Bubbleomix is a name for the "science" of financial bubbles, the idea is very simple:
1. Markets are not always efficient
2. Bubbles are zero sum
That's it; nothing complicated. In simple English the idea is that at any moment in time there is the "right price" for anything and everything, whereby on average for every transaction the seller gets the same amount of economic value as the buyer; Warren Buffett calls that the "intrinsic value".
The problem is that's not always easy for sellers and buyers to figure out what that price is, so sometimes buyers pay too much, in which case they lose and the sellers win. Sometimes the buyers pay too little in which case they win and the sellers lose.
The second idea is that the amount of money the buyers who paid too much, lost, (in the bubble, by paying too much) is always equal to the amount of money the buyers who paid too little (in the bust), won. The whole thing is zero-sum, no net economic value is created; i.e. it's zero-sum. Like throwing a pebble in a pond, you start with equilibrium, then there are waves, then the pond settles back down, the "equilibrium" level was not changed by the fact you threw a pebble into the pond.
Bubbleomix is a "science" because the basis of the analysis is doing experiments in real time, or more precisely making predictions, based on a theory, then checking to see if the prediction was right. That's what Paul the Octopus did, he predicted the result of seven football games in the 2010 FIFA World Cup, he got it right seven-times out of seven; so the probability his theory, whatever it was, was a good theory was 50% raised to the power of 7 = one in 128; (there were two options, win or lose, in those games they keep on doing penalty shoot-outs until there is a winner so there is no draw).
That's not actually very convincing for a scientist, for example the probability threshold for declaring you found a Higgs Boson is one in 3.4 Million; Paul would have had to have made a correct prediction 22-times in a row to be able have claimed that "null hypothesis". The reason they call it a null-hypothesis is that it's impossible to prove anything in science; all you can do is demonstrate that an alternate theory is highly unlikely.
Does Bubbleomix work? Perhaps; the difficulty is working out the probability that the correct prediction could have been made equally well by a blind chimpanzee (or banker) throwing one dart at a dart board.
For example in January 2009 Bubbleomix theory said the S&P 500 would bottom the day it went through 675. At the time the experts were saying anything from 300 to 850 (the price on the day of the prediction), so if that's the "universe", or in the chimpanzee analogy, the number of numbers on the dart-board; and taking on board the fact that any number between 667 and 700 would have been correct (that was the spread on the day of the bottom) the probability the theory behind the prediction was wrong was one in 33/550 = One in 17.
Paul the Octopus did better than that. Except Bubbleomix predicted the index would go to 1,200 before reversing more than 15%. At that time the total of the consensus of the experts was 300 to 1,200, and the right answer would have been any number between 1,200 and 1213, a spread of 13. So 13/900 = One in 69; multiply those together (two correct predictions in a row) you get one in 1,190.
That's hardly a Higgs Boson but it's a lot better than the predictions of Nouriel Roubini, CAPE or Tobin, or even Warren Buffet on the S&P 500. Multiplying the next five predictions that were made together, you get a number, albeit somewhat subjective, in the order of one in 3.4 Million. Most economists pat themselves on the back and write "Guru-Books" if they can do better than one in ten, which goes to the theory that economics is in fact not a "science" but an "art" somewhat akin to abstract expressionism; that's the one where they write on the back of the painting which way is "up".
It's worth remarking that the purpose of that exercise was not to make a "Guru-Claim", it was simply to demonstrate that the idea of how bubbles and busts work, i.e. the "Zero-Sum Thesis" might be right.
So does it work for gold?
The problem always is working out the intrinsic value, that's not always obvious. In fact it's always not obvious because if it was, there would not be bubbles and busts.
So I got a theory for that which is explained here, this is the chart:
Here are the quotes:
(1)….there was a bit of a mini-bubble; that has to pop fully before you get the break-back, eyeballing I'd say that's under $1,500 perhaps as low as $1,475;
(2)…that chart says gold could be $1,800 by the end of 2014
Am I going long on gold? I might, and there again I might not although I'm certainly not going to do that on margin if I do; I'm scientist I'm not a "player". That said, I'm pretty sure that Bubbleomix idea is right, just I'm still a bit uncertain about the valuation of the intrinsic value of gold (as expressed in dollars).
The big issue in my mind goes back to what is money, because the existence of credit complicates that. For example, I have a credit card; typically over time my outstanding balance creeps up, basically because I am disorganized and lazy, and that's mainly how credit card companies get away with charging 27% a year for such un-secured loans.
Every now and then I pay everything up, BANG. And I FEEL virtuous, a bit like when I finally get around to visiting the dentist to fix that niggling tooth, or change the oil in my car which ran over by 3,000 miles, and the guy who changes the oil looks at me as if I am a moron. But THEN what usually happens is that the credit card company; or the computer that keeps an eye on me, put's up my credit limit. And guess what? I FEEL richer.
So what's that got to do with money-supply? Well, the supply of "Money" went up, the fact I didn't spend it doesn't change that, I could spend it, just as if it was crisp dollar bills under my mattress. The spending is about "velocity", which is something else completely. But was that decision by a computer somewhere in cyber-space "captured" in the statistics on money-supply? I doubt it.
On a bigger scale, Ben prints money, but all that happens is that a bank or a government department which was technically insolvent; magically becomes solvent. But that doesn't mean the money gets spent, so supply went up, but velocity was not changed, which is not inflationary.
If gold did in fact bottom at $1,475 and goes up to $1,800 by the end of 2104, that will not prove I am a guru, but it will support the idea that (a) the Zero-Sum idea might probably be right (b) the valuation I did, might have probably have been right, although that doesn't PROVE anything 100%.
If it doesn't do that, well that would certainly prove I am not a guru (that's OK with me); and it would prove either (a) was wrong, or (b) was wrong, or (a) and (b) were wrong. The most likely is that my valuation was wrong since there is other evidence that the zero-sum idea is right.
Let's see what happens, like Charles the First once said, if you are a real scientist, "stop chattering; make trial". That's the difference between scientists and artists, "back-testing" proves nothing, the issue is can you do it in real-time?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.