Muddy Waters founder Carson Block says that artificial intelligence will trigger economic fallout that could make the 2008 global financial crisis “pale in comparison.”

Block argued that AI-driven job losses will cascade through the U.S. economy over the next several years. Fewer jobs mean smaller 401k contributions, which means less passive money flowing into equities.

He also pointed to weakness in private credit, where he said “too much money has gone into an asset class that just couldn’t make enough high-quality loans.”

The warning echoes concerns from Vanguard’s Shaan Raithatha, who flagged hidden risks in Big Tech’s $400 billion debt binge earlier this year.

Short Sellers Are Already Circling

The data suggests bears aren’t waiting. Hedge funds have made $24 billion shorting software stocks in 2026 so far, according to CNBC, as roughly $1 trillion in market cap evaporated from the sector.

Salesforce Inc (NYSE:CRM) and ServiceNow Inc (NYSE:NOW) are both down more than 35% year-to-date, with UBS recently downgrading NOW on fears that AI agents will compress per-seat revenue models across enterprise software.

Short interest in S&P 500 stocks climbed to near-decade highs in February per Goldman Sachs positioning data, with the median stock at 2.7% of market cap shorted. Software sector shorts hit their highest level since Goldman began tracking in 2016.

It wasn’t always this way. Passive index funds, retail dip-buyers and a relentless equity rally crushed short sellers for years. Jim Chanos closed up shop.

Hindenburg Research’s Nathan Anderson walked away. Block himself pivoted to net long strategies in Muddy Waters in late 2024. Now he says that short sellers are about to have the “wind at their backs.”

What Prediction Markets Say

Polymarket’s AI Bubble Burst contract prices just a 17% chance of a full AI sector downturn by end of 2026 on $2.5 million in volume.

The US recession market sits at 33% on $1.2 million volume. The risk of a recession has remained heightened since the Iran conflict began.

Polymarket gives an 18% chance that the US has sub-1% GDP growth this year. The most likely bracket is 1.5-2%, at 25%.

Goldman’s year-end S&P 500 target remains 7,600, implying 12% upside from current levels near 6,817.

Block admitted he missed the original GFC trade entirely. “I was in China trying to build a self-storage business.”

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