The Warning Signs Before Every Market Crash

[00:00] Market bubbles and their crashes always begin  with an opportunity. Some of history's worst   investments began with ideas that changed  the world. Railways transform transport. The   internet built during the com bubble transformed  well pretty much everything. So real opportunity  

[00:15] attracts money and we get rising prices. Rising  prices attract speculation. Speculation attracts   leverage. And eventually when everyone becomes  so convinced that the prices will only rise,   the whole thing starts falling apart right  in front of their eyes. So, in this video,  

[00:30] we're going to take a look at some of the biggest  bubbles and financial crashes in history. Explain   how some of the smartest people in the world got  caught up in them and the warning signs they all   shared so you can spot the next financial bubble,  possibly even this one, before it's too late. My  

[00:46] name is DC and you're watching the Coin Bureau.  Let's start by traveling back in time to the 1600s   and look at one of the earliest well-known bubbles  in the Dutch Republic. Back then, the must-h have   luxury item wasn't a sports car or a designer  watch. It was a flower. Tulips arrived in Europe  

[01:04] from the Ottoman Empire and rapidly became symbols  of wealth and sophistication. Some rare varieties   of the flower had unusual streaks and patterns  which were considered even more valuable. So,   prices started rising quickly because supplying  was limited and demand was growing. And boom,  

[01:20] the beautiful flower caught the eye of investors.  Now, of course, they never cared about gardening.   They were focused on one thing and one thing  alone, making money. Thus, the tulip mania was   born and finance discovered its favorite hobby.  Turning something simple into something nobody  

[01:35] can explain at dinner. It started with traders  buying and selling contracts for bulbs that were   still underground. And people started effectively  speculating on flowers they had not seen and in   some cases would never personally receive. To be  fair, it's not like it destroyed the entire Dutch  

[01:51] economy. People weren't trading their homes for  one bulb. When prices reached absurd levels, the   market ran out of greater fools and then buyers  suddenly disappeared. A lot of crazy stories  

[02:03] circulate about the tulip mania and most of them  are exaggerated for a dramatic effect, but there's   no mistaking that people went crazy for nothing  more than a flower. Now, let's head west and   fast forward to 1720. The South Sea Company helped  manage government debt and held trading privileges  

[02:19] which were connected to South America. This  was a loaded operation with political backing,   royal connections, and a story which involves  access to distant markets supposedly filled with   riches. But the actual trading prospects didn't  turn out to be as impressive as the promotional  

[02:35] story suggested. Nevertheless, the share price  still increased because official support made   the company look safe, and its overseas ambitions  made it sound enormously profitable. At around the   same time back in Europe, France was going through  something similar with the Mississippi Company.  

[02:51] John Law created a financial system which involved  paper money, government debt, and shares tied to   grand promises about France's territories in North  America. Rising prices seemed to prove the scheme   was working as more money entered circulation and  share prices just kept going up. And eventually,  

[03:07] confidence collapsed once the investors questioned  whether the profits that were promised could ever   justify those prices. This brought the whole  scheme crashing. Now, despite relying on these   different stories, tulips, the South Sea Company,  and the Mississippi Company had ingredients that  

[03:22] were remarkably similar. Scarcity, incredible  promises, respected backers, and rising prices   that made skepticism look foolish. And that is  what makes bubbles dangerous. From the outside,  

[03:34] they often look absurd, but from the inside,  they feel like rare opportunities that everyone   else has finally learned to recognize. A century  after the South Sea bubble, Britain encountered   an opportunity that was far more tangible. Steam  railways. Railways were revolutionary around the  

[03:51] mid 19th century. They could move people and goods  faster than horses or canels. It could connect   industrial cities and completely reshape trade.  The network in Britain was rapidly expanded after   the Liverpool and Manchester Railway proved that  passenger travel could be commercially viable.  

