Serious Money: While many developed equity markets have registered healthy gains already in 2006, some smaller exchanges have been having a more torrid time. Indeed, it is probably not an exaggeration to suggest that stocks in the Middle East have crashed. After a stellar 2005, markets in Dubai, Kuwait, Bahrain and Saudi Arabia have all plummeted.

The Dubai stock exchange, for example, is off around 39 per cent at the time of writing, while the Saudi market has fallen around 20 per cent from its recent peak, but only 2 per cent for the year to date.

The obvious explanation for all of this is that a bubble in equity values has formed in small markets full of investors flush with petro-dollars. A lot of the new oil money could be staying in the Middle East, given suspicions there about the West in general and the US in particular, thanks in no small part to the nonsensical furore over the aborted Dubai ports deal. Whatever the reason, the behaviour of the oil-rich markets has certainly been consistent with an asset price bubble. In 2005 for instance, an investment in the Dubai index would have gained 135 per cent.

Like all bubbles, so the argument goes, this one was bound to pop, and so it has proved. Or maybe some of the air has merely leaked, with a lot more to come. I don't know these markets very well at all and, at this distance, they look a bit risqué to me. But is there a deeper message?

Middle Eastern equities have not been the only financial markets displaying sudden surges in volatility.

The Icelandic krona has fallen by nearly 15 per cent since the early part of the year. Normally, movements in small markets such as these rarely make it on to the radar screens of mainstream investors but, occasionally, we should take notice.

Back in 1997, the Thai baht got into difficulties and few of us were aware of it. Even when the trouble started to spread to one or two other emerging market currencies, few people imagined anything other than a few local market difficulties. The consensus view was that there was nothing to worry about. The rest, of course, is history: the crisis spread as far afield as Brazil and Russia and when the latter defaulted on its debt, Western financial systems were threatened by the collapse of the hedge fund LTCM.

Contagion was a word on everybody's lips by the time all of this settled down. Indeed, the smallest blip of a small stock market or twitch of a Latin American currency sent shudders through US and European stock markets. The US Federal Reserve had to cut interest rates three times in an attempt to calm things down. Everyone became so nervous that when the Brazilian real devalued, most commentators declared the end of the world was nigh.

As it happens, that event marked the end of the crisis: everything quickly returned to normal. Thus, analysts and commentators completely missed the events that triggered and ended the global financial crisis. Could a similar mistake be in the making with the way in which we are essentially ignoring what is going on in the Middle East and Iceland?

Bearish analysts think we are. The logic goes something like this: all kinds of assets have been rising on a sea of liquidity, supplied by central banks and ultra low interest rates. Riskiest assets have done best of all.

Now that those central banks have begun the long march back to more normal levels of interest rates, all those liquidity fuelled markets will fall. And the most risky ones will fall first - and have started to do so. The rest, so the argument goes, will inevitably follow.

This apocalyptic vision borrows heavily from the emerging markets crisis of the late 1990s. With hindsight we can see that many countries had over-borrowed to finance real estate and other asset booms. Hot money had flowed into those countries and was just as quick to pull out at the first sign of trouble. As a matter of fact, none of this would have mattered very much if it had not spread to Russia: the debt default there badly affected Western institutions which had too much exposure. But in the end, the system coped and the falls in markets are beginning to look like mere blips on the chart.

So, in one sense, we could argue that even if we get a re-run of the late 1990s, how much will it matter? The system ultimately coped very well and there were relatively few casualties. Even Asia and Russia bounced back very quickly. And lessons were learned, financial risk management systems have been strengthened. There are no obvious flows of hot money - with the obvious exception of the Middle East - in the current climate.

Indeed, if we think about the past decade, the one truly remarkable aspect of the global financial system has been its resilience in the face of multiple shocks. This is not to argue, of course, that the system is invulnerable. Having lived through the Asian crisis, any wobble in emerging markets always makes me nervous. So no panic, but some caution. The one economy where there are obvious signs of excess is China. The economic boom is real but very unbalanced: the trick that the authorities have to pull off is a gradual rebalancing away from excessive capital spending and more towards consumption (the flipside of what the US has to do). If this process goes well, there is nothing to worry about. But the obvious source of the next emerging market crisis is if the necessary rebalancing of the Chinese economy goes off the rails. And if this happens, everything else is affected. This is where our attention should lie, not on the Icelandic krona. Keep your fingers crossed.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.