Stock markets are experiencing a classic crash pattern.  Volatility has spiked and sharp sell offs are often being followed by powerful rallies.  As with previous crash patterns, we would expect markets to continue to gyrate wildly for around the next 8 weeks, and likely retest the lows established in the first few days of the rout.

However, we remind our readers that excess liquidity remains high and this should ultimately prove to be supportive for risk assets and prevent them from experiencing much more significant falls.  We measure excess liquidity as the difference between real money growth and economic growth.  Thus with monetary easing in both Europe and Japan, as well as still-elevated M1 growth in the US, money growth is strong.  Add to this tepid economic growth and benign inflation we have excellent conditions for there to be a surplus of liquidity, which often finds its way into risk assets.

We would be far more pessimistic on risk assets if we were in a much higher inflation environment.  This would mean a higher likelihood of monetary tightening, which together with less benign inflation, would starve the world of liquidity. This would be very negative for risk assets.

So while risk-assets will continue to experience heightened volatility and markets may not yet have put in their lows, excess liquidity will ultimately provide a strong boost for risk assets, including some beaten down EMs, commodities and developed equity markets.

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For our clients, we use our proprietary leading indicators to advise which EMs and risk assets to buy and, using our signals, we will indicate when is the best time to buy them.