We are sometimes asked why emerging markets are so much more volatile than developed markets. The answer is that, due to their relative size, money flows between them cause most of the volatility effect.

Consider a real world situation that most of us have seen — a stream emptying in to a pond and another stream at the the other end of the pond draining the overflow.

Think of the streams as the emerging markets and the pond as the developed markets. Think of the water as money.

The water in the stream feeding the pond moves quickly. When the water enters the pond, it slows as it spreads out in the breadth and depth of the pond. When the water enters the stream draining the pond overflow, it moves quickly again.

The streams are narrow and shallow by comparison to the …