Yesterday (June 27, 2025), the S&P 500 closed at a record 6,173.07. Financial networks celebrated. Analysts pumped out AI supercycle narratives. The Fed’s dovish tone (or at least the guarantee that Powell’s successor will be dovish) added fuel. There was even cautious optimism around the recent ceasefire between Israel and Iran.
Sure, the surface looks strong—until you look at the structure beneath.
The war in Ukraine is still raging. April’s tariffs rattled the bond market, and yields haven’t fully recovered. The U.S. deficit is about to explode if the “One Big Beautiful Bill” passes. And valuations are sprinting far ahead of fundamentals.
This isn’t confidence. It’s fragility wearing a mask.
Crashes Don’t Come Out of Nowhere
Most people think market crashes are caused by shocks—wars, recessions, elections, scandals. Something bad happens, and the market reacts.
But that’s not how it works. Not really.
Crashes are endogenous. They’re the end result of pressure that’s been building inside the system for months, sometimes years. Like tectonic plates or snow-covered slopes, the tension builds quietly—until something gives.
The problem is never the last straw. It’s everything that came before it.
The Physicist Who Saw It Coming
This idea—that markets break from within—was put under a microscope by a physicist named Didier Sornette.
Sornette isn’t your typical financial theorist. His background is in seismology, physics, and complexity science. He’s studied how earthquakes build, how materials fracture, and how systems tip from stability to collapse. And in the early 2000s, he turned that lens on financial markets.
His central idea: markets behave like natural systems on the verge of catastrophe. They show stress, patterns, and precursors. Crashes don’t “just happen.” They follow a structure.
In his landmark book, Why Stock Markets Crash: Critical Events in Complex Financial Systems, Sornette lays out a model to describe this process: the Log-Periodic Power Law, or LPPL.
The LPPL: A Crash with a Rhythm
The LPPL model is deceptively simple—and powerful. Here’s what it shows:
Bubbles grow faster than exponentially: Price increases begin slowly but speed up over time.
They wobble as they rise: The market experiences increasingly frequent oscillations—ups and downs that get tighter and more volatile.
They reach a “critical point”: Like a fault line before an earthquake, a crash becomes mathematically inevitable—even if we don’t know the exact timing.
This combination of accelerating price growth and narrowing oscillations creates a distinct pattern. And if you know what to look for, you can see it coming.
A History of Red Flags
Sornette and his team have used this model to detect patterns before several historical crashes:
1929: The Great Depression wasn’t triggered by one event—it followed a parabolic price rise and widespread overconfidence.
1987: The infamous Black Monday crash was preceded by the same LPPL-style tightening volatility.
1997: The Asian financial crisis followed log-periodic oscillations in Hong Kong and other markets.
2000: The dot-com bubble burst precisely along the lines Sornette’s model predicted.
His analysis even successfully predicted the 2007–2008 crash in Chinese markets and the U.S. housing bubble. In June 2005—three years before Lehman Brothers fell—he published a paper identifying a real estate bubble building in the U.S., forecasting a collapse by 2006–2007.
These aren’t cherry-picked. In fact, a summary table of 10 crashes shows consistent parameters—same acceleration patterns, same scale invariance, same LPPL fingerprints.
The Market in 2025 Is Singing the Same Tune
Fast-forward to today, and Sornette’s model should make us very nervous.
Prices are rising fast—especially in AI and mega-cap tech. Retail and institutional investors are piling in. Everyone knows it’s a bubble. But everyone’s riding it anyway.
That’s the first sign.
Then comes the narrowing volatility. Swings are getting sharper and more frequent. A sign that internal stress is peaking. The LPPL pattern is forming.
Finally, sentiment turns dogmatic. “This time is different.” That’s when the system is most vulnerable.
And right now, we’re there.
The Big Beautiful Bill: A Dangerous Catalyst
Now layer fiscal policy into the mix.
The “One Big Beautiful Bill” (OBBBA) isn’t just bold—it’s reckless. And it’s set to pass at a time when the market can least afford another distortion.
This sweeping legislative package—crafted and backed by the Trump administration—combines three politically popular ingredients: deep tax cuts, expansive new spending on defense and border security, and structural entitlement reforms meant to signal long-term seriousness.
But strip away the politics and look at the numbers, and what you get is one of the most aggressive fiscal expansions in recent history.
