In this first video of the day, I argue that around the world, stock market values are falling as widespread selling of shares takes place. Irrational investors are dumping shares they only recently drove to record high valuations. Is this a timely adjustment, or the sign of a recession to come? It's hard to tell – but the signs aren't good, especially for a new government that says it is dependent on growth.
The audio version of this video is here:
The transcript is:
As I record this, stock markets are falling heavily around the world. Japan has seen the biggest falls, but there isn't a market in Europe which hasn't seen a fall during the course of Monday, and the US stock market is looking particularly vulnerable, whichever version of that stock market you're looking at.
In particular, the VIX, which is the volatility index of fear in US stock markets, indicating the likelihood that panicked trades will take place, is currently running at its highest level since 2020, when the COVID pandemic broke out. In other words, for reasons that aren't completely apparent to anyone, fear is gripping financial markets.
In part it's because Japan saw a significant increase in the local interest rate from the Bank of Japan last week, which has unsettled that particular market.
In part it's because American tech companies are not delivering results which are justifying the billions of pounds, dollars, yen, and everything else that they're pouring across the world into investment in AI.
In part it's because the US Fed is not indicating when or if it will definitely cut the US interest rate again, and it appears that it is far too late to react to market conditions because US employment data is looking particularly vulnerable now, with the number of new jobs that are expected to be created month in month out in the US economy falling heavily.
In part, it's because, well, most people realize that interest rates have been too high for far too long and the chance of recession as a consequence of those rates being so high for so long is now very high.
Are we going to have a recession? I don't know. Let's be clear. Economics does not provide us with a crystal ball.
We might just have a stock exchange blip on our hands, appropriately bringing down some of the excess values that I think exist inside stock markets anyway, and therefore this is just a timely readjustment.
It could be no more than that, but it could somehow feel like something bigger than that. It feels as if the bubble created after COVID ended, which felt wholly artificial from the outset, is being burst.
The bubble has been ridiculous.
After COVID, there was no good reason to believe that the economy would grow significantly.
And whilst most economies have done better than the UK's economy, no one has done particularly well.
At the same time, there's been the threat of war in Ukraine throughout this period, but clearly in the Middle East now as well.
And there's been instability between the US and China.
And if Trump gets back into office, the prospects for global trade insecurity are enormous.
Add to that the threat from global warming, which either is or is not believed by those who trade on world financial markets, but in either case is a cause of further instability, and you end up with a situation where you have to ask the question, why on earth are shares trading at their highest-level price in many of the world's financial markets?
I can find no rational explanation. So, it's entirely possible that this bubble, created by and large by interest rates simply being too large and therefore the price of bonds being too low and therefore money being forced into stock markets - that's my belief - if that's the case then this money that's been forced into stock markets is now going to leave because they realize that stock markets have been over inflated as a result.
Now, the reaction of governments could be, and central banks could be, to reduce the official interest rates in many countries around the world. Starting with the US, maybe, but followed closely by the Bank of England, the ECB, the European Central Bank, the Bank of Japan, and so on. So, although the Bank of Japan has just raised rates, I wouldn't be surprised if that is a short-term position, and there might be a change.
Again, I'm guessing. I stress, no one knows. But if that happens, the price of bonds will rise because bonds are always, in value terms, worth an inverse of the interest rate, and therefore money will pour out of stock markets into bonds and we'll get a market adjustment.
Is that bad? In some senses, in the long term, no.
In the short term, yes, it definitely is. Why is that problematic? Because falling stock markets tend to create a situation where there is a lack of confidence in the business environment. And that is what leads to recession. It's as simple and straightforward as that.
This may not be the start of a recession, I stress, but it has the feelings of instability around it that created problems when previous major stock market downturns took place.
1987 began with a bit of a crash, and the market in Japan did worse over this weekend and early on Monday than it did in 1987 in proportionate terms.
The European markets haven't done that badly, thankfully, as yet, because I don't like instability. I think transitional change is much better, but the US markets are looking highly volatile.
