Muddy Waters founder says AI could boost short selling in US stocks

In short: Investor Carson Block says AI could disrupt the economy and markets, creating more opportunities for short sellers who bet on US stocks falling.

What's going on

Carson Block, founder of the investment firm Muddy Waters, told the Financial Times that the fast spread of artificial intelligence could cause major economic and stock market disruption in the next few years. He said the effects could be larger than the 2008 to 2009 global financial crisis.

Short sellers are investors who try to profit when a stock price goes down. It is a bit like taking out a bet that a team will lose, instead of win. Block said AI could put “wind at their backs,” meaning it could make these bets easier to find and potentially more profitable.

He pointed to job losses as one way AI could hit the market. If people lose jobs or fear they might, they may put less money into 401(k) retirement plans, which are common US accounts that invest savings in the stock market. Less money flowing in can add pressure on stock prices.

Block also warned about risks in private credit, which is when companies borrow money from non-bank lenders. He said too much money has poured into this area, and that some loans may be low quality.

The comments come after a long stretch where short selling in the US has been difficult. The S&P 500 has risen for years, helped by index funds (funds that automatically buy a broad basket of stocks) and many everyday investors who buy when prices drop.

What to watch

If AI changes which companies thrive and which struggle, investors may focus more on picking winners and losers, rather than assuming the whole market will rise together. Watch whether short bets keep increasing, especially in sectors like software, and whether problems in private credit start showing up in missed payments or tighter lending.

Source: Financial Times