[04:08] So by the early 1840s, established railway  companies were producing respectable returns   and naturally investors concluded that if some  railways were successful, then almost any railway   proposal must be worth funding. So the parliament  authorized thousands of miles of railway tracks,  

[04:24] mostly on the basis of extremely optimistic  projections. And now, as we all know, constructing   a railway track isn't cheap. It requires an  enormous enormous amount of iron, labor, land,   and capital. So initially investors had to pay  only a part of the cost of their shares. But  

[04:40] little did they know railway companies could  later demand the rest of the cost as well. And   once those calls arrived, many investors realized  that enthusiasm was much cheaper than actually   building a railway track. Mounting construction  costs and tighter credit brought this boom to an  

[04:55] end by 1847. Railway shares fell heavily after  many proposed lines were abandoned and weaker   companies failed to deliver. Even routes that  were complete sometimes struggled because several   companies built competing lines to serve the same  journeys. But there's a plot twist. Britain's  

[05:11] economy transformed for the better because during  all this chaos, they now had a railway network.   Even though many of the investments failed, the  technology ultimately succeeded. You see, there   is no shortage of strange bubbles, spectacular  crashes, and expensive lessons to explore. So,  

[05:27] if you enjoy this kind of deeper look at markets  and the forces moving the global financial system,   then head over to our Finance Bureau channel and  subscribe. That's where we unpack all manner of   economic stories and dive deep into current  macro trends so you're always informed on the  

[05:41] stuff that matters most for your portfolio. You  can find Finance Bureau using the link in the   description or by scanning the QR code on screen.  Okay, let's move on from the railway mania and   drive into the 20th century. By the late 1920s,  the United States was enjoying what appeared to  

[05:58] be a new age of permanent prosperity. The stock  market seemed to offer ordinary Americans a front   row seat to the future. Corporate profits were  rising and consumer credit was expanding. But the  

[06:10] excitement turned to greed real fast and blurred  the vision of most investors who thought that   share prices would rise forever. A major source  of fuel during this time was margin borrowing,   which means that instead of paying the full price  for shares, investors could put down a relatively  

[06:25] small amount and borrow the rest from a broker.  When prices rose, this multiplied the profits.   When prices fell, it performed the same trick, but  in reverse, which was considerably less fun. So,  

[06:37] rising prices encouraged more borrowing and more  borrowed money pushed prices even higher. And it   all became a vicious cycle in which the market's  success appeared to justify the behavior which   made it increasingly fragile. But then came Black  Thursday, the day when confidence broke. On the  

[06:53] 24th October 1929, a wave of selling overwhelmed  the market. Bankers briefly restored calm by   organizing large share purchases, but this  relief did not last long. The following week,   prices collapsed again because investors  rushed to sell in large numbers and trading  

[07:09] systems struggled to keep up. and leverage made  everything even worse. As share prices fell,   brokers demanded additional money from investors  whose collateral started to disappear. Those who   could not pay were simply forced to sell. This  was like a domino effect that pushed prices  

[07:24] down further and triggered more margin calls and  more force selling. And of course, it ultimately   dragged down the entire American economy. Banks,  farms, property markets, and heavily inepted   businesses were all vulnerable, which led to what  we call the Great Depression. The stock market  

[07:39] crash damaged confidence and exposed economic  weakness that would plague people for generations.   50 years later, this time in East Asia, Japan  looked unstoppable. By the 1980s, Japanese   manufacturers dominated industries ranging from  cars to electronics, helping the country's economy  

[07:56] grow rapidly. Investors even started to believe  that Japanese companies might have discovered   some superior way of doing business. Suddenly,  confidence bloomed in both the stock and property   markets. Cheap credit and aggressive lending made  it easier for businesses and investors to borrow,  

[08:12] while the rising land prices gave banks  increasingly valuable collateral against,   which they could make even larger loans. And so, a  powerful loop was created because now owners could   borrow more against their property as land prices  rose. And at the height of this boom, Japanese  

[08:27] property attracted almost mythical valuations.  The NIK climbed from below 7,000 at the beginning   of the decade to nearly 39,000 by the end of 1989.  Quite the performance. Now, if you think about it,  

[08:40] this boom was entirely dependent on continually  rising asset prices and plentiful credit. And so,   this financial party was disrupted because stocks  began falling in 1980 after the Bank of Japan   tightened its monetary policy. This also caused  the property market to fall soon after inevitably.  