If we do get a crash, the consequences are significant, not least for the UK, because Rachel Reeves will not be seeing the growth on which she's built all her promises to the UK if we get a stock market crash because that will knock on into a real loss of growth impetus inside the real economy itself.
Therefore, this matters. So, watch the markets with care. We may be in for troubled times ahead.
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Are we sure this isn’t being driven — or at least amplified — by far-right American billionaires who want to help Trump by ‘proving’ that Bidenomics isn’t working?
Afraid I don’t agree with your suggestion that high interest rates have inflated the bubble in stocks. On the contrary, high rates depress stocks and the surprise is the time it has taken for high rates to dent stocks. It’s as if Wylie Coyote has run off the cliff…. but keeps going… until he looks down.
The huge fiscal boost in the US during COVID and since has put money in to pockets of people that have bought into the hype around tech and AI.
They are now learning that you can’t fight the Fed.
The question is, Will the Fed respond? Yes, as rates should be lower but any recession or otherwise is not caused by a fall in stocks…. but by too high rates.
Sorry to disagree, but high rates have very clearly not dented stocks.
I really din’t care what false theories say. I look at the world. High rates have at the very least co-existed with inflated stocks. And since bond prices have been artificially deflated, forcing money elsewhere, the idea that high rates have very definitely inflated stocks seems entirely correct.
We will have to disagree on this. The evidence around the world supports my suggestion.
Then disagree we will.
It is higher yields that brings money in to bonds…. Just look at Foreign holdings of gilts graph that you show in the QT piece.
Every body always thinks “it’s different this time” but higher rates always eventually brings stocks back to earth.
In the end, maybe
But for the last three years I have been right – high interest rates have forced money into shares. Excuses have been made for expecting higher returns. Now we have a crash caused by high interest rates
Sorry – but for me I can see nothing at all to support your argument which is based on a theory about a world that does not exist. I will make a video about this.
Clive is correct.
What I don’t understand at all is “and since bond prices have been artificially deflated, forcing money elsewhere, the idea that high rates have very definitely inflated stocks seems entirely correct.”
Why have bond prices “artificially” deflated? Quite the contrary QE kept bond yields depressed and prices high and when this was removed prices moved to where buyers & sellers formed some sort of fair market. These higher rates actually led to more flows into fixed income (you say the reverse) the evidence is look at the flows into fixed income ETFs, it is all publicly available, you will see a significant increase as bond yields have risen. This money will have come partially at least from equity markets. So you are wrong to think high interest rates inflate stock markets, they dont it is the reverse.
This is my last comment on this.
Of course bond prices were deflated – that is what has happened asince 2021 – the period being talked about now.
There is no fair market in bonds: it is all fixed
And because of the structure of investment funds seeking to avoid losses at all costs of course they ditched bonds and bought shares when rates rose and bond prices fell – because institutional pressure required it.
Your litte theories are based on falsehoods peddled by academics who think there are free markets. I am talking about reality – where what I am describing actually happened. I am terribly sorry reality does not match your theories. Deal with it.
And don’t bother replying.
Tokyo fell 12% yesterday but has clawed most of that back..volatility in markets has always existed. Same in most markets. No story to be had.
Wrong
Definitely a story to be had. Markets are signalling interest rate policy is very wrong. And the AI boom may already be over.
This rampant short term bullshit behaviour we see in markets has to got to stop.
Day trading needs to be banned.
Isn’t it about time we all grew up and realised that these get rich quick schemes pauperise us all in the long term?
If Scammer & Co want growth they should stop telling emotive Thatcherite lies like there’s such a thing as a blackhole and get down to basic necessities by nationalising the water firms which clearly aren’t investing in much growth other than inflating share-holders bank accounts!
https://www.theguardian.com/business/article/2024/aug/06/water-companies-record-fine-sewage-thames-water-ofwat
It’s easy enough to foresee in a few years time the main complaint used against Scammer & Co will be “Where’s the growth?”
