Key Takeaways:
- A group of economic experts, including Michael Burry and James Chanos, are warning of a potential market crash due to the AI boom
- These experts, known for their track records of foreseeing major economic downturns, are gaining attention online and in media interviews
- A 2025 Harvard and Copenhagen Business School study found that optimism in the market often portends crashes, and that questioning market optimism is a good idea
- Economists have identified key factors that indicate a crisis could be around the corner, including rapid growth in credit and asset prices in the same sector
- The stock market has pulled far ahead of the real economy, with the total value of the share market outweighing US economic input
Introduction to Economic Prophets
The AI boom has been making headlines in recent years, with many investors and experts predicting a bright future for the technology. However, not everyone is convinced. A group of economic experts, including Michael Burry and James Chanos, are warning of a potential market crash due to the AI boom. These experts, known for their track records of foreseeing major economic downturns, are gaining attention online and in media interviews. As Burry wrote in a post on X, formerly Twitter, "OpenAI is the next Netscape, doomed and hemorrhaging cash," likening the maker of ChatGPT to a casualty of the dot-com bubble.
The Cassandra Effect
James Chanos, the founder and managing partner of Kynikos Associates, notes that market contrarians are often disregarded. Short-sellers like himself are often viewed "as the village idiots or Dr Evil", either wrongheaded or trying to manipulate the market. "There’s kind of no in-between," Chanos said. However, a 2025 Harvard and Copenhagen Business School study found that optimism in the market often portends crashes, and that questioning market optimism is a good idea. The study’s authors found that "optimism remained unchecked until well after the crash". As the study states, "Optimism portends crashes: the most bullish forecasts predict the highest crash risk."
Predicting Financial Crises
Economists have identified key factors that indicate a crisis could be around the corner. A 2020 study of post-war financial crashes around the world found that "crises are substantially predictable". When credit and asset prices grow rapidly in the same sector – conditions the researchers term a "red zone" – there was a probability of about 40% of a financial crisis starting in the next three years. Andrew Odlyzko, an emeritus professor of mathematics at the University of Minnesota, notes that the current AI boom is reminiscent of the 19th-century railway mania in Britain, a bubble of speculation on new railroad infrastructure. "If – or more precisely, I’m pretty confident when – things collapse, the spillover effects will be much more substantial, much more deadly," he said.
The AI Bubble
The stock market has pulled far ahead of the real economy, with the total value of the share market outweighing US economic input. This imbalance has come before previous downturns. However, a report issued by Goldman Sachs Research said many features of past bubbles are absent. Corporate debt is relatively low in historical terms and most of the S&P 500’s 18% returns last year came from increased profits, not investors marking up valuations. Despite this, Odlyzko is warning of a potential AI bubble. "Now the investments are exceeding the capacity of these platform companies to finance them out of their cashflow, and they are drawing in other sectors of the economy," he said.
Comparisons to Past Booms
Chanos makes comparisons between today’s AI fever and the 1990s tech boom, as both bull markets have centered on big ideas: AI today and the internet’s beginnings decades ago. "Artificial intelligence technology is real and probably will be very important, but lots and lots of companies that claim they’re a great business… are probably not going to be great businesses," Chanos said. Baker, a retail investor who’s preparing for the worst, notes that an AI crash could do the US some good. "There’s all sorts of things you could better use those resources for if the AI really doesn’t make sense," Baker said.
Conclusion
In conclusion, while the AI boom has been making headlines in recent years, a group of economic experts are warning of a potential market crash. These experts, known for their track records of foreseeing major economic downturns, are gaining attention online and in media interviews. As the market continues to grow, it’s essential to consider the potential risks and consequences of an AI bubble. As Odlyzko notes, "If – or more precisely, I’m pretty confident when – things collapse, the spillover effects will be much more substantial, much more deadly." Only time will tell if these economic prophets are correct, but their warnings are certainly worth considering.
https://www.nzherald.co.nz/world/artificial-intelligence-these-prophets-of-economic-doom-are-worried-about-another-collapse/premium/OKOSW5W3KVEUXPYE45L6QO3TJU/