[08:57] disappointed shareholders, bad debt for lenders,  and the falling property market weakened the   collateral which supported the bank loans.  So instead of investing, hiring or expanding,   companies that borrowed heavily during the boom  then had to spend years paying off what they  

[09:11] owed. Pure chaos. The crash in Japan happened  relatively quickly, but repairing the balance   sheets underneath it took far longer. The Nikkay  would not exceed its bubble era record again until  

[09:23] 2024, over 34 years later. And as it happens,  just a couple of years after this fiasco came   the internet. By the mid 1990s, the internet  was moving from universities and government  

[09:35] offices into ordinary homes. Suddenly, there  was a way for people to communicate, to shop,   read the news, and even build businesses online.  This technology was going to transform society   as we know it. Obviously, without waiting  for this technology to evolve, investors  

[09:51] again became slightly overexited. And just as  expected, money started pouring into internet   companies. Startups discovered that adding the.com  to their names would attract investors even more,  

[10:03] even if they had no defined path to profitability.  Revenue was good and profits were a bonus. But   despite what history taught us, rapid growth was  again treated as the most important number. Often   with limited operating histories and enormous  projected markets, a lot of companies rushed to  

[10:20] list on the stock market. Everyone ran for the  internet spotlight. Traditional measures such   as earnings were considered a thing of the past.  Suddenly, investors started valuing businesses   that were using website visits. Customer  numbers or simply the possibility that they  

[10:34] might dominate a completely new industry. It was  all to play for. Now, this excitement also led   to the funding of something real. During this  time, telecommunications companies laid fiber   optic cables and businesses developed online  services which made consumers increasingly  

[10:50] comfortable using the internet. However, this  infrastructure did not mean every company deserved   a billion dollar valuation, right? But this was  only the time when things were starting to get   interesting. AOL's agreement to acquire Time  Warner in January 2000 captured the height of  

[11:06] euphoria at that time perfectly. Who could have  thought that an internet company was going to   swallow one of the world's largest traditional  media groups? Nobody. Of course, in hindsight,   this was a clear warning that the bubble was  about to burst. And just a couple of months later,  

[11:21] in March 2000, NASDAQ peaked. Funding dried up  once investors began demanding profits rather   than promises. And many companies discovered  that there was a difference between attracting   users and building a sustainable business. Most  of the era celebrated.com names disappeared as  

[11:36] share prices collapsed and startups ran  out of cash. Now despite all of this,   the internet itself did not disappear just like  the railways stand to this day. Both serving   humanity. Companies such as Amazon managed to  survive and new consumer habits for the internet  

[11:51] developed during this boom. Businesses decided  to build enormous industries on the networks.   The investors were right about the technology,  of course, but predicting the financial future   correctly is never straightforward. There are  way too many variables and a heap of economic  

[12:06] and technological evolution that can take everyone  by surprise. Now, another one most of you probably   lived through is the housing bubble. Before  2008, rates were low, mortgages were easy to get,   and home prices had been climbing for years.  Naturally, buyers believed that property would  

[12:22] simply keep going up forever. Lenders assumed that  even struggling borrowers could just refinance or   sell at a profit. So, banks started handing out  loans to people who actually couldn't afford   them. Some of these loans started with a low  rate that jumped higher a couple of years in,  

[12:36] and that was fine as long as prices kept  rising. But once prices stopped climbing,   the free trial ended, so to speak, and the  subscription was extremely expensive. Banks   took thousands of these mortgages, bundled them  all together, and sold them off to investors as  

[12:51] securities. Some labeled safe, some labeled risky,  which basically meant the bank that made the loan   didn't have to care anymore whether it ever got  paid back because it wasn't their problem. And   that bundle got repackaged again into something  even more complicated and some still got stamped  

[13:07] as safe. Now, on top of that, banks borrowed  huge amounts of money to bet even bigger using   very little of their own cash. And for a while,  it worked. Payments kept coming in. Everyone   made money. Everyone got rich. But eventually home  prices started falling. People couldn't refinance  

[13:23] anymore. Monthly payments jumped and more and  more people just stopped paying. So banks stopped   trusting each other. Be sterns went under. Fanny  May and Freddy Mack needed a government bailout.   And in September 2008, Lehman Brothers collapsed.  Credit froze. Stocks crashed. And governments  

