. “We are in that part of the cycle that precedes it, but we are already approaching it. I think we are close to it,” said the founder of Bridgewater.
Wider market context and additional risk triggers
Dalio lists other factors that could cause the AI market to collapse. Among them he names taxes on large capital and investors’ desire to lock in unrealised gains as cash. That means that even without an external shock, a sufficient wave of selling could puncture the bubble.
He illustrates the point simply and clearly. “Everyone says ‘I’m worth $1 billion,’ but try to spend that money. To spend it, you need to sell wealth to obtain cash — and that’s typically where the bubble is pierced,” Dalio explains. That logic affects venture capital funds, lenders and asset holders at the same time.
