I gave an interview to My Private Banker the other day. They wanted to take my discussion of the potential bubble in currency trading a step further.
Investing in currencies is all the rage in wealth management. Currency ETFs, ETNs and currency structructured products are springing up like mushrooms. Inspired by the Euro crisis many private investors in the EU have started investing in currency products. Wealth managers and bankers play also a big role as more and more products are pushed on to their clients. But does currency investing make any sense? We talked about this topic to Josh Brown, who is one of the best known global finance bloggers providing daily comments on The Reformed Broker. Josh Brown has been recently a vocal critic of the boom in currency investing.
MyPrivateBanking: Why do you see a bubble in currency trading – comparable to bubbles in stocks or house prices?
Josh Brown: With currencies, we are still at the stage where we’re talking “prospective bubble”, but all the ingredients are there. This isn’t going to be a Price Bubble, it will be an Activity Bubble should the mania take over.
MyPrivateBanking: What differentiates this bubble from “normal” investment bubbles?
Josh Brown: Normal investment bubbles require a certain backdrop of speculative fervor along with some exogenous encouragement to fan the flames (think innovative mortgages or freely available margin leverage). This one is more akin to the Texas Hold ‘Em craze of the mid-2000’s where all of a sudden all your friends and neighbors were poker sharks out of nowhere.
MyPrivateBanking: Why do wealth managers increasingly recommend currency products to their clients?
Josh Brown: I think wealth managers are introducing ETFs that are currency-related because of what’s known as “reverse inquiry”. The financial media has done a really terrific job of painting the currency markets as unstable and exciting, this has led to product introductions and marketing which has in turn led to inquiries from the public to their advisors – “How can we get in on this”. The reality is that it’s foolish to “invest” in a currency from an asset management standpoint, unless we’re talking about swinging for the fences with the Iraqi Dinar or something. Currency is not an investment, it is a tool of monetary exchange and hedging activity.
MyPrivateBanking: Should a private client consider such products?
Josh Brown: Anyone looking to trade Forex should not be held back. But they should know that the pros are laughing at them. They should also know that the monster leverage involved all but guarantees a wipeout.
MyPrivateBanking: Are there any good reasons at all to invest in currencies and how should it be done – from a private investor’s point of view?
Josh Brown: Again, currency is not an “investment”. The six major trading pairs are actually fairly stable, there isn’t any money to be made on currency investment, only trading and speculation. And this requires a lot of leverage, which to me cancels out any “benefits” that anyone could cite. I would say no.
MyPrivateBanking: Thanks a lot for your insights, Josh.