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What if the NASDAQ lost nearly 80% of its value? Today, that would erase more than 20,000 points. One of Wall Street's best known investors thinks the AI boom looks a lot like past bubbles. So, let's break down why. Ray Dallio is the founder of Bridgewwater Associates. He co-founded the hedge fund in 1975.
He's known for studying how debt and market cycles repeat throughout history. On Wednesday, October 7th, at the Forbes Global CEO Conference in Singapore, Dalio said, "AI has all the hallmarks of a classic bubble." His reasoning, "A huge amount of debt is being taken on to fund AI as interest rates climb.
That's when the bubble begins to pop." He noted a second trigger. To spend paper wealth, investors must sell assets. He compared it to two famous busts. He put the AI boom right alongside the 1920 crash and the dotcom bubble of 2000. First 1929 stocks soared through the 1920s on new technology like radio and cars and many investors bought with borrowed money.
The Dow peaked in September 1929, crashed on Black Tuesday that October and finally bottomed in 1932 down about 89%. It took until 1954 to fully recover. 2nd 2000, internet mania pushed the NASDAQ to a record close of 5,048 on March 10th, 2000. Then the Federal Reserve raised rates and moneylosing.coms ran out of cash.
By October 2002, the NASDAQ had fallen 78%. It took 15 years to close at a new record. Now today, the NASDAQ 100 closed Thursday at 30,725. 78% drop like 2000 would take it roughly to 6750. A level first reached in 2017. That's over 9 years ago. A 1929 style drop, that's 89% and that would mean roughly 3,380.
Of course, that's hypothetical math, not forecast. I mean, Dalio is covering his tracks in a way, and he acknowledged that AI could could be transformative. [snorts] He does question, however, whether stock prices match the productivity it would actually deliver. And the rate pressure is real. The 10-year Treasury sits around 5.28%.
Great technology, Dio says, often comes with great bubbles. The question is whether prices have run ahead of reality. So, let's take a look on a math check and see if that makes sense. So, looking at the NASDAQ right now, I mean, there's a couple of things here. Look, he's not wrong. There's a lot of debt in this situation that's being used to finance what's going on with the AI buildout.
And honestly, we've seen um a lot of circular debt situations, right? Nvidia giving money to XYZ company, XYZ company getting to another. We've seen all kinds of that going on too. And and and that should probably make investors a bit nervous. But one thing we can always do is take a look at options, right?
And so when I look at the NASDAQ, any idea of of that type of crash does not exist obviously in these options today, one of the things we always look at is implied volatility. And implied volatility only knows how to price itself based on what's happening today. And the other thing we look at is expected moves.
And so um let's just take a look at uh I don't know January of the end of this year. It's pricing in about a $2,000 move. Now, at the start of this, we talked about a potential $20,000 drop doesn't show up in January, right? Um, the other thing is, let's just go really far out. You can go out to as far out as we can right now, December 2019, where you see about a $10,000 expected move.
Now, again, remember these expected moves are both plus and minus direction. I mean, uh, we could possibly go another 10,000 points higher from here by by uh two and a half years from now, right? or we could go 10,000 points lower or maybe even as low as Dalio is saying. And again, a lot of his argument is based off of the debt bubbles that's that's happening right now.
The amount of debt that's being uh thrown around a lot of these different companies. And they've been doing debt auctions for a lot of these at current levels, like five to 6% uh rates right now. And it's almost like they're price agnostic. They don't even care how high it is. are still putting up uh these these debt financings at very high levels.
Um not record levels of course. I mean uh there's a lot of people who've been around for a long time that will point to the 1980s where debt was cost way more back then. But yet and still um one of the things you can always do is just get an idea and say what are the chances of uh this potential move here?
And so let's just say right now at 30,800. Let's just go to 31,000, right? And uh let's just get an idea of this straddle. This is where the 10,000 comes from. You can look at uh the curve here. And you can look at the analysis tab, right? And let's just say what are the expected move over XYZ time period.
I mean this is so big it can't even show you, right? But um it's it's enormous, right? It can't even show you on on a P&L graph. You can't even zoom up zoom out enough to see it. But we're good at doing math. So, let's just call it 11,000, right? And um we can easily see that that would be down to 19,000 to the downside and 41,000 to the upside as far as NDX goes.
And that again is just looking at the options and looking at the expected move. Um you can also do the same thing for some of the bigger names in the S&P 500. Let's just say Meta. As a matter of fact, let's go to Nvidia. I mean, that's that's the number one poster child when it comes to what's going on with AI.
And you can say right now it's pricing 102 points in either direction over uh the next almost uh two two plus years right uh to January 2029. So again another situation where you could say $100 plus or minus $100 to the upside is $329 or $331 to be exact and to the downside that would be $127, right?
And so maybe those are the type of expected moves you could see. Um, again, nobody can predict the future. And even Dalio was saying that at some point in time, maybe this just really ends up being a transformative technology, but his whole thing is looking at the debt right now at the current levels that they're refinancing and doing debt deals for these companies to pay for the AI buildout.
Quite honestly, it does look like that could be a little bit unsustainable unless something changes, right? And things can change some point or another. Maybe um you have a situation where uh a lot of people have theorized that there is this connection between the White House and between the Federal Reserve and maybe rates do eventually come down.
All of a sudden that really changes the calculus in this situation. Maybe there is a change with the current US and Iran relations that are very frosty right now. Maybe that causes oil to pull back and maybe that causes inflation to come down in some way, shape or form as well. So these are all things to keep an eye on.
But the reason why he's comparing those previous crashes has a lot to do with the current state of debt. And that's one of the things that is definitely moving the market around a lot right now. So keep an eye on for any changes with what's going on with uh the current levels of yields and debt. Um the way you're seeing bonds move, I think that's something that's very important right now because that's going to be the thing that that changes this calculus here. I'm Jamal Chandler and thanks for watching this edition of Math Check.
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