Jim Rogers: The Next Bubble Is the Bond Market

Predicting bubbles has become the sport of choice lately. After the tech bubble of the '90s and the recent implosion of the housing bubble, everyone seems to be in the bubble-forecasting business. So, should you listen to Jim Rogers when he predicts that the bond market is the next bubble to burst?

Yes, you should. Jim Rogers is not just anyone. Also known as the "Adventure Capitalist," he made so much money during the commodities bubble-and-burst in the '70s that he decided to "retire" and ride his motorcycle in every country possible. How can anyone possibly ignore the words of a man like that? Let's take a closer look at Rogers' prediction and see what it may mean for investors.

We're all aware of the recent financial crises, and the monetary and fiscal policies the United States and many other countries across the globe have undertaken to reinvigorate their economies. Rogers thinks there will be hell to pay for these actions. His hypothesis that bond markets are a bubble waiting to burst stems from what he feels are easy money policies at central banks and highly indebted governments. In his opinion, investors should not believe that bonds are a safe haven from tumultuous markets.

Looking closer at Rogers' thesis, it is not hard to see why he foresees mayhem. As we have seen from the recent catastrophe with Europe, debt does matter to governments. Besides some European nations, the United States, the United Kingdom, and Japan also have high debt-to-GDP ratios. On the monetary front, things are not much better. According to Federal Reserve data, the broadest measure of the U.S. money supply, M2, has continued to grow during the recession. This is similar to other developed countries. While, Federal Reserve chairman Ben Bernanke may argue that money supply is ably controlled by central banks, there are doubters.

It appears that Rogers does have some basis for his skepticism, but how can you profit from his pessimistic scenario if you agree with him? There are ways to bet on a collapse of the bond market through the equities market that don't involve pesky derivatives. If you're down on financials to begin with, consider shorting major financials such as J.P. Morgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Bank of America (NYSE: BAC  ) . All three carry large amounts of treasury securities as part of their operations and would sustain losses on other debt holdings as a result of a rise in interest rates. Another possible way to profit from this scenario would be to short the equities of bond insurers like MBIA (NYSE: MBI  ) and Assured Guaranty (NYSE: AGO  ) . Although they do not insure treasury securities, they do insure other bonds, particularly municipal bonds, which likely would suffer substantially from another credit crisis.

If the unlimited downside risk of shorting scares you -- it should give you great pause -- and you're comfortable with options, an alternative is buying put options.

Only time will tell if Jim Rogers' conjecture is correct, but there certainly is some evidence to support his thoughts. If he is correct, the above mentioned investment ideas, while risky, will likely prove to be very lucrative for those intrepid enough to undertake them.

Gerard Torres does not own shares in any of the companies mentioned in this article. The Fool disclosure policy has long lasting flavor.


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