The FTSE 100 and S&P 500 are near record highs. The real economy is deteriorating. And the Bank of England's Deputy Governor for Financial Stability, Sarah Breeden, has now said publicly what most politicians will not: a stock market crash is coming, and the financial system is not ready for it.
This crash could be worse than 2008 because of overvalued stock markets, the AI bubble, an overexpanded and at-risk shadow banking system and the Iran energy shock, which the International Energy Agency is calling the biggest energy shock in history.
If any of these risks crystallise simultaneously, and Sarah Breeden thinks they might, then the result will not be a market correction. It will be a financial crisis that will result in falling confidence, rising interest rates, frozen lending, job losses, and a domino effect through the real economy.
Governments must act now to plan for this eventuality and not after any crash happens. Contingency plans must exist, and nothing appears to be being done as yet.
If ever there was a moment to worry, even the Bank of England is saying this is it.
This is the audio version:
This is the transcript:
I've been warning about a stock market crash for some time now. The reason should have been obvious.
Stock markets have, over the last year, been at all-time highs and steadily rising while the real economy has deteriorated, and now we are in a wartime situation.
The risks have been clear and obvious for all to see, but they have been ignored.
In that context, the fact that the Bank of England has now recognised that the risk of a stock market crash is real and potentially imminent is something that is really important. The significance of this is that what I'm saying is no longer a fringe view. It is now the official position of the UK's central bank.
The Bank of England's Deputy Governor, Sarah Breeden, has told the BBC that stock markets look to be overvalued at present. The significance of this is that not only is she the deputy governor of the Bank of England, she is also head of financial stability there, and it's highly unusual for a person like her to talk about markets in this way.
She's pointed to multiple risks that markets appear to be complacent about at present, and that makes this a significant moment. Central banks do not make interventions like this lightly, and to quote her precisely, what she said is “There's a lot of risk out there. And yet, asset prices are at all-time highs.”
And she's right. Look at the chart on the screen right now. The UK FTSE 100 is near a record high at the moment, and reached it only a few weeks ago, and the same is true in the USA, where the S&P 500 is trading at around a record level. You would think that we are living in a world where milk and honey is flowing, and risks are minimal when the truth is the exact opposite is the case.
Sarah Breeden continued. She said, “We expect there will be an adjustment at some point. The thing that really keeps me awake at night”, she said, “is the likelihood of a number of risks crystallising at the same time.” And she went on to say that what she is worried about is “A major macroeconomic shock, confidence in private credit going, AI and other risky values adjusting.” “What happens in that environment, and are we prepared for it?' was the question that she asked, and I exactly share her view. That is the right question to ask.
She is saying asset prices do not reflect the risks that the real economy is actually facing right now. And as a result, she expects a correction. I would call that a crash. She did not say when or how large that correction might be, but I believe that because of the multiple risks that are being identified, that risk could be very real indeed, and in this context, she even seemed to underplay the risk that the war in Iran could create. But she's looking at that, plus a credit collapse, plus an AI bust. That is what she is fearing, and in plain language, she thinks a crash is coming, and when she's saying that, she's not just looking at the UK.
US markets have repeated all-time highs despite mounting economic warnings, and the International Energy Agency has called the Iran crisis the biggest energy shock in history. Markets are behaving as if none of that risk exists. Prices and reality have become dangerously disconnected.
At the same time, technology companies have had hundreds of billions of dollars poured into them to build AI infrastructure, which may not work if this war continues, because the raw material supplies to build the chips that all this infrastructure works upon may not be available.
Bill Gates has called this investment process a ‘frenzy' resembling the dot-com bubble of the late 1990s, which I remember all too well, and in that bubble, investors threw money at unproven companies, and many of them lost everything. Valuations of this sort are one of the specific risks that Sarah Breeden named as likely to readjust in the future, and when that readjustment comes, it will not be gentle.
That's the key point, and alongside this, there is the risk from shadow banking: the hidden risk within our economy. The shadow banking system is linked to what is now called the private credit market, and over the last 20 years, these structures have grown enormously. There is now more than $2 trillion invested through these organisations that mimic banks, they're private equity companies, they're major investment funds, and they lend privately to businesses in the way that banks might have done in the past, but which they do directly now instead.
Some of these funds are already sustaining losses and are restricting investor withdrawals because they are at risk of losing their credibility and financial liquidity as a consequence of the demands being made upon them, and the shadow banking system has never been stress-tested at this scale before now.
