Technical analysts, fund managers, economists and financial media . . . scores of 'experts' make their living navigating the turbulent waters of predicting the future. Mere mortals, however, are more often keen to follow the common-sense 'urban legend' rules set by the JP Morgans and Warren Buffetts of this world.

One such rule is attributed by some to Joseph Kennedy and by others to JP Morgan.

These 'smart-money' investors escaped the 1929 US market crash by reportedly recognising the right moment to sell their stocks after a shoeshine boy gave them a hot stock tip.

Over the years, this principle . . . sell when market participation becomes too broad . . .has worked magically in tracking big crashes. Given recent events in the currency markets, it might be a good time to use the logic again.

Since around 2004, quietly, behind every media outlet's back, Japanese housewives and pensioners have been playing a delayed-time version of financial Russian Roulette:

betting on long-term currency movements. In the process, these recreational investors wrecked the forecasts of the world's currency traders and messed things up for central bankers around the world.

Masses of Japanese retail investors are borrowing domestically in yen to buy weaker foreign currencies and benefit from substantial spreads between low Japanese interest rates and much higher rates abroad. In the case of the US dollar, this spread has averaged around 4.75 percentage points so far. In the case of New Zealand's dollar the spread is at a whopping 7.5, while for the euro it is 3.5.

On the back of these trades, Japanese investors are effectively dumping huge amounts of Japanese currency, depressing the yen.

This is what financial professionals and economists call currency carry trade and this trade has been affecting not only the US but also New Zealand, Australia, the UK and even Brazil and Turkey.

Consider Yukiko Ikebe, a 59year-old housewife in Tokyo. In April she was indicted for evading 139 million yen ( 837,000) in income tax while earning 407 million yen trading foreign exchange.

The problem, of course, is that the currencies and interest rate markets are all about a state-controlled commodity . . . the national money. This makes money markets susceptible to a 'bull-in-a-chinashop' factor . . . the central bankers' policy swings. Last week, Japanese traders doubled up their purchases of the New Zealand dollar (NZD) when the Reserve Bank of New Zealand sold its currency on 11 June, weakening the NZD by as much as 1.8% overnight. Two smaller interventions this week produced more volatility. So far, a carry trade against the New Zealand dollar funded with yen would have returned 14% this year.

Bank of Japan is also getting jittery. In 1998, when Russia defaulted on its debt, the Japanese yen appreciated by 20% within two months on the back of Japanese retail investors rushing to cut losses and buy back yen. The US dollar fell 22.1% between 31 August and 8 October, wiping out carry trade. A stock market crash in China on 27 February this year pushed the yen higher, by some 2.3% in one day.

These might be shorterterm hiccups with carry trades' proliferation, but, as New Zealand's economic problems are beginning to show, there is no shortage of downside risks in the long term.

First, over the past year, the New Zealand dollar has increased 26% against the US dollar and 32% against the yen, arguably solely on the back of carry trades. This appreciation is taking a huge slice out of exports growth.

Second, New Zealand sports the highest interest rates in the developed world . . . 8% and rising. The country needs high rates to cool off domestic real estate markets that have seen over a decade of prices rise at the fastest pace in the world.

This inflation was fuelled by the banks and investors taking . . . you've guessed it . . . low-cost loans in yen and buying NZDdenominated houses. Given the extremely unusual structure of housing markets and land ownership in New Zealand, this price appreciation is a disaster waiting to happen.

The tricky part is that carry trades-triggered currency market interventions by the Central Bank are neutering the country's entire monetary policy, making a housing market crash much more likely.

For Irish investors, international carry trades are increasingly focusing on the US, Turkey and other major destinations. This means that, in the short term, by increasing global demand for the likes of US dollar and Turkish lira, carry trades are effectively propping up their values against the euro as well. This translates into an added risk of foreign exchange losses in that bungalow investment in Anatolia or condo deal in Florida.

The risk is serious enough for the likes of Buffett to pay attention to. Since late last year, he has been saying he is not optimistic on the US dollar's return to strength any time soon. Other telling signs . . . the gold markets, the ultimate hedging currency, are hitting all-time records, and the Bank for International Settlements (BIS) is starting to look worried too. Since around 2004, almost every BIS quarterly analysis of foreign exchange markets has pointed to the fact that the overall valuations of major currencies are becoming more reflective of carry trades than underlying countries' fundamentals.

This begs a question: given international retail investors' huge appetite for risk, can Irish brick-and-mortar investors end up on the receiving end of the 'Biggest Fool Theory'?

Alas, if your bet on that bungalow in a faraway land includes a punt on an exchange rate, it looks like the carry trades may have the final say

Dr Constantin Gurdgiev is an economist and editor of Business & Finance magazine constantin@tribune. ie