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Hey everyone,
You've probably heard the classic investing advice: "Nobody can predict a crash."
It sounds smart. And honestly, it's mostly true—nobody knows exactly when markets will tank.
But here's the thing I learned digging into Jamie Dimon's risk management philosophy: while you can't predict the exact date of a crash, you can absolutely see when the conditions for one are building.
Think of it like weather. You can't tell someone "lightning will strike at 3:47 PM." But when you see dark clouds, humidity, and that weird green sky? You know a storm is coming.
Dimon—the CEO of JPMorgan Chase and the longest-serving bank CEO on Wall Street—has spent decades reading these financial "weather patterns." And he's identified six specific signals that show up before major market crashes.
Let me break them down.
Signal #1: Credit Markets Start Acting Weird
This is usually the first domino to fall.
Credit markets are where companies borrow money. When businesses can't get loans, or banks suddenly get picky about who they lend to, that's a red flag.
What to watch:
Banks tightening lending standards (they're getting nervous)
Corporate bond spreads widening (investors demanding higher returns for risk)
Businesses struggling to refinance their debt
Why it matters:
In 2006—two full years before the 2008 crash—subprime mortgage defaults were already spiking. Banks were quietly tightening their lending. But stocks kept going up, so nobody cared.
The credit market was screaming "danger" while the stock market was partying. Guess which one was right?
Signal #2: The Fed Is Tightening Too Fast
When the Federal Reserve raises interest rates aggressively, it's like slamming the brakes on a car going 80 mph. Eventually, something breaks.
What to watch:
Rapid rate hikes in a short period
The inverted yield curve (this is when short-term bonds pay MORE than long-term bonds—basically the market saying "the near future looks scarier than the distant future")
The Fed reducing its balance sheet aggressively
Why it matters:
Before the 2000 dotcom crash, the Fed raised rates from 4.75% to 6.5% specifically to cool down speculation. It worked—a little too well. The market crashed.
Rate hikes don't kill markets immediately. But they create stress that eventually shows up somewhere.
Signal #3: Valuations Are Detached From Reality
When stock prices get way ahead of what companies actually earn, you're basically standing on a house of cards.
What to watch:
High price-to-earnings (P/E) ratios
The Shiller P/E ratio (which smooths out short-term noise)
Certain sectors trading at crazy premiums compared to others
Why it matters:
During the dotcom bubble, tech stocks were trading at 100x or even 200x their earnings. People justified it with "this time is different" logic.
It wasn't different. When the bubble popped, the NASDAQ lost 78% of its value.
High valuations don't cause crashes by themselves. But they make the market fragile—vulnerable to even small disappointments.
Signal #4: Everyone's Borrowing Too Much
Leverage—borrowing money to invest—is like gasoline. It can make your returns explode. But it can also make your losses explode.
What to watch:
High margin debt (retail investors borrowing to buy stocks)
Companies with massive debt-to-earnings ratios
Complex financial products that hide leverage
Why it matters:
The 2008 crisis was fundamentally a leverage crisis. Investment banks were leveraged 30-to-1. That means for every $1 of actual capital, they'd borrowed $30.
When things went south, there was no cushion. They collapsed almost overnight.
If you see margin debt hitting record highs, that's not a sign of confidence—it's a sign of fragility.
Signal #5: Everyone Thinks They're a Genius
This one's more vibes than data, but it matters.
Market tops are often marked by a shift where speculation replaces analysis. Day trading explodes. Meme stocks go viral. Your Uber driver is giving stock tips.
What to watch:
Spikes in day trading volume
Record options activity (especially 0DTE options)
Low-quality companies going public at insane valuations
Everyone talking about "this time is different"
Why it matters:
Remember 2021? GameStop. AMC. SPACs raising billions for companies with no revenue. Crypto projects with dog logos worth more than established companies.
That level of speculation doesn't cause crashes directly. But it shows that prices have disconnected from fundamentals—and when reality shows up, it's not pretty.
Signal #6: Earnings Are Quietly Deteriorating
Stock prices can stay high even when business fundamentals weaken. But earnings eventually tell the truth.
What to watch:
Companies broadly lowering guidance
Profit margins getting squeezed
A gap between reported earnings and actual cash flow
Why it matters:
In 2007, financial firms started quietly reporting credit losses and cutting forecasts. The stock market ignored it for months.
Eventually, it couldn't anymore.
When you see earnings problems spreading across multiple sectors—not just one struggling company—that's when you should pay attention.
The Real Lesson: Watch for Clusters
Here's what Dimon emphasizes most: no single signal predicts a crash.
One warning sign? Could mean nothing.
Two or three? Worth watching closely.
Four or five lighting up at the same time? That's when historically devastating crashes have happened.
It's not about predicting the exact date. It's about recognizing when the probability of something bad has gone way up.
What Should You Actually Do With This?
If you start seeing multiple signals align:
Gradually reduce risk – You don't have to sell everything. But maybe trim some speculative positions.
Build your cash reserve – Cash feels boring when markets are ripping. It feels genius when they're crashing and you can buy cheap.
Focus on quality – Companies with strong balance sheets, real earnings, and low debt survive downturns. Speculative junk doesn't.
Don't try to time the exact top – Nobody gets this right consistently. The goal is to be more defensive when conditions are dangerous, not to nail the perfect exit.
The Bottom Line
You can't predict lightning. But you can read the weather.
Jamie Dimon has spent decades doing exactly that—not trying to call exact tops and bottoms, but recognizing when the conditions for a storm are building.
Right now, we're not seeing all six signals flashing red. But knowing what to watch for means you won't be caught completely off guard when the weather changes.
Stay curious,
Alex
Have questions about any of these signals? Reply to this email—I read everything.