Breeden's warning is explicit. This is what concerns her most. A war in Iran and the collapse of AI would be bad enough, but the risk from the private credit system connected to shadow banking is her greatest fear of all. As she put it, “Private credit has gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years”, and that is the problem. The risk is that we might have a credit crunch rather than a banking-driven credit crunch, and that's what she's worried about. This sector is where we are seeing deeply interconnected risk that is, however, largely hidden from view in the way that the mortgage crisis was largely hidden from view before the 2008 global financial crisis, and the scale of the risk is at least as big, if not bigger.
The point is that all of these issues could arise virtually simultaneously, and there might be a domino effect. The consequence would be a sharp fall in stock market prices, and that will make households feel poorer, and they will then cut spending.
That fall could in turn upset interest rates. They might rise. This might make it harder for businesses to raise funds as a result, and that will lead to falling business confidence, which in turn will lead to falling rates of employment and investment.
And if the private credit market freezes at the same time, lending across the economy might seize up. This then would not be a market correction. This would be a financial crisis.
The fact is, we are not safe from this. The problems that Sarah Breeden is talking about are global. Her control reaches the English Channel. The extent of the risk goes way beyond that. What she's talking about is something that may be beyond anyone's control, but which nonetheless the UK has to react to.
The question is: how might prices fall? Will there be a sharp adjustment downwards? She's not saying it's going to happen today. She's not saying it's going to happen tomorrow. She does not know. No one knows, including me, but what she is saying is that the system must be ready because it could happen at any time. That is not reassurance. That is a warning dressed in the sort of careful language that central bankers like to use. Read between the lines. We are heading for trouble.
This risk of a global crash sits on top of the global trade wars driven by Trump's tariffs. It sits on top of the energy crisis created by the war in Iran. It sits on top of an already fragile UK economy. It sits on top of the AI risk, and these are the multiple shocks that we might get simultaneously. Those conditions are already forming.
So the Bank of England now agrees with the warnings that I've been giving for some time. Markets are overvalued, and a correction is coming. The effects will be severe and widespread, and this is not about being alarmist. This is a description of where we are. When the Bank of England's head of financial stability says she's losing sleep over this, so should we.
I've been making this case for a long time, and now the Bank of England is as well. The question is not then whether a correction is coming. It is when it is coming and how bad it will be. But my point now is something else. The government needs to be prepared for this. Regulators also need to bring shadow banking and private credit inside proper oversight now, and not after the crisis, and everyone in government and in the Bank of England needs contingency plans to help and not hinder the real economy when the City fails again, as it is going to do.
The time to act is before this crash and not when the bubble has burst. That bubble is going to burst in my opinion, but what do you think? There's a poll down below. Let us have your comments. We do appreciate them. Share this video if you like it. Let other people know about the risks that we're facing. Subscribe to this channel, and if you want to make a donation to keep this work flowing, I'd be very grateful.
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My immediate thought was if the CBRA had enough in it this time? As well as the fact that the amount in it now seemed to act like an open invitation to be irresponsible.
Enjoy your model railway excursion – I have a mini rugby festival this week to get done.
Richard raises serious risks, and the Bank of England’s warnings deserve attention. But my own reading of the situation is slightly different. In 2008, the core problem was toxic financial products that were fundamentally worthless. I don’t see an equivalent structural rot in today’s markets. As long as underlying demand remains strong — and at the moment it appears to be rising, not falling — the system has more resilience than headline indicators suggest.
The bigger risks I see are not purely financial but technological and political. AI is accelerating at extraordinary speed, and when a breakthrough like fusion energy eventually becomes stable and scalable, it could trigger a global economic reset. At the same time, social and political pressures are building. Human capital is becoming more restless, and that instability may prove more disruptive than market valuations alone.
So while the financial risks Richard highlights are real, I’m not convinced they point to an imminent crash. The deeper vulnerabilities may lie in the intersection of technology, energy, and social cohesion — and that’s where I think the next major shock is more likely to emerge.
Wow
Naive, or what?
You don’t see toxic products?
Look again, then
I may well be missing something, Richard — but when I refer to “toxic products”, I mean instruments whose underlying value was fundamentally mis‑stated or mis‑priced, as in 2008. If you’re seeing comparable products in today’s markets, I’d be interested in which categories you have in mind.
My point was simply that the current vulnerabilities look different in nature: less about hidden balance‑sheet rot and more about the interaction of technology, energy and social pressures. If there are specific instruments you think pose systemic risk, I’m very open to looking again.
Bitcoin
AI shares
Bank debt
Oil
Enough?
