This week's credit market warnings from US Federal Reserve chairman Ben Bernanke, alongside the wipe-out of two Bear Stearns hedge funds, are the clearest signal yet of a potential financial market meltdown, arch-bear fund manager Ian Rush- brook told shareholders in his Personal Assets Trust yesterday.

Rushbrook told the trust's annual meeting in Edinburgh that over 40% of all US corporate profits were now being generated by the financial sector, which had created "an apparently perpetual motion credit machine" that could only end in disaster.

"The US mortgage industry, the investment banks, private equity and hedge funds all know what is happening and yet they carry on regardless."

Rushbrook said he had taken the trust from 50% to 60% liquid in the last few weeks, that equities were now 45% over-valued, and that the catalyst would be "a vulture glutting on sub-prime mortgages falling from its perch on a skyscraper in Wall Street".

However, on the £193m fund he admitted: "To our shame it hasn't happened yet Remarkably, to my chagrin, we are in the fourth year of a rising equity market, and despite continued rises in our net asset value, as you might expect, our relative performance has been pretty awful."

The trust is up 25.9% over three years against 50% for the all-share index, though it still looks good over seven years.

He also conceded: "We may be wrong for another 18 months, so we could look even more silly next year."

Rushbrook said the US sub-prime mortgage bubble was founded on the citizen's right to a 30-year mortgage, whether they could afford it or not.

A huge class of linked and apparently AAA-rated securities had sprung up, whose valuations were now beginning to crumble. As assets devalued, credit would have to be reined in, and the market would unravel without serious intervention by the Federal Reserve.

However, Rushbrook admitted that the trust's board had considered and rejected going 100% liquid, and he told one shareholder: "I think this is much bigger than the (1980s) savings and loans crisis but the result may not be nearly as bad as I think because the US government are going to have to bale it out."

Asked why the trust still held banks as key investments, Rushbrook said it had recently reduced its position in both Barclays and Royal Bank of Scotland. He said that a successful bid for ABN Amro would now only give Royal Bank institutional business in the US, "which is where I see the bulk of the risk in future".

He also revealed that the trust had sold Scottish Investment Trust and bought Alliance Trust in the expectation of a reduction in its much wider discount.

Sir Tom Farmer, a long-standing shareholder, commented afterwards: "I am delighted with the performance and I have absolute confidence in the board and Mr Rushbrook's attitude - there is nothing wrong with being cautious."