Prediction Markets Bulls, Capital Markets Bears

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Prediction Markets Bulls, Capital Markets Bears

Every month or two we like to check in on the event prediction markets at predictit.org, which is a website where anyone can place small-money wagers on various sorts of future events. The implied odds here aren’t perfect reflections of what may actually come to pass, but it does check the boxes for a good crowd sourced model. There are lots of people in the mix, meeting in a convenient market place where they can express their views in the form of a wager.

In no particular order, here are a few themes of interest to investors just now:

#1. Brexit/new British Prime Minister/new EU Commission president:

Odds of Brexit by 11/1 (the current deadline): 43%. These were just 35-39% until PM May announced her resignation. At the same time, they are not at the +50% levels of mid-April.

Odds that Boris Johnson will be the next UK Conservative party leader: 45%, the highest of any candidate standing. Dominic Raab holds second place at 22%.

The weekend’s EU parliamentary elections and leaders’ summit today have made the upcoming presidential contest a two horse race.

  • Manfred Weber, a favorite of Angela Merkel, still shows 80% odds of getting the top job.
  • France’s Michel Barnier’s odds have jumped, however, from 17% pre-elections to 65% now. This is a thin market (hence the wonky odds), but worth noting as a sign that the German-French alliance is hitting some turbulence.

#2. US 2020 Presidential Race:

Odds that Joe Biden is the Democratic Party nominee: 30%, at the head of the field. Bernie Sanders comes in second at 18% and Pete Buttigieg is in third at 16%.

Predictit users are currently giving the Democratic Party the edge to win the presidency in 2020, at 55%. At the same time, the trend is the GOP’s friend because a month ago that was 58%. Another prediction market – the Iowa Electronic Markets – puts the current odds of a Dem win at 58%.

Predictit put the same odds – 70% – on Democrats holding the House and Republicans keeping the Senate in 2020.

#3: Impeachment odds:

As much as the topic remains a talking point in the US House of Representative, Predictit users aren’t giving it much of a chance. Odds here are 37% presently and even before the Mueller report came out the odds were less than 50-50.

For our non-US readers, recall that “impeachment” doesn’t automatically lead to a President’s removal from office. That’s why Predictit’s community gives Mr. Trump 83% odds that he will complete his first term.

Summing up: we find that looking at these odds is a good exercise in grounding expectations with an independent point of view. The upcoming US Presidential race will be close, but the chance of full-blown impeachment hearings is relatively low (no matter what the news may say). Europe has some governance issues to address, and Brexit by Halloween 2019 is (at best) a 50:50 shot. None of this looks unusual/unexpected to us, so what Predicit users are really saying is that political risk (defined as something unexpected) in the US and Europe is relatively low.

Now, there are no Predictit contracts for the timing of a US-China trade agreement or how much the current delay may damage the global economy in 2019/2020. For that we must look to financial asset prices because these are clearly the fulcrum issues of the day.

The news here today is pretty straightforward: the odds of a near-term trade agreement are shrinking, along with 2019 growth prospects. Unlike Predictit data, however, the stakes are much higher in capital markets and that leaves the hope that US/Chinese policymakers will listen and respond. And while hope may not be a strategy, this dynamic is in the uncomfortable position of being “Bull case #1” just now.

Sources:
Predictit website: https://www.predictit.org/markets

Iowa Electronic Markets: https://iemweb.biz.uiowa.edu/