Risk is steadily building across the financial system, fueled by individual investors adopting increasingly speculative, short-term, and risk-heavy trading strategies.
While many business leaders recognize the buildup, they may not fully appreciate its scale and potential consequences. Crucially, the risks are not limited to financial markets; rampant speculation also threatens the stability of household finances and, ultimately, the broader economy.
The danger has become acute, because risk-taking is set to intensify. Digital platforms and mobile apps have made trading effortless, drawing in a surge of new retail participants. More recently, U.S. President Donald Trump signed an executive order allowing 401(k) pension plans to invest in alternative assets such as private equity, private debt, infrastructure, real estate, commodities, and cryptocurrencies. Traditionally reserved for institutional and professional investors, these assets are typically illiquid and carry risks that most retail traders are simply not equipped to manage.
Compounding the problem, baby boomers are projected to pass an estimated $124 trillion to younger generations by 2048. This enormous wealth transfer is already empowering a cohort of retail investors with a strong appetite for equities, cryptocurrencies, and meme stocks and coins, as well as for sports betting and prediction markets.
At the same time, the new generation of retail traders has unprecedented access to markets and the tools to trade in highly complex derivatives like zero-day options. Once primarily used to hedge financial exposure or take longer-term positions, such high-risk instruments are now increasingly used for intraday bets on stock-price movements by investors seeking quick returns. Many of these trades are driven not by fundamentals but by rumors and narratives circulating on Reddit and other social-media platforms.
Worse still, some traders are magnifying risky wagers through leverage, borrowing money to buy more volatile assets. Others are borrowing to purchase already leveraged products, most notably triple-leveraged Nasdaq exchange-traded funds like TQQQ (triple long) and SQQQ (triple short). These funds are characterized by extremely short holding periods: five days for TQQQ and only two for SQQQ.
The speculative mindset extends to individual stocks. Shares of companies like Robinhood, Coinbase, Palantir, and Tesla have average holding periods of less than a month, indicating that many investors are speculating on short-term price movements rather than assessing how these businesses will perform over time.
Beyond individual portfolios, this speculative behavior, which ignores the fundamentals and financial metrics (such as price-to-earnings ratios) that have long guided investment decisions, contributes to the already opaque and largely unmeasured leverage in the shadow banking system. As a result, debt-fueled trades inflate systemic risks, raising the likelihood of nonperforming loans and widespread defaults that could spill over into the real economy.
For business leaders and policymakers, the emergence of this speculative culture creates two problems. Most immediately, combined with rising leverage, it introduces new systemic risks. Losses from risky bets could ripple through the financial system, much like the collapse of the U.S. mortgage market did in 2008, destabilizing the global economy. In the worst-case scenario, short-term private gains could once again turn into taxpayer-funded losses.
The second problem implicates the long-term health of the real economy. As John Maynard Keynes observed nearly a century ago, excessive speculation distorts economic development by diverting resources away from productive investment. Capital that might otherwise support breakthroughs in healthcare, infrastructure, and other vital sectors is instead being siphoned off into short-term trading and financial gamesmanship.
Unless speculative trading is reined in, it will hollow out the market architecture and financial plumbing that channel capital into productive enterprise and make it harder to cultivate a new generation of long-term retail investors. Capital markets that once financed businesses and drove sustainable economic growth will serve as playgrounds for short-term gamblers chasing the trade of the week. The erosion of “patient” capital will weaken the stable investor base on which businesses have historically relied.
While the termites of speculation are already at work within the financial system, the most urgent questions remain largely unasked. Is the stage being set for another global crisis? And just how much erosion can the foundations of an economy withstand?
Dambisa Moyo, an international economist, is the author of Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth — and How to Fix It (Basic Books, 2018). ©Project Syndicate
