My second point is that “ignoring derivatives” makes zero sense to me. The fact is that increased leverage increases risk at an increasingly exponential rate. Yes in theory a reasonable level of derivatives leverage would reduce systemic risk as risk is hedged more efficiently. However, we passed that sign on the road many exits back. The global EXPLOSION in derivatives growth over the past 3 years has likely increased systemic risks massively. We likely to see many weird market developments as over-leveraged players unwind positions due to forced selling. The recent quant fund debacle is just the tip of the iceberg in my opinion.

Personally, I think the mosaic is fairly simple at this point – the timing of the emergence of the rest of the iceberg is what is extremely uncertain. Credit creation has exploded globally outside of the direct control of central banks and derivatives have been the tools of ignorance. This will be the epicenter of the eventual unwind in my opinion and to ignore it is to ignore one of the most critical variables in the marketplace.