Well if we don’t look at the massive over investment in AI datacenters and the vast amounts of financial loses that they include then they don’t exist! Oh and bitcoin and other exotic products don’t exist either because we have regulated markets that are perfectly hedged.
Bill, I’m not denying that AI and crypto carry valuation risks — they clearly do. But that’s not the same as the “toxic products” we saw in 2008, which were fundamentally mis‑priced and structurally worthless. Data centres are real assets with long‑term utility, and Bitcoin has survived 15 years of stress‑testing. These may correct in price, but they’re not toxic in the 2008 sense. If there are specific instruments you think fall into that category today, I’d be interested to hear which ones you have in mind.
There is no correct price fir a Ponzi scheme
That is what Bitcoin is
And no one knows if AI can work at scale
And oil may well be seriously mispriced
As is much debt
As is much bank debt
This crisis is much worse.
I see AI as the exact equivalent of the.com bubble. Of course AI will in the future find its natural level but probably not at the exaggerated hype that accompanies it now
I’m not seeing the Poll.
Sorry
Not awake this morning
Richard, I’m not dismissing the risks you highlight. Markets can be mispriced, debt cycles can turn, and private‑credit opacity is a genuine concern. But my point was narrower: in 2008 the core issue was toxic, structurally worthless products hidden inside the system. Nothing you’ve listed so far fits that category.
Calling Bitcoin a Ponzi scheme doesn’t make it one. A Ponzi requires a central operator, fabricated returns and new investors paying old ones. Bitcoin has no issuer, no promised yield and fifteen years of open‑market price discovery. It is volatile, certainly, but volatility is not toxicity.
Likewise, saying “no one knows if AI can work at scale” overlooks the fact that it already does. Large‑scale AI underpins search, logistics, fraud detection, medical imaging, chip design and global cloud services. The question is not whether AI scales, but how expensive the next scaling step becomes. That is a cost‑curve issue, not a structural‑failure issue.
Oil, debt and bank liabilities can all be mispriced at times, but mispricing is not the same as being fundamentally worthless. In 2008, the problem was that the underlying assets in key instruments were rotten. Today’s risks are real, but they are valuation risks, liquidity risks and geopolitical risks — not toxic‑product risks.
So I’m not arguing that markets are perfectly priced or that shocks are impossible. I’m simply saying that if we are going to use the language of “toxic products”, we should be clear about which specific instruments today are structurally fraudulent or fundamentally worthless. If there are examples you have in mind, I’d genuinely be interested to hear them.
History never repeats exactly.
You seem to think it does.
And cling to your assumptions that the past confidently predicts the future if you wish.
That’s why few correctly forecast crashes.
You included by the look of it.
And some of your claims are absurdly wrong. If you think crypto is not heavily controlled and organised I think you need to do some research.
Then think about the likelihood of al, your other claims.
My suggestion is simple: look at the evidence not your prior assumptions.
Richard, I am a fan and will remain one genuinely thank you for your engagement with me. You believe that a crash is imminent – I don’t. Let’s review this conversation in a years time.
I could be wrong. But you are wildly underestimating the risks right now. And that is reckless.
Is this likely to become a self-fulfilling prophecy? Didn’t Bernanke said something similar in 2008?
Not self fulfilling, just true.
I just can’t imagine there is such an entity that has the power to make decisions and act on them that is also capable of acting with intelligence and in the interests of the general wellbeing of society and it’s component individuals.
Out system is so profoundly corrupt and the politicians and bureaucrats so self-serving and also out of touch with reality I’d have more faith in a system run by primary school pupils.
Richard, I wonder if at sometime, you could do glossary entries for Shadow Banking and Private Credit, I’m not sure what they are, I’d assume that crypto currencies would be part of this. Thanks and enjoy your weekend.
Tomorrow
On the upside, neoliberalism will be clearly seen by all to have failed. The “market” will have lost credibility as the state moves in to clean up the mess. Much will have to change.
It all depends on who is in charge when the reckoning comes. In 2008 there was an opportunity to discipline financial institutions and bail out the wider population, but the reverse approach was taken. If the current government is in charge when we face the next financial shock, I have little confidence they will seize an opportunity to be radical in their response. While I do not look forward to what seems to be an inevitable crash, there is always the opportunity to be radical in times of crisis. Sadly we never seem to have the right people in place.
