Every couple of years, somebody puts up a scary chart and announces that a market crash is coming. Then it doesn’t come, or it shows up half a year later for reasons unrelated to the chart.
So, I want to try something more useful. Something that’s not a prediction, because predictions are mostly coin flips with good lighting, and nobody goes back to check the ones that missed.
The point is that market crashes don’t have a date you can circle on the calendar. Instead, they have a shape. A structure that has stayed almost eerily consistent for four hundred years.
Historical patterns suggest that there are always four signs that show up before a big market crash, and they arrive in roughly the same order every time, just wearing different clothes. All four were sitting in a flower market in Holland in the 1630s, exactly the way they were sitting in the mortgage market in 2008.
So, I’m going to walk through all four of these signs. Three of them tell you when a market becomes fragile, and the fourth tells you how much damage the crash can cause. I’m going to walk through four crashes. One flower market, one Great Depression, one very bad Monday, and one housing bust. Then, I’ll take what I find and hold it up against the market as it looks right now, in 2026, with real numbers.
The Moment a Price Stops Meaning Anything
Let’s start in the Dutch Republic, and there’s a good reason for going back that far. The crash happened before computers, before Wall Street, and before anything you would recognize as a modern bank, so whatever caused it couldn’t have been any of those things. What it had was people.
The Dutch were fighting for their independence from Spain. They had also launched the East India Company and built what most historians call the world’s first real stock exchange, and money was pouring in faster than anyone knew what to do with it. Within a few decades of inventing the stock market, they unknowingly invented the market crash.
The center of it all was tulips. Yes, the flower. Tulips arrived in Holland in the late 1500s and became a status object almost immediately, which is easy to laugh at until you remember what people pay for handbags these days.
Anyway, the one variety of tulip everybody wanted was the Semper Augustus. It had white petals and red flame patterns running down them, and in the 1620s, there were maybe just a dozen of those tulip bulbs in the world. So, the early prices were steep without being excessive, because an actually rare thing costing a lot of money isn’t a bubble.
What changed, however, wasn’t the price of the tulips, but the plumbing underneath the market. In 1636, Dutch traders began buying and selling contracts for tulip bulbs still in the ground, with delivery months away. Essentially, that was a futures market, and futures markets are a completely normal part of today’s financial world.
To be clear, there was nothing reckless about the tool itself. However, it quietly took the actual flowers out of the deal. Sellers didn’t need a garden anymore, and they didn’t even need to know the first thing about growing tulips. Instead, they just needed a piece of paper and somebody willing to pay more for it than they had.
The contracts were traded so heavily that they reportedly changed hands at least 10 times a day in taverns. Many of the people trading them had never even seen the tulip bulbs behind the contracts. Anyway, contract prices were skyrocketing with demand, and the most sought-after varieties reportedly jumped more than tenfold.
In February 1637, a single Semper Augustus carried an asking price of around 5,500 guilders. For perspective, a skilled craftsman in Holland earned roughly 300 guilders a year back in the day. So, one flower had reached about eighteen years of a carpenter’s pay. Can you imagine that?
But the number was only the symptom. The more interesting part was that people were telling themselves why the number made sense. People justified the high prices by arguing that tulips reproduce, so even if prices fell, they’d still own a rare bulb that could produce more rare bulbs. Because, again, they reproduce. If the market busted, you would simply have to wait for the next boom. That was it.
Now, every bubble in history cooks up some version of that argument. I mean, people always find a reason to suspend the normal rules of what something is actually worth.
Alan Greenspan famously called that mindset “irrational exuberance.” In plainer terms, overconfidence sets in when you stop asking what an asset produces and start focusing on what the next guy will pay you for it.
Then, in February 1637, a tulip auction opened in Haarlem, and guess what? Nobody showed up to bid. Within days, prices had fallen by something like 90%, and the entire futures market went down with them.
So, the pattern to watch for isn’t optimism. Optimism is normal and healthy, and it’s how anybody makes money in the first place. What you should be watching for is the moment a price comes loose from anything the underlying asset actually does.
Regulation Shows Up at the Wrong Time
For the second market crash, let’s move about 280 years forward, to the 1920s, which were the site of a real technological boom.
