"While systemic shock is unlikely, the President of Queens' College, Cambridge University, and Chief Economic Advisor at Allianz said he expects economic and credit accidents because market participants have "stretched really far for additional returns." This has been encouraged by loose financial conditions and a strong economy, he added, and some investors seem to have gone "beyond their comfort zone and beyond their ability to do due diligence.""
"El-Erian told Yahoo that he had, in collaboration with Nobel Laureate Mike Spence, assessed the AI boom and concluded that the market is experiencing a "rational bubble." While the aggregate value being created is significant, making it rational for investors to take a venture capital approach and "overinvest" due to the large payoff, there is a darker side: "there will be tears" and losses."
The underlying global financial system remains intact, but investors should prepare for significant individual losses in the AI sector and numerous credit accidents. The current environment contains many isolated problems rather than foundational threats, likened to "cockroaches" rather than "termites." Systemic collapse is unlikely, yet economic and credit accidents are expected because market participants have stretched far for additional returns amid loose financial conditions and a strong economy. Many investors have exceeded their comfort zones and due diligence capabilities. The AI boom represents a rational bubble: large aggregate value justifies overinvestment, but many companies will fail, producing losses.
Read at Fortune
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