3 Potential Bubbles for Retail Investors

The “everybody’s a real estate mogul” era started innocently enough, with a distaste for the stock market after the dot com meltdown and an incredibly long stretch of time with 1% interest rates.

The leap from trading up in house size to using home equity loans for financing boat purchases certainly didn’t take very long.  With that in mind, I thought I’d share some of my observations about other potentially dangerous national pastimes currently being taken up en masse by retail investors.

These areas bear a strikingly similar resemblance to the recent real estate bubble.

Bubble Candidate 1:  Forex Trading

The relentless inverse correlation between the US Dollar and the S&P 500 has reduced us all to amateur currency pundits, and the majority of the equities guys I speak with don’t know the first or second thing about currencies – nor are they willing to learn.  They would much rather just remark as often as possible that “the dollar is gonna get slaughtered” and be on their merry way.  Retail investors are also beginning to fall in love with the Forex currency markets and there are no shortage of trading services and firms cropping up to meet this demand.  For example, plain vanilla firm Fidelity Investments just rolled out a new trading platform allowing retail investors access to 8 foreign currencies.  The danger here is twofold:

1.  Currency trading has been, for the most part, only lightly regulated and there are many sleazy participants who have been kicked out of other industries, like retail brokerage, for manipulation and sales practice violations.

2.  Forex trading typically involves a substantial amount of leverage, 50 to 1 is not uncommon even for small retail accounts.  One does not need to be clairvoyant to see where this could be headed as the proverbial greater fools rush in.

We’ll know it’s a bubble when:  Cramer recommends the Euro/Yen Cross to the Mom-and-Pops.

Bubble Candidate 2:  Commodity Trading

You’ll notice I didn’t say commodity prices, I’m simply referring to the new-found obsession with commodities speculation.  I have friends and customers from the art world, the real estate and insurance rackets as well as the music business who can now quote the spot prices for natural gas, oil, gold and silver on a regular basis and are not shy about making predictions for them.  These are smart people, for the most part, but they’ve never displayed the slightest interest in what hard assets were selling for in the past, now they seem determined to track and discuss them.

We’ll know it’s a bubble when:  Five words…The Munder Corn Corn Fund.  Alternate – Flip This Soybean, Tuesdays on the Discovery Channel.

Bubble Candidate 3:  Options Trading

The new infatuation with options trading amongst retail investors can probably trace its origins back to the insane volatility in the stock market that followed the collapse of Lehman.  All of a sudden, “buy-and-hold” cost investors who did not hedge roughly 12 years worth of performance in 6 months time.  Conservative investors began to explore the merits of covered-call selling and the more adventurous sought out education on things like Long Straddles (bets on higher volatility).

Option trading is a wonderful skill for investors to pick up and certainly has its place, but as usual, the charlatans are coming out of the woodwork to induce even more aggressive options activity, not to mention to sell seminars, books, videos, newsletters and website subscriptions.

We’ll know it’s a bubble when:  OptionMonster.com goes public with a billion dollar valuation out of the gate.

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For the investor class in America, there’s always a thin line between enthusiasm and mania, especially when money’s being made.  There are tons of great websites and resources for commodities, forex and options education.  Unfortunately, the bad guys will also follow the money which inevitably leads to losses for people who can’t afford them.

What starts off as curiosity can quickly become reckless speculation, so let’s keep our eyes open.

Full Disclosure:  Nothing on this site should ever be construed as advice, research or an invitation to buy or sell any securities.  See my Terms & Conditions page for a full disclaimer.

image: ConstructionWeek