Nassim Taleb, the author of 'Black Swan', warns that for those blindly rushing into the AI-driven stock market rebound, the brutal sell-off of Nvidia (NVDA) stock on Monday is just the tip of the iceberg.
Taleb stated during Hedge Fund Week in Miami that the future downturn could be two or even three times the 17% drop Nvidia experienced earlier this week. This drop evaporated $589 billion from the chipmaker's valuation, marking one of the most severe instances in U.S. stock market history.
‘This is just the beginning,’ Taleb said in an interview with Bloomberg News after Monday's market close. ‘People are starting to adapt to reality. Because now they realize that things are no longer flawless, just like there’s a crack in the glass.’
The reason behind Monday's sell-off is that investors suddenly worry that American tech giants may not dominate the AI field as expected. These concerns emerged after the debut of DeepSeek, a Chinese AI startup that showcased a low-cost approach to developing AI technology.
Investors are worried that this will threaten the market's demand for and reliance on Nvidia's advanced chips. Taleb noted that up to this point, investors have been overly focused on one narrative: that as the company maintains its dominance in the AI field, its stock price will continue to rise. He stated that given the risks in the industry, the drop in its stock price on Monday was actually 'very small'.
Taleb's bestseller discusses the extreme impact of rare and unpredictable events, and he is also a scientific advisor at Universa Investments, a tail risk hedge fund that effectively provides a form of insurance to help protect portfolios from major market events.
This former options trader is known on Wall Street for his pessimistic remarks, but not all of his statements have proven accurate. At the beginning of 2023, he stated that many investors were unprepared for an era of high interest rates, when assets might no longer 'inflate wildly'. Since then, the benchmark U.S. stock index has risen nearly 50%, largely due to enthusiasm for AI.
Taleb and Universa's argument is not that investors should flee the market and miss out on these gains. They are simply allocating a small portion of assets in their portfolios to hedge against unexpected shocks.
Taleb stated that too many investors have been inflating the stock prices of AI-related companies without properly understanding the details of how the technology works or how it can succeed. He describes tech companies as 'gray swans' because investors underestimate the potential price deviations of their stocks in a single day.
Meanwhile, Taleb also doubled down on his warning about the unsustainable U.S. debt burden on Monday. He expressed concerns that rising labor costs combined with aggressive tariffs could lead to a 'burst of inflation', and stated that given this risk, bonds are 'not a wise investment'.
Article reposted from: Jin10 Data