12:01am

Thu August 11, 2011
Economy

What's Spooking Investors?

While Wall Street experiences the biggest stock sell-off in years, some very successful investors don't appear to be concerned. They're out buying stocks while everybody else panics.

Top executives are also downplaying the perceived crisis.

"We don't run the business based on what happens in the market in a day," Jamie Dimon, CEO of JP Morgan Chase, said Wednesday on CNBC. Bank stocks like his have been getting hammered in recent days.

"Markets are volatile, probably for pretty good reasons," he said. "There's a lot of uncertainty in the world out there, but we're still going to open branches tomorrow and hire bankers tomorrow and create clients tomorrow."

Dimon has been traveling around the country to his bank's branches to tell employees the world is not coming to an end.

"Look, if I thought it was a calamity I'd go back to New York," he said. "But I think there is a lot of volatility in the marketplace, and America will get through this, too."

Europe's Woes

Still, it's hard for many people to ignore the historic downgrade of U.S. Treasuries, and some other unpleasant developments.

A group of financial executives and economists were on a retreat in Maine when S&P announced that downgrade Friday.

"We're focused on the wrong story," Jim Bianco, the president of Bianco Research, said to Barry Ritholtz, CEO of the money management firm Fusion IQ. "It's not about downgrades that's worrying the markets; it's about the Germans coming out and saying --"

"The hell with the Italians," Ritholz interjected.

"The hell with the Italians, we're not going to bail out Italy," Bianco continued. "Italy is the third largest bond market in the world after the United States and Japan. They're not getting bailed out. Is that the problem and not the downgrade? That's very possible, but I think ..."

Ritholtz brought up what has a lot of financial experts scratching their heads: The problems in Europe aren't new.

"Look, everybody who's following the markets knows that the PIG countries — Portugal, Ireland, Italy, Greece, Spain — the PIGS are in some form of financial distress," he said. "The Germans are reluctant to write big checks and bail everybody out, but none of this is an unknown. This is well understood."

Losing Momentum

So why are stocks crashing now? One explanation is this: The implications of all this trouble in Europe could change if the U.S. economy is much weaker than we thought — and it might be.

"Simply put, the evidence that's been coming in over the past few weeks doesn't point to any pickup in U.S. growth," Nigel Gault, the chief U.S. economist for IHS Global Insight, says.

For months now, economists have been blaming a soft patch in the economic recovery on some temporary factors — the tsunami in Japan, bad weather — but if that was all that was going on, growth should now be picking up. It's not.

"On top of that, we had some historical GDP revisions which told us for most of the recovery we've actually been doing worse than we thought," Gault says.

Think about the economy as a bicycle: When you have some forward momentum on, it's easier to stay upright. You might hit a bump — like financial trouble in Europe — but you'll be OK. If the bicycle is moving slower and slower and almost stopping, however, something that might not have knocked you off before could suddenly be a bigger problem.

"The slowdown in growth puts us at a point where we are extremely vulnerable to shocks that could push our economy over the edge into recession," Gault says. "So I think the fear in the market is understandable. The risk is that that panic feeds on itself and that expectations drive us into recession."

Gault says he's not forecasting a recession. But he says the recovery is all of the sudden more uncertain — the bike seems to be wobbling — and many investors are worried.

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