Not long before, an order from Kansas would ride a train east for days. By the time it reached the New York Stock Exchange, the price had already moved. That was the slow-paced era of the stock market.
Telegraphs and then telephones cut those days of travel down to minutes. An order from Kansas could hit the floor of the New York Stock Exchange in minutes instead of days, and the mood was that the country had permanently figured something out.
Before the market crash, there had been a warning two decades earlier. In 1907, a botched attempt to corner the copper market brought down the Knickerbocker Trust. That was the third-largest trust company in New York. The bank runs that followed dragged the market to roughly 50% below its 1906 peak.
Theodore Roosevelt had spent years breaking up the great trusts, targeting real problems. But the reforms came after those institutions had grown large enough to shake the entire system.
Twenty-two years later, the failure ran the other way entirely. A product called the leveraged investment trust spread across the market through the 1920s. On the surface, it looked like an ordinary pooled fund. The difference was that these trusts borrowed money on top of whatever their investors put in, sometimes carrying $8 in debt for every $1 of real capital.
Goldman Sachs Trading Corporation sponsored a trust called Shenandoah, and Shenandoah sponsored one called Blue Ridge. So, investors ended up with a fund inside a fund inside a fund. By 1929, most of these traded above the value of the stocks they actually owned, because investors trusted the name on the door.
Regular buyers were leveraged too. Brokers were routinely lending small investors more than two-thirds of the value of whatever shares they bought. By the fall of 1929, total margin debt had surpassed $8.5 billion, more than the physical cash circulating in the country.
Washington wasn’t worried about any of this, because the economy looked terrific and a booming market had never been a problem any politician was in a hurry to fix. The confidence held up right until the market ran out of people willing to pay more.
The Dow peaked at 381.17 on the third of September 1929 and bottomed at 41.22 on the eighth of July in 1932. That was a drop of 89.2%, and it didn’t get back to that level until November 1954.
Well, the fix arrived after the damage was done. The Banking Act of 1933, better known as the Glass-Steagall Act, separated commercial banking from investment banking and created the FDIC, so ordinary depositors would be less likely to lose their savings when a bank made a bad decision.
So, this pattern is regulatory failure, and people keep getting it backward. The lesson from putting 1907 next to 1929 is not that regulation is bad. In 1907, the regulations showed up late and hard, while in 1929, they never showed up at all.
The danger sits at both ends. Watch the gap between how fast a market grows and how quickly regulators respond.
Innovation No One Fully Understands
Again, there are four major signs that a market crash is imminent. The first sign was market overconfidence, the second was regulatory failure, and the third is the hardest to spot among the four.
That’s because it doesn’t feel like a risk from the inside, but more like progress. And that is “innovation” that no one fully understands. Does that ring a bell? I’m sure it does.
Anyway, let’s go back to history again. The 1980s changed the character of Wall Street. Bankers went from being back-office paper-pushers to some of the richest people in the country, and the engine behind that shift was a new financial invention.
At that time, computers made it cheap and easy to design new financial instruments, and the banks that shipped the next big thing first locked in huge profits. The new innovation that defined that decade had quite a calming name. It was called “portfolio insurance.”
Two finance professors at Berkeley, Hayne Leland and Mark Rubinstein, developed it using principles from the Black-Scholes options pricing model. The idea was that, instead of buying a put option to protect a large portfolio, investors could recreate the protection synthetically.
As the market fell, a computer would sell stock-index futures for you, and as it rose, it would buy them back. It was like an automatic buy-and-sell feature. In theory, that puts a floor under the losses while leaving the upside alone. You can think of it as a seat belt for a pension fund.
Then, in October 1987, somewhere between $60 billion and $100 billion of institutional money was running on strategies like that. But the system became vulnerable if many funds followed the same strategy simultaneously.
That year, 1987, is also when you get to watch the patterns pile up on each other. Overconfidence was everywhere, largely because it was the golden age of the leveraged buyout.
For starters, a leveraged buyout is when a company is bought mostly with borrowed money, using the target’s own assets as collateral, meaning the debt falls on the acquired company itself, not the buyer. It was so rampant that the market developed a mania for guessing which company would get taken over next.
