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Is the Ron Paul bubble starting to pop?

November 19, 2007

Why now might be the last time to take advantage of the ‘irrational exuberance’ surrounding the Texas congressman.

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Nothing has done more to disprove the notion that betting markets are an accurate judge of election prospects than the dramatic shortening of the odds on Ron Paul to become the Republican nominee. As I said before, although nothing is ever a complete impossibility, the chances of someone who want to legalise hard drugs and believes that 9/11 was a conspiracy getting on the GOP ticket, let alone heading it, are so close to zero that they are not worth considering. Although Paul, like Denis Kucinich and Lyndon LaRouche, has managed to raise some money from his legions of fellow cranks he failed to break 10% in the Ames straw poll and is around 5% in most Iowa opinion polls. However, up until now his fans, aided by people looking to offload their contracts to ‘greater fools’ has meant that the price on his contract on intrade has been gaining steadily since April.

At one point in early November his contract reached 9.5, suggesting that the odds of him winning the nomination were nearly 10%. However, his contract has declined since then with the last traded price at 6.9. As the above chart shows the closing price has fallen below the 50 day moving average (a key technical indicator). I believe that it is going to collapse further and fall down to below 5 by the end of the month. This is for several reasons:

Greater awareness of the contract – Not only is the bubble being discussed on internet forums but it is being discussed in the maintstream media. The Republican magazine Human Events ran an article about the mispricing last week, which will alert gamblers (although strictly speaking, internet gambling is illegal in the US).

Increased participation by foreign gamblers (such as myself) – As the election draws nearer interest from gamblers outside the US will increase. Because of the US ban on internet gambling these bettors, who are unlikely to be biased towards Ron Paul, will be much less inclined to bet on the congressman.

Profit taking by lucky gamblers – Aside from his supporters trying to move the price, one of the key features that led to Ron Paul’s price soaring has been momentum buyers looking to sell the contract to ‘greater fool’s at a higher price. Now that his price is moving downwards these gamblers will start taking their profits (or losses if they bought into the hysteria late), depressing the price.

Even if the price doesn’t fall this is a good value bet.

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