Deficit Risk at a Glance:
House version: Estimated to increase the federal deficit by $2.4 to $2.8 trillion over ten years.
Senate version: Tacks on even more, pushing potential debt additions to $4.5 trillion once interest payments are factored in.
White House position: Projects the bill will pay for itself through faster GDP growth and increased tariff revenue.
Independent estimates: Widely skeptical. Most mainstream economists argue the growth projections are overly rosy and that tariff revenues are too volatile and politically fragile to be reliable offsets.
But the real issue isn’t the bill’s existence—it’s the timing.
When rates are low, deficits are painful but manageable. But in a market like 2025, with bond yields already volatile and confidence in U.S. Treasury issuance under stress, this kind of fiscal jolt doesn’t stimulate—it destabilizes.
Debt isn't just a number. It's a signal. It communicates to investors—especially foreign creditors—how much strain a system is under. And if the U.S. pushes through a bill this large with no credible repayment path, it sends a very loud message to global bond markets: the U.S. is prioritizing politics over fiscal reality.
That’s not just a red flag. It’s a flare over a dry forest.
The Compounding Risk of Policy Euphoria
Part of what makes OBBBA so dangerous is how it feeds into the existing market psychology.
Right now, equity investors are already high on:
Rate-cut optimism (some of it speculative, tied to Powell possibly being replaced)
AI-fueled growth narratives (especially in a handful of mega-cap tech names)
Temporary geopolitical relief (from ceasefires that haven’t yet held)
The bill adds one more layer of feel-good energy. More stimulus. More cash. More growth expectations.
But what markets often forget—until it’s too late—is that fiscal policy has a cost. And if that cost shows up in the form of higher bond yields, investor skepticism, or credit rating downgrades, the music can stop fast.
That’s especially true when Treasury issuance is already at record highs, and foreign buyers are showing signs of fatigue.
You don’t throw weight on a cracking bridge.
But that’s exactly what this bill does.
The Trigger Isn’t the Cause
If a crash happens soon, people will blame the headline. They’ll say it was:
A Fed rate surprise
Another war in the Middle East
A botched bill
A tech stock stumble
But the real cause will be deeper. Structural. Internal.
Markets don’t fall apart from a push. They fall apart because they’re brittle. And today’s market is showing all the warning signs.
Why Complexity Theory Matters
Sornette’s work doesn’t just apply to markets. It comes from a broader field: complex systems theory.
These are systems where many small parts interact in unpredictable ways—like neurons, earthquakes, ecosystems… or financial markets.
When these systems hit their limits, they don’t fail gradually. They snap.
And in markets, that snap shows up as a crash.
It’s the result of endogenous risk—stress that builds inside the system, not because of a single event but because of how people behave:
Feedback loops
Herding
Speculation
Narrative over data
That’s why understanding this model matters. It teaches us to look under the surface.
What to Watch for Now
So what are the signs we should keep an eye on? Here are some of the key signals that suggest mounting systemic risk:
Parabolic price moves
Unnatural, faster-than-exponential growth—often driven by speculation, not fundamentals.
Tightening volatility
Oscillations get sharper and more frequent, indicating rising internal stress.
AI/Tech concentration
Overreliance on a narrow leadership group makes the entire market more fragile.
Retail/institutional herding
Crowd behavior replaces independent analysis, pushing valuations even higher.
Narrative dominance
Feel-good stories override sober financial assessments.
Ballooning public debt
Adds pressure to an already unstable system—especially dangerous when rates are elevated.
These aren’t predictions. They’re risk indicators.
They tell us how fragile the system really is.
Don’t Wait for the Earthquake to Ask About the Fault Line
Market crashes are rarely surprises. Not to those paying attention.
They’re the result of structures pushed too far, for too long. They’re the final chapter in a story that began years earlier—with momentum chasing, policy excess, and belief outrunning reality.
Didier Sornette gave us a way to read the patterns. To identify the signals. To prepare.
That doesn’t mean you can time it perfectly. But it does mean you don’t have to be blindsided.
So ask yourself:
Are we climbing?
Or are we wobbling near the edge?
Because if you’re only watching the headlines, you’ll miss the quake until the floor drops out from under you.
Thanks so much. I'm 250 pages through Didier's book. The math is pretty heavy, so I appreciate your summary!