Bridgewater Associates founder Ray Dalio warned Tuesday that a bubble could be forming around megacap technology in the U.S. amid the artificial intelligence boom, but said it may not end until the Federal Reserve reverses its current accommodative policies.
“There are a lot of bubbles going on,” Dalio told CNBC’s Sara Eisen in an exclusive interview at the Future Investment Institute in Riyadh, Saudi Arabia. “But bubbles only burst when they are made to burst by more restrictive monetary policy, etc.”
Dalio added: “We are more likely to cut interest rates than raise them.”
The hedge fund titan said he is using a personal “bubble indicator” that is currently relatively high. Dalio joins a growing chorus of well-known market participants who have warned in recent months about the possibility of an AI spending bubble.
The Fed will cut interest rates for the second time this year on Wednesday, and many investors expect the central bank to do so again at its final meeting of the year in December.
The billionaire investor also pointed out that the market as a whole has performed “relatively poorly” outside of AI-related names and that there is a “concentrated environment.” He noted that 80% of the profits are concentrated in Big Tech. The three major indexes rallied to all-time closing highs on Monday, led by technology stocks, with more good AI news expected from a range of Big Tech earnings results this week.
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Dalio said there is a “two-part economy” where interest rates fall in some places due to the slowdown while a bubble develops in other places.
He said monetary policy cannot help both ends of that spectrum given the divergence, making it more likely that the bubble will continue. Dalio said the result could be similar to 1998-1999 or 1927 and 1928.
“Whether it is a bubble or not and when that bubble will burst, we may not know for sure,” Dalio said. “But what we can say is that there is a big risk.”