Just to make a brief comment on the global warming issue briefly mentioned:
Although warming is the most discussed environmental issue it is far from the only potentially species-ending problem we face, and it is in fact probably the simplest part of the polycrisis to fix.
The other problems include, in broad terms:
* Biodiversity and habitat loss
* Soil loss and degradation
* Water scarcity
* Chemical pollution
* Resource depletion
Taken together, these problems cannot be “solved” because they are merely an indicator of the unsustainably of our modern way of life. The populations of the Global North need to reduce their energy consumption massively and rapidly to help averts the worst effects of ecocide and any economic system predicated on growth is now doomed to failure.
So there’s no point building plans around a growing economy because that is not going to be the case in the future. The dream of fixing climate change with technology is just that: a dream, not real or practical in any sense. It is being sold as a scam to raise money, that’s all.
Accepted
I have to agree. We are not facing our challenges. But I’m sure we could do it.
John Gray in his book ‘The New Leviathans: Thoughts After Liberalism’ (2023) p. 48 asserts that ‘ Renewable energy is a fossil fuel derivative’ (after listing a load of rare minerals and metals used/required for batteries).
Basically Gray is right, and to some extent supports Matthew’s hypothesis. In the short term, carbon will be needed to produce change until the modes of production have changed or are replaced.
But Matthew is right. Again, as Gray says now on p. 142 ‘Humans do not desire the good; the good is whatever they desire’.
And that is the root of the problem. We kid ourselves that by retaining cars – but this time electric ones – we can maintain our sense of whatever it is cars are supposed to deliver for us and avoid change (Clue: look at the adverts). But its bollocks. We should all be riding push bikes or electric trams/buses that we got rid of previously, and restoring those comes at a huge cost. But now, even bikes have batteries reliant on digging stuff out of the ground!!! Building new houses like I do for a living also has a huge impact on the use of carbon. I cannot deny it.
But what I see is a continuous abuse of a major resource – money. Money is being sucked out of solving not local or national problems but planetary problems. Because it is increasingly being mis-allocated as profit to corporations and individuals who can then go on a space trip or other non-entity consumption rather than investing in the future. Money is being hyper-individualised, away from the collective in a market that hyper-individualises us too through the selling of trinkets.
Water scarcity could be dealt with by investing in desalination plants – if the oceans are to rise – at least turn some of the deeper briny blue into something useful – water we can drink.
The ‘polluter pays’ principle – if only!! It should be upheld. If that was the case a hell of a lot new housing would be cheaper and our in land and coastal water system might be better for it.
This is why we/you must keep banging about new money and Government investment and more public ownership to restore the investment principle as well resource accounting to reify what is actually being lost – as Mark Carney pointed out not so long ago – we don’t value an elephant until we have its ivory – and then it is usually too late because we don’t value the whole animal.
We can do it.
But failure is possible for sure.
And that is scary.
This question taxes my mind somewhat. You have made a good case here that rising share prices don’t benefit the companies concerned – the shares traded on exchanges are second hand and none of the money from the rise in price goes to the company. So presumably the converse is true when share prices fall?
On the other hand awareness of history tells me that times when share prices fall are bad for the wider economy. In 2009 when shares fell to a low people were losing their jobs and companies struggled. Whether or not it is causation, it seems to be a strong correlation at least as long as the stock market fall is sustained.
Financial writers (as opposed to economic commentators like yourself) always seem to have glib explanations for what is going on which unfortunately have negligible predictive value. So there seem to be lots of possible reasons why the events this week might have no longer term implication; it is a time of year (at least in the northern hemisphere) when low volumes of trade amplify volatility, world stock markets are dominated by the US which is understandably jittery in the face of an election, there are good reasons to think that the American stock market with its tech bias has been overvalued by the exaggerated claims about AI and needs correction, plus of course those interest levels which are now unjustifiably high but will presumably normalise eventually. But being able to justify stock market falls doesn’t mean they won’t continue or have real world consequences, and if they don’t stabilise over the next month or there is a significant risk of a wider impact.