22 January 2008

To Some, the Widening Crisis Seems Driven by Fear, Not Facts

This article is excerpted from the 22 January 208 edition of “The New York Times”.

The fear is spreading.

For months now, investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the credit squeeze plaguing the United States market.

But the broad international sell-off on Monday — and the prospect of a steep market decline in the United States on Tuesday — raised fresh concerns that a looming recession and the fallout from subprime mortgages could have global repercussions.

Some analysts saw the sell-off, with leading indexes off 4 percent to 7 percent worldwide, as being driven by fear more than by fact.

“I don’t think it’s warranted by the fundamentals,” said Edward Yardeni, an independent strategist. “The resilience of the global economy in the face of a credit crunch has been impressive.”

Mr. Yardeni warned, however, that in a time of panic and fear, less attention is paid to fundamentals, like a fairly tight United States job market and strong growth and the extraordinary buildup of foreign exchange reserves in emerging markets. The result is panic selling and the prospect of a global recession. “People are creating the financial violence that they hoped to avoid,” he said….

What makes this correction more dangerous, they say, is that the selling is not being driven by panicky retail investors, as it was in the collapse of the technology bubble, but by hedge funds and investment banks that find themselves saddled with illiquid securities backed by an array of valueless assets.

“What you see is not a panic of the public. This is a panic of the sophisticated,” said James Sinclair, a well-known gold trader who oversees a financial Web site and who has warned investors for years about the dangers of derivatives. “But this will have a tremendous impact on the public. In the end, this will hit Joe Sixpack. It’s very serious, and drastic emergency economic action is needed.”…

Most retail investors have not inv