I suspect we are both not fans of neoliberal economics and understand to some degree how it operates. But, I question the notion of a coming crash being a sign that neoliberalism has failed. I used to think that the neoliberal project has been a colossal failure. But, I’m increasingly starting to think it has done what it was set up to do. That is create a very small very wealth elite. It was never meant to be something that would bring any benefit to ordinary people. After the crash the wealthy elite will still be very wealthy, many will have got out of risky assets before the crash happens. With those at the bottom of the economic pyramid already impoverished by austerity and wage stagnation. The ones who will suffer most from the next crash will be those slightly higher up, those with mortgages and pension funds. One thing will be certain the billionaire owned media will do everything it can to deflect attention from the system that created the problem and will single out some subgroup of the population to blame.
Upside?
What, Neo-liberalism corrected – again? How many nadirs does Neo-liberalism need?
I do not see any upside in this forthcoming crash when the post crash methodology is to always socialise the losses as they did last time and many times previously (we’ve had austerity in the public sector, yet 2008 was an outright private banking failure).
My expectation is that the private sector will be bailed out, (and so do they) and then, because so many think that money is a closed system, more austerity will be brought to bear on social spending and then we really will be brought back to the stone age. The Neo-liberal catch pit as society cuts the social security cable and it careers out of control downhill, is authoritarianism – we will crash into that and only then we may realise what has happened. The ground for this is already being prepared; the points have been switched (hat tip to those thinking about railways this weekend).
As Finton O’Toole quotes in his excellent ‘Heroic Failure: Brexit & the Politics of Pain (2019) ‘The unsettling of a nation is easy work; the settling of a nation is not’. His portrait of the UK whose governing is so top down, so anti-plural to the point that it really needs to have the right people in control of it (people who care) – otherwise the power of the state can be harnessed by bad actors – reveals us to be a fundamentally weak country that is unable to protect us from such crashes as these which make no doubt, are on the horizon.
Much to agree with
In response to comments may I clarify?
There is most certainly a gloomy prospect before us, that is obvious. However, somehow we will probably survive it, yet again. But, in a lighter vein, I thought I would inject an element of hope.
Yes, how things are handled depends on who is in government. Yes, initially neoliberalism will continue. But, what of the opinion if the people? Again we are the ones suffering, again we are the ones paying the price. We will not be happy.
In such circumstances how will a continuation of the status quo be justified? The answer is it cannot. The evidence of failure is displayed for all to see. Then, this is the time for a politics, and economics, of care to break through.
Personally, as I grow older and my health is, shall we say, questionable, I would rather think that, when this fiasco blows over, a better world will emerge.
We seem already to have many of the effects of a crash without the actual crash. Dire NHS waiting times, appalling scenes in A&E, social care in utter disarray, infrastructure collapsing, essential services failing. We don’t really need a stock market crash to wake us up. The alarms are all ringing right now. Additional financial failures will bring truly appalling outcomes.
Stock markets are driven by emotion (“go with the flow” is a well recognised meme amongst traders). You can see the minor result on an almost weekly basis, stock pricies moving mostly based on emotion (animal spirits?). Thus, if there is a collective loss of confidence (oh dear the emperor really does have no kit on), then down she goes as traders try to unload positions etc. The diff with dot.com crash and 2007/8 is the high-speed trading aspect which is now significant, i.e. an amplifier.
Will is happen soon? Dunno. Will it happen? Yup. ARM @ a P/E of 200 – most amusing, sign of the times.
I’ve been saying the same thing for a long time, others have also. My goto chart is the longterm (4 decades) chart off the S&P500 you will not find a clearer picture of the bubble created by neoliberalism anywhere else. All assets are now grossly over valued, that will include our homes and pension finds. If there was to be a complete correction I would estimate a 50% fall in asset prices across the board. This will be devastating for many ordinary people. Asset values were artificially high before 2008 but since then they have escalated to an extraordinary degree, this was initially caused by the decade long global obsession with quanitatve easing which lead to huge amounts of government money pouring into financial markets inflating asset prices rather than being invested in real infrastructure and support for communities that would benefit all people. The artificial economy of the finance sector has sucked the life out of the real economy in the west, most notably in the Uk and USA. There’s no correlation between real economic activity and the levels of growth seen across all asset classes. I find it incredible that people who condemn governments for a small increase in high street inflation never question the validity of much larger inflationary rises in asset classes. Both decrease the value of money. No one knows when the correction is going to start to happen, it could be next week it could be another decade. The longer we go on artificially inflating assets the bigger the correction is going to be and the more people will suffer.