Market overconfidence had gone so far that a small-time investment adviser called the Dow Jones News Service and made a $6.8 billion offer for the retailer Dayton Hudson. Dow Jones ran the story, and the stock jumped roughly 17% on an offer that turned out to be completely empty.
At that point, investors stopped looking at companies’ actual value and started reacting to the stories about them. Meanwhile, regulators were doing almost nothing, because nobody at any agency had thought carefully about what would happen if all of these programs fired at once.
Then, a few months later, the market started drifting down, slowly and unremarkably. Guess what? The computers noticed, and they all began selling futures in small chunks, exactly as programmed.
Each of those sales pushed prices slightly lower, triggering additional selling by more funds. All of them were calibrated to the same index and reacted to one another without realizing it.
As a result, the Dow experienced a 22.6% drop in a single session, which remains the worst day in the index’s history and is nearly double the worst day of 1929. Roughly $500 billion in market value went up in smoke over about six and a half hours. In today’s money, that’s closer to $1.5 trillion.
On the floor, one specialist faced a crowd holding half a million shares of a single stock, all of them for sale, with no bid on the other side. No buyers at a discount. No buyers at all.
The Brady Commission investigated the crash and concluded that portfolio insurance and related trading strategies intensified the market’s decline, even though they weren’t its sole cause. That was the whole lesson. The models assumed that sellers could always find buyers.
So, at a high level, the third pattern is when everyone gets excited about a new innovation that no one fully understands. What are the downsides and long-term consequences? What happens when everyone starts using it?
The Debt Decides How Bad It Gets
The first three patterns tell you that a market has become unstable. The fourth one, however, tells you what happens to ordinary people when it finally gives way.
The easiest way to see it is to ask who is doing the selling on the way down.
Someone who bought with their own money can afford to wait through a bad year. Someone who borrowed money can’t, because the lender makes that choice for them. And lenders tend to want their money back at precisely the worst moment.
That difference is what separates a market that simply dips from one that completely collapses. It’s the difference between those who can wait and those who can’t.
Let’s go back to the tulips for a bit. When historians go through what survives of the Dutch court records, the wreckage turns out to be much thinner than the legend suggests, because what collapsed were mostly contracts between merchants only, or promises to “buy” that had never actually been settled.
The courts just spent a few years working out who owed what to whom, and in the meantime, the Dutch economy carried on more or less as before. So, although the tulip bubble popped, only a fraction of the entire economy went down with it.
Now, let’s compare that to what happened after 2007. The setup began with the previous crash, the dot-com bubble of the 1990s. Money left tech stocks after the bust and went looking for something “safer” to sit in, and real estate looked like the ideal place available.
So, demand for mortgage exposure emerged, and the banking system immediately built a framework to supply it. Banks issued loans, pooled them, and sold them as mortgage-backed securities and collateralized debt obligations. Yes, a new innovation that no one fully understood.
And this is where lending changed. Once a loan gets sold a few weeks after signing, the bank answers to the investor holding the paper, and that investor can’t walk through the kitchen for an inspection or check whether the family can really afford the place.
Not a single politician or regulator stepped in, because the boom looked like success. Homeownership was a goal both parties shared; the Federal Reserve kept rates low through the middle of the decade; and everyone in the chain was getting paid. More importantly, no one was getting paid to stop it.
The line people used to justify it was that home prices had not fallen nationwide in the available postwar data, which was treated as reassuring but ignored the unprecedented deterioration in lending standards.
In September 2008, Lehman Brothers filed for bankruptcy, the largest filing the country had ever recorded. The firm opened its doors in the 1850s and lived through every mess America produced for the next 158 years.
What finished it was leverage of roughly 30-to-1, meaning that a decline of slightly more than 3% in the value of its holdings could have been enough to wipe out its equity.
The bill showed up late. Nearly 4 in 10 subprime adjustable loans were seriously delinquent by early 2009, unemployment climbed to 10%, and 2010 brought foreclosure filings on 2.87 million properties.
