Dalio's Latest Interview: 3 Signs That the AI Bubble Is Bursting, and How to Respond

Originally from the podcastThe Diary Of A CEO

Compiled by Odaily Planet Daily's Golem (@web3_golem)

Editor's Note: Ray Dalio, founder of Bridgewater Associates, recently sat down for an in-depth interview on the renowned business podcast The Diary Of A CEO, sharing his views on the AI bubble, the 80-year cycle, and Bitcoin. In the conversation, Dalio reveals why we are currently in an AI bubble, outlines the three major signs that it is about to burst, and argues that while capitalists will be the biggest beneficiaries of the AI revolution, those with exceptional human intelligence who can collaborate with others will still thrive in the future. Odaily Planet Daily has compiled the key takeaways from the interview below. Enjoy~

Learning from History: How Do AI Bubbles Form?

What people often call a bubble is when prices rise sharply and companies perform exceptionally well, then the bubble bursts, impacting the economy and markets, followed by a depression—like the bubble of 1929 or the dot-com bubble of 2000.

This happens because when a revolutionary new technology emerges, this is exactly what occurs. During the dot-com era, we also had amazing new technologies, and everyone bet they would surely succeed, rushing to invest, even borrowing money to do so. But they overlooked the importance of price, and eventually prices soared, creating a bubble.

Now we are equally excited about AI, and we should be, because it will bring revolutionary change—and it already has. So again, everyone wants to invest a little, but they still ignore the price. This is the same mechanism hidden within different cycles.

In an economic bubble, people take on massive debt to invest. You see many people become wealthy, but that wealth isn't equivalent to real money because they can't spend it. And when they must sell their wealth to obtain money, it depreciates. So when they need cash for some reason—such as tax changes, rising interest rates, or debt repayment—the bubble begins to burst and markets decline.

When the bubble bursts, the wealth accumulation process reverses. When they were making lots of money, they had plenty of collateral with high asset values to take out loans against, and that compounding effect continued. But when the bubble bursts, this process also works in reverse.

Economic recessions typically follow bubble bursts because when people start paying off debt and selling assets, consumer demand decreases, and spending naturally declines.

Take the Great Depression in the United States, for example. The late 1920s were booming. Households got electricity for the first time, refrigerators and lighting entered homes for the first time, and cars, airplanes, and radios became widespread for the first time. Everyone believed these technologies would have a great future. But at the same time, as people kept buying assets and stock prices kept rising, they also leveraged up by borrowing money to buy stocks. Eventually, corporate profits simply couldn't support the corresponding stock prices, triggering a chain reaction that ultimately led to the Great Depression.

My point is, during these massive transformative shifts, people know very little. Anyone working in AI cannot plan with precision. They simply don't know how much revenue the future will bring. Ultimately, only two outcomes are possible: either you underinvest and get left far behind by competitors, or you invest heavily and still can't achieve precise control. When that happens, problems arise.

Three Major Signs That a Bubble Is About to Burst

In the early stages, the factors that prick the bubble are often situations that force people to sell off some assets to raise cash, and this is generally rising interest rates. It could also be policies like wealth taxes, but overall it's a tightening of financial conditions. Because at this stage there is usually inflationary pressure, and central banks decide to tighten monetary policy. As a result, when interest rates rise, the returns investors can earn from holding bonds exceed what they can get from equity investments.

Additionally, there is a significant increase in stock issuance. We've been discussing how demand pushes stock prices up and how wealth is created, but the market also has a supply side. Companies can issue shares, and there's almost nothing easier for creating wealth than issuing stock. Today, people can simply announce they're starting a company and taking it public, then tell their audience they're going to issue shares. This massive supply of stocks, along with other increased corporate fundraising needs, ultimately leads to the bubble bursting.

Another very typical way to gauge the extent of a bubble is to look at who holds the shares—whether they're in the hands of steadfast investors or weak-handed retail traders. But I also want to emphasize that bubbles are not a black-and-white phenomenon; it's a matter of degree.

A typical characteristic of weak-handed positions is a massive influx of retail investors lacking professional knowledge, especially those using leverage—either borrowing to buy stocks or purchasing leveraged financial products. For instance, there are now leveraged ETFs tracking the stock market, and investors participating in these products is essentially no different from rolling dice and gambling.

These are the main signs that a bubble is about to burst. When it does, panic sets in, leading to massive asset liquidation. Conversely, from the opposite perspective, all assets become cheap at that point, and everyone can afford them.

