I believe the recent global equity sell-off may have marked the beginning of a period of much greater volatility. If so, the possibility of some sort of violent financial crash cannot be ignored. The world has been flush with liquidity originating from the US trade deficit and the yen carry trade; this has encouraged extreme speculation in asset markets.

The present environment of indifference to risk rarely reverses in an orderly manner. Seemingly mild negative news could set off a positive feedback loop that drives investors to sell.

Here are some possible events which elicited little fear from investors in the recent past, but in the present environment could spook investors enough that they regain their appreciation for cautiousness:

• the introduction of capital or currency restrictions by some government in a major emerging market
• a financial accident in the subprime lending or derivatives market
• a major corporation declaring bankruptcy
• a large multi-billion dollar hedge fund blowing up
• a natural disaster
• the outbreak of a deadly disease
• an escalation of geopolitical tensions or a terrorist attack

My intention is not to scare people, but to warn investors of a higher than normal probability of significant near-term financial loss. I have prepared my portfolio by selling some of my gold stocks and shorting brokers, commodity producers and emerging markets. However, I wouldn’t recommend this strategy to others. The easiest way most people can protect their portfolios is by selling some of their assets and keeping cash and physical gold.