Michael Burry, Raghuram Rajan Saw The 2008 Crash Coming — They're Sounding The Alarm Again

The 2000 dot-com bubble, and the 2008 market crash altered global markets and economies. During those times, a few economists and market watchers had warned of the tsunami that was about to hit. Those murmurs are back and this time the AI bubble may make things worse still.

But should you really be concerned?

Three experts that called the crashes — Michael Burry, Raghuram Rajan, and Howard Marks — and they're are calling it again, and think you should be moderately cautious.

The Big Short Strikes Again?

American investor Michael Burry, in a recent podcast 'Against The Rules', said that he thinks, "the whole thing is just going to come down. And it would then be very hard to protect your stock portfolio."

He backed his claim up by noting that currently, over 50% of the money in the stock markets is invested in passive money. He also said that only a mere 10% is invested for the long-term. This, he claims, will be the reason for a "longer bear market that is akin to the 2000 bubble."

Burry advises the listeners that if you own something that has risen a lot, "and is shooting straight up, and you think it's overvalued, you should sell it."

A Mix Of 2001-2008?

Economist and Former RBI Governor Raghuram Rajan was deemed a person who was afraid of progress when he presented a paper in 2005, warning of a great financial bubble.

At a recent UBS conference in Zurich, he said that now have a combination of the 2001 and 2008 bubbles. Rajan remarked, "I think it's early days, but it's time to get cautious." He said that the frenzy over AI reminds him of the dot com craze in 2000, and the credit ballooning and liquidity by the central banks is eerily similar to 2008.

Rajan noted that many of the now top-scaling AI companies were using internal cash flows to invest in AI. However, now they are forming special purpose vehicles (circular financing with their peers, for example) for additional financing. He cautioned that it all depends on the unknown AI demand.

Is It A Bubble?

Another American investor Howard Marks has a similar sentiment. After calling the slow trainwreck that was soon to come before the 2008 crash, and holding on to $11 billion in cash, he made sure to start investing in September 2008 when the crash was at its peak.

In a recent memo, titled 'Is It A Bubble?' uploaded on his company Oaktree Capital's website, he wrote that “in the current market, I'd advise that no one should go all-in without acknowledging that they face the risk of ruin if things go badly. But no one should stay all-out either. Adopt a moderate approach.”

Red Flags Of The AI Bubble

In November, Ruchir Sharma, the chairperson of Rockefeller International, said that the current wave of enthusiasm from investors across domestic and global markets to invest in artificial intelligence is "the most hated bubble in history".

He pointed to certain factors that have been consistent before some of teh most impactful market crashes in history — increasing valuations, fast spikes in investment and increasing leverage.

No Magic Words In Investing

The AI bubble finally bursting may be the onset of emotionally complicated times, and market veterans have started calling it.

As Marks put it in his memo, "it's essential to bear in mind that there are no magic words in investing. These days, people promoting real estate funds say, “Office buildings are so yesterday, but we're investing in the future through data centers,” whereupon everyone nods in agreement. But data centers can be in shortage or in oversupply, and rental rates can surprise. As a result, they can be profitable . . . or not."