The genesis of my latest book, "A History of the United States in Five Crashes," was the realization that each of the five modern stock market crashes, beginning with the Panic of 1907 and ending with the Flash Crash of May 6, 2010, exhibit astonishing similarities that we should be alert for. This doesn't mean another crash is imminent. In fact, it's probably years off. But less than two years passed between the meltdown of 2008 and the Flash Crash of 2010 and another crash is inevitable while we hope it is far off.
The market always rallies strongly before a crash – this is easy to recognize. The other similarities are camouflaged by changing circumstances but include the appearance of some external catalyst – the San Francisco earthquake of 1906 led to the Panic of 1907 when the rebuilding of the financial capital of the western United States vacuumed up liquidity around the world – and the appearance of some new financial contraption that is poorly understood and untested under stress and which injects leverage into a system that is on the ragged edge of equilibrium, pushing it into chaos. In 1987, that contraption was portfolio insurance; in 2008 it was the alphabet soup of mortgage-backed securities; and in 2010 it was algorithmic trading.