Episode summary
Steve Hanke Warns: A Financial Crisis Could Send Stocks Down 40%
Wealthion
· · 49 min · Hosts: Maggie Lake · Guests: Steve Hanke
Summary
Steve Hanke argues that the biggest macro risk is not Washington alone but a massive AI-driven investment boom that he believes has become malinvestment. He says AI investment is running at about 5.2% of GDP, far larger than past booms, and claims the sector’s revenue outlook cannot justify the capital being poured in. In his view, the combination of overinvestment, stretched valuations and rising credit exposure raises the odds of a financial crisis to about 40%, with AI stocks potentially falling 70% and the broader market taking a roughly 40% hit if the bubble pops.
Hanke says the policy backdrop makes the damage harder to absorb. He argues the federal deficit and debt have left Washington with little fiscal room, while the Fed may also be constrained by inflation that remains too sticky to allow easy rate cuts. He expects the bond bear market that began in 2022 to continue and thinks the 10-year Treasury could stay above 5% for some time. On the short end, he says the Fed funds rate may still need to rise by 2.5 to 3 percentage points to align with a 2% inflation target.
For investors, Hanke’s answer to where to hide is direct: he would not add money to stocks and would instead favor money market funds. He also warns that the political and market mood is shaped by resentment toward big players, tech leaders and Washington, which he thinks adds to the fragility of the current environment.
Key takeaways
- Hanke says AI investment is a massive malinvestment and estimates a 58% revenue shortfall versus projected spending.
- He warns the probability of a financial crisis rises to about 40% when credit expansion and valuation expansion happen together.
- Hanke expects the broader market could fall about 40% if the AI bubble pops, with AI stocks down about 70%.
- He says Washington has little fiscal firepower left because deficits and debt have erased the margin of safety.
- Hanke thinks the 10-year Treasury could stay above 5% and the bond bear market that began in 2022 is not over.
- For extra liquidity, Hanke says he would favor money market funds over adding to stocks.
Notable quotes
“If it pops, they'll go down about 70% and the collateral damage in the in the general markets will probably be 40%. It's all about malinvestment”
“the increased probability of a financial crisis that that means the bubble popping but also lots of collateral damage. That's a a pure crisis would increase to about 40%”
“I think it will stay uh up over 5% for quite some time”
“the bare market will continue. That's what it means”
“I wouldn't be putting them in the stock market. I'd be putting them in a money market fund”
How the episode opens
I would say probably overinvestment in AI. If it pops, they'll go down about 70% and the collateral damage in the in the general markets will probably be 40%. It's all about malinvestment. There's going to be a lot of damage. I wouldn't be putting them in the stock market. I'd be putting them in a money market fund.
What will the Democrats mean for the deficit and spending? to discuss. I'm joined by Stephen Hanky, professor of applied economics at John's Hopkins University and author of Making Money Work. Hi, Stephen. It's great to see you again. — Yeah, good to see you, Maggie.
Wow, we kind of have earthquakes all over the news headlines these days. Of course, the big results from the midterm. We've had a huge amount of market volatil volatility on the back of that.
You've been watching this intersection of politics and policy and markets for a long time. What's your take first of all on what this sea change in Congress will mean for the economy? for the economy.
I I I don't anticipate much of a change really because uh ne you mentioned when you started the deficits and debt and and the general macroeconomic situation and and and that will remain about the same because both it's a bipartisan deal that the deal is neither party is very interested about controlling government spending controlling deficits are controlling the debt.
We ask the experts closest to the real economy to make sense of it. The people who build, mine, and power real assets and put their own capital behind them. Then we connect the dots and tell you what it means for your money. Wealthon.
Getting back to the economy and the markets, the the deficit problem will get worse and worse.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- financial crisis risk
- stocks down 40%
- private credit exposure
- fed rates and inflation
- ten-year treasury yield above 5%
Companies and tickers mentioned
- Federal Reserve
Watch the episode
Watch “Steve Hanke Warns: A Financial Crisis Could Send Stocks Down 40%” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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