[13:39] had to step in because a housing problem had  ultimately turned into a full-blown banking   crisis. This crisis showed that securitization  did not remove mortgage risk. Instead, it only   hit and spread it while heavy borrowing made  the losses much worse around the world. Okay,  

[13:54] let's bring all of these lessons into the now.  And here's where it gets truly interesting.   Because if you were paying attention to every  story of a bubble I just covered, you probably   noticed something. Crypto and AI might feel like a  highlight reel of every single bubble playing out  

[14:09] at once. Starting with tulips. Remember the deal?  People buying contracts on bulbs still underground   priced on nothing but the belief that someone  else would pay more tomorrow. Are these meme   coins? Are these NFTts? A token with a dog on it  backed by no revenue, no product, no cash flow,  

[14:25] just a chart in the hope that somebody else shows  up after you did. But when the buyer stop coming,   there is no flower left to sell. Just a ticker  or an image of an animal. Remember the South   Sea Company? a venture that looked safe because  it had powerful backers in an official story,  

[14:40] even though the actual numbers never justified  the price. Crypto has had plenty of these projects   that rallied hard the moment a big exchange  listed them or a well-known name backed them   or a government hinted at approval. The backing  made people stop asking whether the fundamentals  

[14:55] were ever there to begin with. And do you remember  the railways? Real technology wildly overbuilt.   Most of the companies that built it went broke  and the tracks got used for a century anyway.   That's the blockchain infrastructure argument.  Thousands of tokens and chains have launched.  

[15:10] Most of them will disappear completely, but the  ones still running through every crash so far,   the mining, the settlement, the actual rails keep  getting used regardless of what the price is doing   that week. Remember 1929, leverage that multiplies  your gains on the way up and then forces you to  

[15:26] sell on the way down. Crypto didn't just inherit  that lesson, it automated it. Perpetual futures,   margin trading, leverage tokens. When prices  drop, exchanges liquidate positions automatically,   which pushes prices down further, which triggers  more liquidations. The 1929 margin call became a  

[15:43] piece of code that runs itself 24 hours a day. And  do you remember Japan? Rising collateral values,   letting people borrow more, which pushed prices  higher, which let them borrow even more. That   loop has shown up inside crypto directly. people  borrowing against their coins to buy more coins,  

[16:00] using the new coins as collateral for the next  coins. It works exactly as well as it worked   in Tokyo in 1989, right up until the collateral  stopped rising. And the securitization lesson,   the one that took down the banking system in  2008, wrapping risk into products so complex  

[16:17] that almost nobody holding them fully understands  what's underneath. DeFi might have built its own   version of this. yield products stacked on other  yield products, tokens that represent other   tokens collateral borrowed against collateral. It  spreads the risk the same way mortgage bonds did,  

[16:32] which means it may or may not hide the risk  the same way mortgage bonds did. And now to AI,   genuinely transformative. Nobody's arguing  otherwise, exactly like the internet in 1999.   But the same pattern, is it not? Companies get  funded on user growth and total addressable market  

[16:48] instead of profit. Anything with the letters AI  attached gets a premium. the same way anything   with.com attached once did. Some of what's being  built right now will become this cycle's Amazon,   but most of it will disappear the way pets.com  did. And right now, nobody can tell you with  

[17:04] certainty which is which. So, is Bitcoin the  railway? Are memecoins the tulips? Is.ai the   new.com? And is DeFi rebuilding 2008 with better  branding? Maybe all of it. Maybe none of it.  

[17:17] Every asset in this list has true believers  who will tell you this time is different.   But history has a long undefeated record  of proving that phrase wrong. And that's   the point of this video, to give you perspective.  The most important question isn't which category  

[17:32] any of this falls into. It's whether you'd  actually recognize the warning signs from   everything I just walked you through while you're  standing inside of it. But what do you think? Are   financial bubbles just an unavoidable part of  markets? Are we experiencing one today? Please  

[17:47] get highly opinionated in the comments and let us  know what you think. And if you want to see more   videos on financial history, market crashes,  and the forces shaping the global economy,   then head over to the Finance Bureau channel  and check out our latest video right over here.  

[18:02] As always, thanks so much for watching and I'll  see you again very soon. This is DC signing off.