In my post on July 28, 2013 "Early and Wrong?" I wrote :
When central bankers and central planners meddle in financial markets and market economies (or quasi market economies) they pervert the price discovery mechanism and distort the risk and liquidity premiums that are fundamental to the efficient allocation of capital and resources. In the near term interventionist policies can alleviate some pain or create apparently favorable market conditions (QE induced rallies) but in the longer term these policies create complacency at the cost of superficial and incomplete analysis of underlying micro and macroeconomic activity and risks.
I'll speculate that fundamentals eventually will matter again and when they do it will be imperative to have estimated how much systemic risk, because of the mispricing of risk, has been created by manipulative policy. Start your (independent) analysis early. Where are we? How did we get here? Under which conditions are the current risk premiums and valuations sustainable? And most importantly how much can I lose if I'm late to the party and wrong?
Forget about looking for a catalyst to explain what we saw in world financial markets in the month of January, it's really not that important. Unstable and unsustainable conditions create corrections and dislocations in financial markets, much like avalanches are inevitably created not by the the skier but by the amount of snow on the slope and the climatic conditions preceding the event.
Don't look for the next skier. Have conditions changed enough to alleviate the disequilibrium / distortions in valuations and risk premiums, the excess leverage and the overconfidence in markets? I'm preserving capital and thinking about the reversal of the flows of the past five years that brought us to these conditions. Is it possible that what was erected in five years (malinvestments) can be demolished in five weeks? Perhaps, but I can't know that and I'm not betting on it.
