New York Daily News
If you invest in stocks, don't look Dow-n
By ROBERT REICH
Thursday, March 1st, 2007

''Correction" is the Wall Street euphemism for "Yikes!" That's the appropriate reaction to what happened Tuesday.
Was this week's one day slide in the Dow the start of something bigger? Probably - because the underlying causes can't be fixed quickly, easily or painlessly.

What's the problem? In short, cash is so plentiful all over the world (excess petrodollars, excess Chinese money, excess saving in the rest of Asia) that global investors have been overly optimistic in lending money and buying stocks.

They've gotten ahead of themselves, taking on way more risk than they thought they took on. That has created speculative bubbles, and speculative bubbles eventually pop, as several did this week.

The single biggest speculative bubble has been in China. This isn't surprising, given the frenzied growth of the country's economy and the underregulation of its financial markets. But because global financial markets are so intertwined, the bursting of that bubble has hurt investors all over the world. American mutual funds had been putting capital into the Chinese stock market because, hey, that's where the action has been, and every fund wants a piece of the action.

But we can't just blame China and be done with it; there are plenty of speculative bubbles right here in America. One has been the sub-prime lending market - through which banks and mortgage lenders have made risky loans to low-income borrowers on terms borrowers often can't afford over the long haul. When the housing market started to tumble, some of these risky loans revealed themselves for just how risky they are.

Another bubble has emerged in hedge funds and private-equity funds, which have so much money they're buying up whatever they see. When these bubbles burst, it will be time to run for cover. The noise will be loud enough to shake foundations from New York to San Francisco.

The wakeup call this time around was Alan Greenspan, whose visage had been beamed by satellite to a group in Hong Kong on Monday (New York time). Though sounding generally optimistic about the economy, Greenspan - in typically cryptic fashion - warned that there was lots of money sloshing around global financial markets, leading to overoptimism, and he didn't completely rule out the possibility of a recession later this year. Boom!

I predict we will indeed have that recession - but it's too early yet to tell how big the explosion will be.

So, should the average investor - the worker with the 401(k), the retiree with a pension or the casual trader - be worried? Yes, but don't head for the hills. For one thing, there are no hills to head for. You've got to put your money somewhere, and capital markets are so globalized there's no place to hide.

You'd be stupid to put your savings under your pillow - or to throw everything into gold or T-bills or any other passing fad. Just as before, keep your savings diversified in a broad mix of stocks and bonds.

Meanwhile, read a good novel. Take up bridge. If you're a day trader, find another hobby for a while. Think of this like a bad case of indigestion. These bubbles will pass.