When asked why evil exists in the world, the Indian saint Ramakrishna answered: “To thicken the plot.” Well, volatility plays a similar role in the financial marketplace. Major trends tend to last for years and often define a decade, à la Japan in the 1980s, the US tech boom in the 1990s or emerging markets since. But in between there are several twists and turns to juice up the plot.

The latest bout of global market turbulence should be viewed from that perspective. Financial-market volatility fell to record low levels earlier this year, signaling investors had become too complacent. While trouble had been brewing in the US housing market for several months, many investors were willing to overlook it, instead holding on to the belief that in an environment of easy money and strong world growth, no problem could be serious enough to derail the global bull market for stocks.

However, with the crisis of confidence in the US credit market over the past few weeks, assumptions underlying the big trends of this decade are being questioned. Emerging markets have been the asset class of choice this decade, rising by nearly 300 per cent from the October 2002 lows, due to rapidly improving economic fundamentals. But in the past month, as foreigners have pulled more money from emerging stock markets than in any other decline, old fears have resurfaced about how markets are doomed to rise and fall with American mood swings.

The important questions for investors are: does the credit crisis have the potential to become a full-fledged systemic shock that breaks the back of the US economy, and, if that happens, what are the implications for growth in the emerging markets? Given the role the US housing market has played in the current economic cycle, it seems unlikely that it will have no macroeconomic follow-through.

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