We are quite aligned
The irony of all this of course is that its Trumps action that could be the biggest push that net zero gets with a combination of renewables, energy conservation and the global economy slumping
You may be right
Something always pushes a paradigm shift
I’ve been looking at something called the hedge fund basis trade, which is being used to fuel private debt at margins of 50:1, worth about $30trillion. If Trump refuses the currency swap the UAE has requested and they start demanding that their oil is priced in Yuan, this could be the snowflake that causes the avalanche.
Similarly the frenzy of investing this borrowed money into AI, which in turns destroys the consumer base (AI bits don’t buy food, clothes, cars, houses etc) guarantees that these investments will never see a return and the debt will never be repaid.
I’d say that this crash is coming very soon!
We agree
I’m going to take a devil’s advocate view and argue that there isn’t an imminent risk of a stock market crash.
While I agree that economic risks are rapidly building, especially around energy and geopolitical tensions, I think it’s important to separate the real economy’s challenges from a complete breakdown in, say, the secondary stock market.
Looking at the VIX (the fear index), I can see that the current level of volatility has not reached that observed between October 2008 and May 2009. That period marked an extreme, driven by a total collapse in confidence about liquidity and counterparty risk not approaching economic risks. Today, that kind of market stress is not (yet) apparent.
Traders seem more focused on adjusting to new conditions rather than fearing a full-scale crash. That suggests we might see a period of volatility, but it might not translate into a crash of the secondary market itself. They have incentives to ride out the volatility, adjusting portfolios and focusing on sectors that can weather the storm. There will be volatility and sectoral adjustments rather than a systemic breakdown in the functioning of the secondary market.
An energy crisis, rising costs, and scarcity certainly signal a real economic crisis, impacting households, industries, and inflation, but that doesn’t necessarily translate into a collapse of entire industries or an immediate financial crash.
Of course, this rollercoaster of volatility makes it difficult, if not impossible, for defined contribution pension savers to navigate. There will be a lot of losers, but also some winners.
No one can predict what will happen, but for traders fear of fear itself can be just as destabilising as the underlying risks.
I admire your optimism
But I can’t imagine why secondary markets will survive this when the AI risk is all there
As always, it is the causal models we have in mind. The Iran War as it has developed was not included in the calculation of risks for valuation of assets and their cash flows. As the event has not occurred before, the effect on energy costs for many years has not been included in how it causes changes to the cash flows from assets. Investors will eventually realise that they need to remodel the effect and revalue the cash flows and hence assets, which determines production and trade. The revaluation will occur first en masse where rises in energy costs begin most acutely in economies, that is producer prices and particularly essential basic goods which could be used in complex products. Investors as owners of producers will calculate the effects on prices, demand, and revenue over a number of years. Depending on the price elasticity of demand, some investors may decide the asset is no longer worth owning and so divest. In the financial models used by investors and producers for calculating the value of different assets, there exists variation and uncertainties, the less variation and the less uncertainties, the more quickly there will be large-scale rapid movement to a new valuation. One or two industry sectors and even individual firms are the indicator species for imminent change of a break in the trend, like the canary in the coal mine.
Sarah Breeden is a signal that the warning lights are flashing on their dashboard, but as with COVID and the Ukraine War, the Bank of England does not have an adequate causal map of how events are likely to determine economic effects. Academic economists could assist the Bank in understanding the likely economic effects, particularly at the level of individual firms, industry subsectors, and their causal connections, including households.
You assume there are models
You assume rationality
Really?
1+1=2
Get it?
Yes. I get that you are rude. I get that you use simple models. I get that complexity evades you. I get What else am I missing? That you are neoliberal?
You already proposed a simple causal model in your blog and by your comments you undermine your own argument.
With the greatest respect, of course models are causal. There has to be some logic to them. If they are not causal, they are not models.
But they have to embrace risk. Your own certainty suggests you do not do that, because I strongly suspect that you are quite unable to recognise the assumptions you make.
For example, you say 1 + 1 = 2. That is only true in some cases. If you are using nearest whole numbers and are actually adding 1.35 and 1.4, the answer to your suggested little bit of maths is 3.
Your claim requires that the assumptions be stated or that uncertainty be accounted for. You do neither. That is why your reasoning fails.
Anyone who doesn’t think that there is going to be a crash should look into the insane financial numbers around AI datacentres, the ridiculous valuations of the AI companies proposed IPO’s, and thirdly the potential for those toxic products being hidden in the shadow banking sector – and specifically private credit. The warning signs are there. Anyone wanting to know more should look up Ed Zitron and his detailed investigations into all of the above.