Carson Block has flipped his view on the market over the last several weeks — all because of artificial intelligence.
“Up until one month ago, I was completely sanguine on the S&P 500 and markets in general and the economy,” Block, the chief investment officer and founder of Muddy Waters Capital said in an on-stage interview with Barry Ritholtz at the Future Proof Wealth Management conference in Miami Beach. “And my view has 180-ed.”
Block, who made his reputation as a short seller, now sees the potential for the technology to change society and as a result, the stock market. It’s a sharp pivot from his view in late November that he would rather be long than short the US equity market. At the time he unveiled a few rare long positions. Since then, the S&P 500 has stalled after a streak of successive highs.
Block’s comments come as investor anxiety is growing that the hundreds of billions of dollars pledged to AI infrastructure buildouts will either fail to deliver or that the technology will disrupt the business models of a wide array of companies, displacing white-collar jobs.
At the crux of Block’s thinking is how job displacement from AI could disrupt the labor market and flow through to the US economy and markets.
“I think it’s not unrealistic to say 15% of knowledge worker jobs in the US in three years are gone,” Block said. If new jobs aren’t created, that could lead to higher unemployment and pressure the market as workers stop contributing to 401(k) retirement plans. Further market stress could come if the cohort can’t easily find new jobs and need to begin drawing down their retirement accounts.
Once such outflows start, “there’s nobody there to catch the falling knife,” he said.
Block expects the labor disruptions to be most prevalent in industries like law, accounting, tax advisory and finance support roles and in positions held by junior staff and administrative teams. Within hedge funds, he said, many back-office and operational functions like IT could be replaced by cheaper and more efficient automated systems. Bigger, more profitable firms may continue to hire junior analysts out of tradition but most businesses with thinner margins will adopt automation quickly, he said.
Still, there are parts of the market that look attractive and could offer some protection. The Muddy Waters founder said he’s set up trades “basically shorting credit spreads” and betting on dislocations in exchange traded funds that have liquidity mismatches.
“I do think credit spreads are stupidly tight right now and credit volatility is stupidly low,” he said. “To me, you want convexity, and there are lots of ways to play it where you’re capping your potential loss.”
He argued that years of ultra-low interest rates and easy money have made investors increasingly tolerant of risk and created questionable corporate behavior. Although fraud itself is relatively rare, a large “gray zone” of aggressive accounting and misleading narratives has become prevalent, he said.
“My business has gotten harder because unless it’s something really, really egregious, people don’t care,” he said.
Written by: Carmen Reinicke and Alexandra Semenova @Bloomberg
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