Rickards on Existential AI Risks
AI-driven trading is taking over the stock market.
Jim Rickards estimates that 95% of volume on the NYSE is automated today, and an increasingly large part of that is driven by new AI algorithms.
According to Jim, the NYSE trading floor is now “half museum, half TV set”. Basically irrelevant.
He revealed all this and more in a recent interview with South Korea’s Global Money Talk. We’ll link to the full interview below, but for now let’s cover some highlights.
Jim warns there is essentially zero volume from human traders in markets today, and that “trading has been handed over to AI.”
These AI algorithms exaggerate market moves, both up and down. Jim makes the case that this represents a monumental risk to markets.
When the current bubble eventually pops, the cascade of AI-driven selling could cause an epic collapse in share prices.
We’ve had financial panics since the 1400s. That’s not new. What is new is the degree of automation and the introduction of AI into the chain of execution. That can make the markets more vulnerable.
Naturally, Jim says it’s hard to pinpoint exactly when the bubble will pop. He doesn’t recommend shorting broad market indexes, because the market can stay irrational for an extended period. But these types of overvalued markets always eventually end the same, with a crash.
Bending Reality
Jim also warns about the use of AI in video generation. A well-made AI video is already good enough to fool most people, and it’s only going to get better from here.
What happens if someone makes a fake video of a company CEO announcing a downward earnings revision? Or a false video of the Fed announcing an unexpected rate hike?
The use of AI videos represent a new class of potential black swans going forward.
And even when the videos are revealed to be fake, because of the way AI traders can move markets, the momentum may cause a significant selloff.
Regarding the stock market bubble, Jim speculated on what could be the pin that pops it:
It could be geopolitical. It could be a natural disaster. It could be something unexpected. But the difference with AI in the chain of execution is that it acts as an accelerant, more dramatic, more unexpected.
Protecting Your Portfolio
Jim also reveals how to protect your portfolio against these black swans.
First, he says that being diversified across sectors in the stock market isn’t enough. In a crash scenario, they’ll all go down together.
He does recommend owning some stocks, of course, but not 70% or 80% in this environment.
- Stocks – 20% at these overvalued levels. Miners, hard assets look good
- U.S. treasuries notes and bonds – 10 to 20%, huge upside potential and nice yields
- Cash, up to 30% – decent yields and you’ll have dry powder
- Gold: at least 10%, huge upside potential still
- A little silver for diversification
- Residential real estate
- A dash of alternative assets such as venture capital and private equity
It’s an excellent interview I highly recommend watching. 40 minutes of Rickards dishing on AI, markets, and portfolio protection.
Also, be sure to check out Jim’s new book, MoneyGPT. It’s an excellent read if you want to understand more about how the rise of AI will affect markets.
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