So, the tulips cost some merchants their profits, and 2008 cost families their homes. Debt is the multiplier. I watch this one more closely than the other three because the other three tell you the market is shaky, but this one tells you how much of your life is sitting on top of it.
The Questions to Ask the Market Right Now
No one walks into a bubble knowing what it is. Everyone in these market crashes had justifications at the time. So, let’s line up those four patterns against the market sitting in front of us now in 2026.
The first question is about overconfidence. Are people paying for what a company earns, or for what somebody else might pay next week?
One way to check is the Shiller CAPE ratio. That’s a yardstick maintained by Yale economist Robert Shiller, and it stacks today’s stock prices against the last ten years of company profits with inflation stripped out. It reads about 40.9 right now. The long-run median is about 16, and the highest it has ever gone is 44.2, back in December 1999.
The way people trade says the same thing. Nearly half of the retail options volume executed by Citadel Securities now consists of contracts expiring on the day they’re traded, up from about 30% in 2025 and 13% in 2021. You see, a contract that dies at the closing bell tells you nothing about a business, only about a bet in the afternoon.
The second question is about the guardrails in place. Is a young market running loose with no one watching, or are new regulations landing hard on markets that can’t take them?
Now, regulation is loosening. The Securities and Exchange Commission included a proposal in its 2026 regulatory agenda to facilitate retail participation in private markets.
The Labor Department followed in March, proposing rules that would make it easier for 401(k) plans to include alternative assets.
Money has also poured into semiliquid funds, which sell ordinary investors a slice of companies that aren’t publicly traded and let you cash out only on a schedule. That pile has grown 120% in four years to nearly $600 billion.
This feels like the 1929 investment trust coming back around, except it’s now being sold as democratization. Signs of strain have already emerged in retail private-market vehicles, where redemption limits can prevent investors from withdrawing all the money they request.
The third question is about innovation, and this might get a bit sensitive. Right now, roughly $3 trillion in AI data centers are going up, and more of it is being financed with borrowed money rather than profits.
AI companies reportedly took on at least $200 billion in new debt in 2025, and one widely cited estimate puts the industry’s financing needs at about $1.5 trillion by 2028.
Plenty of that borrowing sits inside separate companies, so it never shows up on the parent’s books. Some of it is secured by chips themselves, and chips go stale faster than the loans get paid off.
Now, chip makers invest in cloud companies, and cloud companies spend that money on chips. That sounds like the telecom bubble, when network equipment makers lent their own customers the cash to buy the equipment.
The Bank for International Settlements, which is a sort of central bank for central banks, highlighted the sustainability and opacity of AI financing as a major financial vulnerability in its 2026 annual report, including the circular financing links among chipmakers, hyperscalers, AI labs, and neocloud providers.
The fourth question is about the debt. Margin debt is money investors borrow from their broker to buy more stock. It hit a record $1.50 trillion in June 2026, up 49% from a year earlier.
Growth like that has occurred three times since these records began in 1997, including late 1999, the middle of 2007, and the spring of 2021. Today, margin debt is near 4% of GDP, while the 50-year normal is closer to 1.5%.
Final Thoughts
So, here’s where I land, and it might surprise you after everything we just walked through.
I’m still bullish, not because I ignore the warning signs, but because being early is the same as being wrong. People who called the top in 1996 were technically right and practically broke, because the market ran for another three years before it cared about their opinion.
More importantly, say you see the crash coming, sell everything, and now sit on a pile of cash. You might feel like a genius, but ask yourself: What usually follows a market crash? Government panic.
Yes, they cut rates, they print, and they stimulate, which means inflation shows up to the afterparty. And now, that pile of cash you’re so proud of buys a little less every single day.
The point is that selling isn’t a shelter. In a market crash, it’s just a different way of losing money, with extra steps, and worse, taxes and paperwork. Those who actually get wrecked in a crash are the ones using borrowed money, or in this case, owning highly leveraged companies.
The best thing to do is to own real things, owe as little as possible, and keep enough cash that nobody can force your hand. Do that, and a market crash starts looking like a sale.
Remember, the market doesn’t reward people who predict the storm, but those who are still standing after it.
