Something "bad" is brewing in the financial system - The 5 signs of economic collapse have appeared

Markets are on extremely unstable ground, according to Phoenix Capital Research. The S&P 500 index has failed to remain within the uptrend channel of the market. This happens when the index breaks below its trendline and then fails to recapture it during the subsequent rise. This is a SERIOUS warning, as it indicates that price levels that previously functioned as "support" are now acting as "resistance".

There are other indications that things are not well in the financial system, suggested by the behavior of the US dollar. Despite the fact that the US is running fiscal deficits equal to 6% of GDP and the Federal Reserve (Fed) is easing monetary conditions, the dollar remains stable and refuses to decline. Put simply, despite poor fundamentals, the dollar continues to strengthen. This is a strong signal that the market is seeking "safety" and that something is wrong in the financial system.

In plain terms, something "bad" appears to be brewing in the financial system.

Warning signs before the crash

"Stocks have reached a permanently high plateau." "Property prices never fall." "This time is different."

These are the confident statements that, time and again, have been heard right before market collapses. Market booms and busts are nothing new. From the Dutch tulip mania to the railway bubble, from the dot-com boom to memecoins, the story is the same: human psychology is vulnerable. We want to believe that there is such a thing as easy money. And yet, right now, Wall Street is saying: crash? What crash?

Since the tariff shock in April, US stock prices have surged by 25%, pushing the total market value relative to the economy—market capitalization as a percentage of GDP—to the highest level ever recorded. If there are economic difficulties, Wall Street seems not to have noticed.

The warning

However, there is a warning. Warren Buffett once said that a capitalization ratio of 70% was a good time to buy. Anything close to 200% signaled a "red" alert—as we saw in 1999 before the dot-com collapse and in 2007 before the financial crisis. 221% is quite high.

The question is, Are we repeating history? It has been a different year. Gold has reached historical highs. The dollar has fallen by 10%. There are real fears of stagflation and concerns about the long-term decline of the dollar. And yet, stocks continue to climb.

Why? Some argue that the rise reflects a larger money supply, untold wealth at the top, and rising inequality. Others say it's due to the new miracle technology: Artificial Intelligence. Silicon Valley prophets tell us that AI will transform productivity and increase GDP. But, might this be a bubble that is about to burst?

What happens before a crash?

New technology

One of the things that often happens before a crash is that people get excited about a new technology. New technology can cause a wave of speculation that drives values to incredible levels. At the end of the 1990s, many said that the Internet had revolutionized the rules of business, and that this time was different: companies with no profits—sometimes no products—were valued in the billions. And indeed, in 2000, the Nasdaq had lost almost 80% of its value. Although, of course, it recovers over time.

Complex financial products

It is not only the new technology. In 2006, real estate salespeople and bankers assured everyone that property prices would only go up. In the US, brokers were lending money to anyone who had a pulse. To enhance credit, new financial tools were created, such as credit default swaps and Collateralized Debt Obligations (CDOs). If you didn't understand them, that was the point. They managed to fool credit ratings and banks worldwide, which completely missed the bad credit hidden in the new products. Two years later, the global financial system was on the brink of collapse.

Regulatory gaps

The financial crisis was characterized by regulatory gaps. The new generation of financial tools arose from the deregulation of finance. In 2005, Alan Greenspan was congratulating himself on creating low inflation and high growth. But it was a case of missing the forest for the trees. You might think that such regulatory failure cannot happen again. After 2008, regulators introduced new rules for mortgages and bank lending. But, regulators usually fight the last war. Since 2008, new leverage tools have emerged—margin trading apps, complex derivatives, and cryptocurrency lending platforms. Memecoins are the ultimate symbol of bubble psychology.

Fear of missing out

From tulip mania to the housing market, when prices rise quickly, a fear of missing the opportunity is created. Even the rise in gold prices right now, some claim, causes people to buy gold who would not normally do so.

Debt growth

One of the major characteristics of financial bubbles is the role of debt in creating excessive growth. In the Southeast Asian crisis of 1997, Asian economies borrowed in the US dollar, and any depreciation of their currencies made the debt much more expensive.

What are we seeing now?

Many of these characteristics are present now. However, it is important to remember that the stock market is not the economy. And before a crash, there are usually several years of forecasts before it actually happens. Global economic growth is slowing, the AI miracle may prove to be more of a ghost, and governments face a real challenge due to the aging population and bloated fiscal deficits. Furthermore, the US government shutdown may be genuinely serious, indicating the potential for political division that makes it impossible to bring debt projections under control.

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