Top financial commentator Robert Armstrong, of the Financial Times‘ Unhedged blog, took notice (Armstrong famously coined the term “TACO” trade, for “Trump always chickens out”). Damadoran is unusual, Armstrong wrote, because he’s not a perma bear like, say, Michael Burry of “The Big Short” fame, who has warned of a bubble and cryptically closed his hedge fund. Damadoran is “a true enthusiast” who “likes investing, believes in markets, and has a strong risk appetite.”

Armstrong argued the view is worth considering, even if you believe, as Armstrong does, that a growing U.S. economy and strong cash flow and less-wild valuations elsewhere in the Magnificent 7 aren’t at bubble levels. He said he can only offer “a mild level of disagreement” with Damadoran’s statement that there’s “nowhere to hide in stocks” amid the AI boom/bubble situation. Galloway has been saying there’s nowhere to hide somewhat often recently, as he and Elson found Sam Altman’s recent statements to be an “emperor has no clothes” kind of moment.

Here’s what Galloway, Elson and Damadoran discussed. Warning: it’s grim.

Social unrest, or stock market collapse?

Regarding the trajectory of the American economy, Galloway forecast an inevitable reckoning within the next 12 months. He said the U.S. faces either “chaos in the labor markets” due to generational inequality, or a severe market correction that could see the “Magnificent 7” technology stocks “cut in half.”

Galloway suggested that the only visible return on investment (ROI) from the massive AI spending so far is “efficiencies”—which he describes as “Latin for layoffs.” This would be a disaster given the increasing levels of concentration in the S&P 500, with a calculation in October finding that 75% of gains and 80% of profits in the index were somehow AI-related since the release of ChatGPT three years earlier.

While acknowledging that cyclical bubbles are a natural part of markets, Galloway and Damadoran discussed how the scale of the current risk is amplified because 40% of the S&P’s total market cap rests in just 10 companies—including the “Magnificent Seven”— creating an unhealthy and fragile market susceptible to a global ripple effect if the AI bubble bursts.

Damodaran largely validated this “broader thesis,” noting there is “very little evidence right now” of a lucrative AI product and service market. He said to justify the current investment in AI architecture, the AI products and services market must generate approximately $4 trillion in revenues—a far cry from the tens of billions it generates today.

Companies like Nvidia are trading at prices that look “most irrational,” according to Damadoran, as the valuation suggests the company will have to deliver 80% gross margins “in perpetuity on revenues that are going to be a trillion dollars or more.” That would make it “the greatest company ever,” he said, adding that it just doesn’t hold up to any kind of scrutiny, although Nvidia is surely a great company.

Catastrophe and baseball cards

Damadoran said he believes the market is not pricing in the risk of a “market and economic crisis that is potentially catastrophic,” with the chances of this happening perhaps greater than any time in the last 20 years. If the top 10 stocks decline by 40%, Damadoran argued, “it’s not like the industrials are going to hold their value while this happens,” with a panic ensuing that will “ripple through stocks.” Damodaran noted the rising price of gold, hitting all-time highs while stocks are also up, suggests a subset of the market believes “something bad is coming.”

Galloway, who has known Damodaran for 25 years, said he had “never heard that tone” of pessimism from his colleague, who is typically biased toward staying in the market. Damodaran said he is considering moving his money entirely into cash and “perhaps collectibles,” naming baseball cards as one possibility. “If that’s where you want to put some of your money into is baseball cards, because you’ve truly done your work on baseball cards, who am I to step in and say that’s not a great place to put your money?”

The professor clarified that for the first time in his investing career, he is looking at parking money into alternative assets himself, adjusting his portfolio to hold a “bigger chunk than ever into cash or something close to cash or maybe even collectibles.” Damadoran confirmed that he owns less of his portfolio in stocks and bonds than probably at any time previously. He noted that Ray Dalio has been speaking of gold a lot recently: “The very fact that Ray Dalio is holding gold tells you something about safe places and how difficult it’s become to find them within the financial asset markets.”