What's Spooking Investors?

Aug 11, 2011
Originally published on August 11, 2011 4:13 pm

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 JPMorgan 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.

"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 that they're not going --"

"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 downgrade?"

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 Portugal, Ireland, Italy, Greece, Spain are in some form of financial distress, insolvency, please we need a bailout, one of those three things," he said. "The Germans are reluctant to write big checks and bail everybody out, but none of this is an unknown. All 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 last few weeks doesn't point to any pickup in U.S. growth," says Nigel Gault, the chief U.S. economist for IHS Global Insight.

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 that 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.

"I think that the slowdown in growth puts us at a point where we are extremely vulnerable to shocks which potentially 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.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

STEVE INSKEEP, host:

It's MORNING EDITION from NPR News. Im Steve Inskeep.

RENEE MONTAGNE, host:

And Im Renee Montagne.

The state of the stock markets, this week, depends on the exact moment you look. Stock indexes have swung hundreds of points down or up in a matter of minutes. Investors have shown signs of fear about the downgrade of U.S. debt, Europe's struggle with debt and the weak U.S. economy. The wild fluctuation suggests that experts can't quite agree how bad the news is.

Here's NPR's Chris Arnold.

CHRIS ARNOLD: Some very successful investors actually think that not much has really changed in recent weeks. And they're out buying stocks while everybody else panics. And some top executives at major companies are down-playing the perceived crisis.

Mr. JAMIE DIMON (CEO, JP Morgan Chase): We don't run the business based on what happens in the market in a day

ARNOLD: Jamie Dimon is the CEO of JP Morgan Chase. Bank stocks like his have been getting hammered in recent days. He spoke yesterday to CNBC.

Mr. DIMON: Markets are volatile, probably for pretty good reasons - 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.

ARNOLD: Meanwhile, Dimon has been on a road trip, traveling around the country to his bank's branches, to tell those employees that the world is not coming to an end.

Mr. DIMON: If I thought it was a calamity I'd go back to New York. But I think this is just a lot of volatility in the marketplace and, you know, America will get through this too.

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

I was on a retreat with a group of financial executives and economists when S&P announced that downgrade.

Mr. JIM BIANCO (President, Bianco Research): We're focused on the wrong story. Okay?

ARNOLD: Jim Bianco, the president of Bianco Research, was talking to Barry Ritholtz, the CEO of the money management firm, Fusion IQ.

Mr. BIANCO: It's not about downgrades that's worrying the markets. It's about the Germans coming out and saying that they're not going to

Mr. BARRY RITHOLTZ (CEO, Fusion IQ): The hell with the Italians.

Mr. BIANCO: Yeah, the hell with the Italians - we're not going to bail out Italy. 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 down-grade?

Mr. RITHOLTZ: That's very possible but I think

ARNOLD: Barry Ritholtz brought up what has a lot of financial experts scratching their heads right now. These problems in Europe aren't new.

Mr. RITHOLTZ: Look, everybody who's following the markets knows that Portugal, Ireland, Italy, Greece, Spain are in some form of financial distress, insolvency - please we need a bailout. One of those three things. And the Germans are reluctant to write big checks and bail everybody out. But, none of this is an unknown. All this is well understood.

ARNOLD: So why are stocks crashing right 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.

Nigel Gault is the chief U.S. Economist for IHS Global Insight.

Mr. NIGEL GAULT (Chief U.S. Economist, IHS Global Insight): I mean simply put, the evidence that's been coming in over the last few weeks doesnt point to any pickup in U.S. growth.

ARNOLD: For months now, economists have been blaming a soft patch in the U.S. 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. But it's not.

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

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

Mr. GAULT: I think that the slow-down in growth puts us at a point where we are extremely vulnerable to shocks, which potentially could push our economy over the edge into recession. 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.

ARNOLD: Gault says he is not forecasting that, but he says the recovery is all of a sudden more uncertain. The bike seems to be wobbling and many investors are worried.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.