A transformative artificial intelligence boom that sweeps across the global economy will leave some casualties in its wake — at least, that’s the verdict of Citadel co-Chief Investment Officer Pablo Salame.

In a rare interview, Salame said the extraordinary capital demand underpinning the AI revolution is clashing with wary lenders unwilling to take on all that risk. That, he said, will force a reconciliation between stock-pickers chasing multiples of their winnings and creditors who need to make sure they are repaid.

“The credit market is getting jammed right now because it hasn’t figured out a good way to offload those risks yet,” Salame said. “AI’s rising tide will sink some boats, and it’s a wavy tide.”The enormous financial ask needed to get to AI’s promised utopia is cropping up as a source of friction that’s holding back runaway growth, according to Salame, who helps command Citadel’s $77 billion investing arsenal alongside its founder Ken Griffin.

“Credit is not done resetting,” Salame, 60, said. “It’s going to be very tested.”Global credit markets have been flashing warning signs as money managers have grown skittish over the massive amount of debt tech companies need to fund the AI buildout. The risk premium on junk-rated debt has surged. And on Sunday, Elon Musk warned that choked off debt markets could leave more than 200 neoclouds facing “guppy-level” death and consolidation.

With prominent business leaders forecasting trillions of dollars of capital needs in the coming years, the AI arms race has mutated into a financing arms race.

“A huge part of the market-cap growth was credit light,” Salame said of the rally in recent years. “Now we are moving into a period of growth that is capex based.”“Reduce that capital expenditure and that means the growth assumed in equity markets is just wrong,” he said, expanding on remarks he made at a closed-door investor event last week.

That risk was recently spotlighted by Meta Platforms Inc. after it said it would bet even more aggressively on AI, with its future spending commitments rising to $825 billion. The social-media giant even carved out a new class of stock that could be used to help pay for acquisitions and other expenses, underscoring the limits of solely relying on borrowed money.

A Wall Street Journal report earlier this month said that Anthropic — one of the leading AI developers — may spend $750 billion on additional computing power in the coming years. The company’s upcoming public listing could offer a litmus test on the durability of an AI rally.

Stock investors pushing the AI narrative will have to come to terms with what the market allows companies in the sector to borrow, Salame said.

“The credit market isn’t structured to raise hundreds of billions of story debt,” he added. “Equity investors can earn multiples of their money. Lenders are earning a spread.”

“It’s not a crisis, it’s a reconciliation.”Citadel founder Griffin said last week that bubbles are “almost certainly” starting to emerge in AI as investors continue to grapple with just how much they’ll spend on the technology and how it will transform the economy.

“Any radical transformation of our economy is generally intertwined with a bubble,” Griffin said. “These bubbles, if we want to use that word, often coincide with these giant technological transformations.”Salame joined Citadel to lead its credit business in 2019, and was elevated to co-CIO starting in 2022 alongside the 58-year-old Griffin. He was a powerhouse hire for Citadel, having been one of Wall Street’s most prominent trading executives after spending about a decade helping lead Goldman Sachs Group Inc.’s trading division.

Citadel’s assets have shot up to $77 billion from $30 billion in the year before Salame joined Citadel.

“There is so much more capital that needs to be deployed that credit investors will get the chance to be choosy,” said Salame, who has had a front-row seat to several periods of boom and bust on Wall Street over the last three decades.

“It’s an exciting time,” he said. “It’s a great opportunity set” with the AI-driven borrowing binge tilting the dynamic in favor of lenders.

The lowest rated borrowings are already getting picked over, and the market will start to turn the screws on other junk-rated debt with better credit grades, he said. And the fever pitch from AI bulls on the immense pace of change in the industry can itself serve as a sign of caution.

“The market expects credit investors to partly underwrite the rate of technological change,” Salame said, while pointing out the difficulty of peering deep into the future.

“Our ability to predict on a three-year basis — it’s low. On a five-year basis — it’s impossible,” Salame said.

“I think thirty-year credit spreads are a little fanciful.”