This Renowned Short-Seller Has Big Worries About AI
We're doing something special for Top Stocks over the next few weeks.
I recently got the chance to sit down with some of the top minds in the investment world. And rather than talk specific stocks, I'm going to let you in on the conversation.
I'll be sharing an interview series that will give you real investing insights... But if I've done my job right, you'll learn a lot about how today's world, in general, works as well.
Let's get started...
Earlier this month, I hopped on a flight to Miami Beach to attend the Future Proof Citywide conference.
The event brings together more than 4,000 investors, asset managers, and technologists from all around the country who want to figure out how to prepare their businesses and investments for a future riddled with AI.
At least one attendee was not optimistic.
You likely (read: hopefully) know the name Carson Block. He's the founder of Muddy Waters Research, an investment and research firm that takes activist short positions against companies it believes are fraudulent or dishonest.
Block has an incredible track record, finding and publishing deep evidence on sketchy companies across the globe. Many go bankrupt before long.
In one case, his firm found a medical-device company whose cardiac devices had security flaws that left them vulnerable to hacking. The company denied it, but a later investigation showed Muddy Waters to be correct.
The last time I saw Block was in October at our Stansberry Research Conference & Alliance Meeting.
At the time (marked by the line in the chart below), he shared a thesis on the big opportunity in the mining industry. And mining stocks went on a tear shortly after...
Right now, Block is worried about AI and the effects it'll have on the job market.
Here's how he sees it...
Three Big Ideas From Carson Block
AI Is About to Break the Job Market
Block came into 2026 optimistic about the economy. Then, six weeks ago, he did a complete 180.
What happened? He played with the latest version of Claude – and was floored by what it could do.
Block used Claude to draft an estate plan. He didn't expect it to come back with something a real attorney would charge serious money for.
What really shook him was learning that today's AI models were largely coded by their predecessors. That's not a linear improvement – it's a step change. We're at the beginning of an exponential curve, not the middle.
Moreover, Block found that the most sophisticated AI users today can do the work of eight developers. Let me say that again: one person... doing the work of eight. If that ratio holds even loosely across knowledge workers – lawyers, analysts, compliance staff – 15% of high-paying jobs could be gone within three years.
There's still a big question, in my mind, as to whether or not AI can do everything promised at that speed. But it's a risk we all need to watch.
Index Funds Could Be the Fuse on a 1929-Scale Crash
Block has watched index funds go from tracking the market to making the market.
The S&P 500 inclusion process, he argues, has become little more than a momentum chase. Since the index is market-cap weighted, companies that have seen huge run-ups get waved in – regardless of business quality. And then every index fund in America is forced to buy them.
That creates a dangerous loop: Stocks rise, get added to the S&P 500, index funds buy more, then those stocks go up further.
But this mechanism works in reverse, too. And this is where AI-driven job losses come in...
Right now, we have a constant flow of 401(k) contributions – the steady paycheck-by-paycheck buying that has powered this bull market for years. If those contributions stop, perhaps due to layoffs, the whole structure flips.
Block invokes strategist Mike Green's framework here...
As Green laments, index funds used to follow the market. Now, they are the market. Even John Bogle, the founder of Vanguard and father of index investing, reportedly worried these funds had gotten too big before he died.
Block's conclusion is blunt: If AI-driven layoffs become the shock that cracks the employment picture, the resulting market crash could be severe. He says it could rival 1929 in scale... the year in which "Black Thursday" kicked off the Great Depression.
The Real Risk in the Market Isn't Fraud – It's the 'Gray Zone'
As a short-seller, Block seeks out fraudulent companies and bets against their stocks.
But he makes a surprising admission...
Outright fraud – the kind that ends in handcuffs – is actually pretty rare.
The much bigger problem is what he calls the "gray zone." By that, he means accounting and business practices that are technically legal but intellectually dishonest.
He mentioned one health care company, eHealth (EHTH), that had adopted a new accounting standard that let it book future revenues upfront based on a "lifetime value" calculation.
Suddenly, earnings looked great. But that model was based on high-quality, sticky customers. So when eHealth started aggressively signing up customers that weren't so sticky... well, eHealth's accounting was much less accurate.
Its model broke down, the market caught on, and the stock eventually fell close to 90%...
What happened with Enron was similar. Block argues Enron is widely misunderstood – most of what it did was legal, just deeply misleading. The actual fraud was small relative to the collapse.
Block says the gray zone has expanded tremendously since the great financial crisis, driven by low interest rates and a culture where the most dishonest operators often get the richest.
When the tide goes out on the next cycle, a lot of companies will look nothing like what investors thought they were buying.
Watch to Learn More
To hear more about my discussion with Carson Block, check out today's Top Stocks video. We sit down for a wide-ranging and valuable tour of all of his thoughts regarding the risks and opportunities in today's market.
You can watch the entire episode on our YouTube page by clicking the image above. Be sure to like and subscribe to get more of our videos.
Straight to the Source
- Muddy Waters Research website, including its occasional short reports on companies with trouble ahead.
Until next week,
Matt Weinschenk
Publisher and Director of Research
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