Renowned big short Carson Block: The scale is about to surpass the 2008 US stock financial crisis.

Recently, Carson Block, founder of the globally renowned short-selling firm Muddy Waters Capital, issued a stark warning, stating that the rapid development of artificial intelligence technology is creating unprecedented opportunities for short sellers.
He also predicted that the employment market turbulence triggered by AI could lead to a stock market shock surpassing the 2008 financial crisis.

Notably, Block was optimistic about the economy earlier this year; however, six weeks ago, his view underwent a fundamental shift, which was driven by his firsthand experience with the capabilities of the latest Claude AI model;
the model drafted a heritage planning plan for him that was comparable in quality to that of a professional lawyer, and he was surprised to find that the most skilled AI users can now complete the workload of eight developers.

AI Impact on Employment Market and Retirement Systems
Block predicts that if this efficiency boost becomes widespread among knowledge workers, then within the next three years, 15% of high-paying jobs in the U.S. could disappear, with fields like law, accounting, and financial support being the most affected, especially for entry-level employees and administrative positions.
This large-scale job replacement will impact broader markets through unemployment issues. Block is particularly concerned about the effect of AI-driven unemployment on 401(k) retirement plans; he points out that if rising unemployment leads to reduced contributions to 401(k) plans or forces unemployed workers to dip into their savings early, the stock market will face ongoing capital outflows, which could trigger severe market declines.

Risk Management Strategies and Market Positioning
In response to this risk, Block has taken concrete actions. He is establishing options short positions on corporate bond ETFs, especially shorting BlackRock’s iShares iBoxx USD High Yield Corporate Bond ETF (HYG) and iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD).
Since the evolution of the employment market is difficult to predict precisely, Block prefers using options strategies rather than direct short selling. He recommends a bear put spread strategy, which involves buying and selling put options with the same expiration date but different strike prices. This strategy can amplify gains during significant market declines while limiting downside risk.

Structural Market Risks and Hidden Dangers in Index Fund Mechanisms
Block also points out vulnerabilities in the current market structure. He believes that passive investment has become too large, and when trends form, passive funds automatically amplify price volatility.
More critically, the liquidity of corporate bond ETFs far exceeds that of the underlying bonds they hold. When fundamentals deteriorate and investors concentrate on redemptions, ETFs will struggle to liquidate underlying assets at reasonable prices in a short period, leading to larger price discounts.
He also expresses concerns about the index fund mechanism. He states that the selection of stocks in the S&P 500 has become a chase for rising stocks, because under the market-cap weighting rule, companies experiencing large gains are included, forcing all index funds to passively buy in.
However, this mechanism creates a dangerous market cycle, and its reverse effect is equally significant. Large-scale layoffs driven by AI could impact employment markets, and the resulting market crashes could be extremely severe.

Summary:
Overall, Block compares the current market situation to the 2008 financial crisis, believing that the market disruption brought by AI will open new profit opportunities for long-term pressured U.S. stock shorts, presenting an excellent shorting opportunity.
In recent years, well-known short sellers like Jim Chanos and Nathan Anderson of Hindenburg Research have withdrawn and shut down their firms, but with the rapid development of AI technology, short-selling trading is expected to regain vitality.

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