But in investing, people always like to get ahead of the curve, trying to catch the bottom too early, and this behavior often further fuels bubbles. So I'd also like to add that the future is full of uncertainty, and investors shouldn't try to "time the market." Even experienced investors find it extremely difficult to precisely time when a bubble will burst. Therefore, the best way to invest in the face of a bubble is diversification.

Diversifying to Weather a Bubble Burst

Ordinary people often think cash deposits are the safest asset, but in the long run, it's the worst investment because inflation erodes its value.

Beyond the stock market, investors actually have many asset options, such as gold, bonds, real estate, and Bitcoin. Each of their values fluctuates for various reasons. Typically, when gold rises, bonds tend to fall, and real estate depreciates. These changes follow certain patterns.

Therefore, the best approach is to build a diversified portfolio—this not only doesn't reduce returns but actually lowers risk. Diversification means holding a certain proportion of each asset class. Due to differing volatility, investors must know how to balance them. My advice is to start by investing in a true asset, and that is gold.

Gold is very interesting because when all other assets perform poorly, gold often performs well. It's a very effective diversification tool. Gold cannot be cracked by technology; you can hold it, own it. It's the only financial asset that isn't someone else's liability.

So for most people, if you want to ensure you have some "hard currency," gold should account for 5% to 15% of your investment portfolio.

Views on Bitcoin

Some investors view Bitcoin as "digital gold," but I prefer investing in actual gold bullion over Bitcoin.

Bitcoin is merely a gold-like asset. It also belongs to the category of currencies that cannot be printed, but certain technologies could harm it. For example, if quantum computing emerges and governments can monitor it, then it could be taxed. Any digital currency is somewhat similar in this regard.

Moreover, when governments say "we don't need Bitcoin," they have the power to dispose of it as they wish. And central banks won't hold large amounts of such assets because they need to ensure the privacy of their own transactions while keeping tight control over them. Just look at Russia's situation—their other assets were confiscated/frozen, but their gold? Nobody can touch that.

Who Benefits Most from the AI Revolution?

In this AI revolution, only a very small number of people (less than one percent of the population) possess cutting-edge technology and can apply and accelerate its development. As for everyone else, if you work in a job that requires thinking, you're at risk of being replaced.

We are entering a world where everything can be automated. Human evolution began in the agricultural era, when there was almost no real innovation. Then humans invented machines, which replaced human physical labor. People used to work in the fields like oxen; then they were replaced by tractors. After that, we entered the industrial era. First, the printing press enabled people to acquire knowledge, then various inventions emerged, and the First Industrial Revolution arrived, when machines began replacing human physical labor in factories, and so on.

So in my view, it's as if machines first replaced the bodily functions of humans, then moved up the hierarchy, and then began replacing the computable parts of human thinking. And this trend continues, gradually replacing higher-order thinking and reasoning abilities. This trajectory is part of the ongoing evolutionary process.

And the ultimate beneficiaries are the capitalists who own the ideas that replace workers. For example, when people shop in stores, merchants earn revenue. But if you look at the share allocated to workers, you'll see it's declining, while the share going to merchants is rising. So we're experiencing a phase where, on one hand, the top tier is creating astonishing wealth; on the other hand, the bottom tier faces enormous pressure.

This is the challenge we face. Although the economic situation is relatively good, university graduates are finding it significantly harder to get jobs. For instance, new graduates used to receive on-the-job training when starting work, but now many jobs can be quickly done by AI and computerization. As robotics technology advances, this will intensify. The disruptive speed we're witnessing now is precisely because massive amounts of capital are pouring into frontier AI models like Anthropic and OpenAI.

Meanwhile, the wealth gap is widening because capitalism—and I love capitalism—but the reality is, it creates enormous disparities in income and wealth. When a worker's thinking and physical abilities are both replaced, what can they, as humans, still sell?

But there's no need to be overly pessimistic. Humans still possess emotion and intuition—services that AI cannot provide. So, if we explore what these "services" actually are, for example, can robots provide a good massage at a SPA? What else remains? People can keep exploring. In short, I believe that for the foreseeable future, those with exceptional human intelligence who can collaborate with others will still perform excellently.

On the 80-Year Cycle

I've said before that the world order changes roughly every 80 years, but this number isn't absolutely precise. The cycle length has an average fluctuation range—it's like a human lifespan; each person's life expectancy varies from one individual to another.

I wouldn't overemphasize the exact timeframe. I'd focus more on the current situation. Based on symptoms or relevant indicators, where are we in this process right now? Where will the next significant milestone appear?

The answer is: right around the time zone we're currently in.