Prediction Markets for Prescient Political Punters
A political prediction market trader holds forth on recession, the 2024 presidential race, politically charged indictments and the chance of a nuclear armageddon
he ink is still wet on the midterm ballots, which can only mean one thing: The 2024 presidential campaign is now in full swing. So let’s start there with our assessments of upcoming prediction markets.
2024 Presidential match-up: Gov. Gretchen Whitmer (D-MI) vs. Gov. Ron DeSantis (R-FL)
With two pseudo-incumbents in the mix—President Joe Biden, the actual incumbent president, and former President Donald Trump, the one-termer who insists he remains the rightful officeholder—it may seem odd to foresee neither at the top of this ticket but it’s unlikely either winds up running, much less winning the nomination.
While they have large, durable bases of support and are the only two eligible humans with presidential experience—save Jimmy Carter, who will turn 100 a few days before the election—I’m hard pressed to believe either actually wants to return to the job.
While slightly younger than the peanut farmer, they’re obviously of a certain age now. They’ve both endured unpleasant terms in office and their respective party establishments clearly (if quietly) join them in pining for their overdue retirements.
Neither has any incentive to hint at wanting nothing more to do with the White House just yet, but the time to drop the ruse will be upon us before long.
As for their replacements, DeSantis seems nearly unstoppable on the Republican side without Trump in the mix, judging by unfathomably outsized fundraising, polling (where no one else registers double-digit support) and prediction market pricing.
The Democrats will put on more of a show, but their bench is similarly thin. Warmed-over 2020 quarterfinalists from the U.S. Senate ranks (Massachusetts Sen. Elizabeth Warren, Minnesota Sen. Amy Klobuchar, Vermont Sen. Bernie Sanders) have been weighed and measured enough at the national level by now.
U.S. Secretary of Transportation Pete Buttigieg and California Gov. Gavin Newsom should have a decent showing. But as a female governor from a purple, non-coastal state Democrats need to hold, Michigan Gov. Gretchen Whitmer, seems like the right formula.
We won’t officially know the nominees at this time next year, but expect Whitmer and DeSantis to be in pole positions.
Inflation
After arriving late to the party, the Federal Reserve has consistently promised rates will go as high as needed to combat this non-transitory inflation, and it’s taken a while for markets to take them at their word. (I’m not sure they do even now.)
Wherever they pause, it’ll be at an economically restrictive level, something we haven’t seen in quite some time. With growth already flat-to-negative, this almost surely tips us into a less debatable recession. Most Americans haven’t seen stagflation in their lifetimes, and I don’t expect them to love it.
There’s still a decent chance the recession will be shallow or brief, but it’ll be enough of a bummer that the economy will remain the dominant political issue. Expect 2024 battle lines to be drawn on this front.
Neither side will persist in pretending the economy is better than it is. We’ll spend our deliberative energies arguing over whose fault it is.
Trump indictment
Without rehashing the various state and federal cases underway, there’s just too much well-worn tomfoolery afoot in Trumpworld (both political and corporate) and too much political will for him not to go punished and skate forever.
In the end, the indictment(s) will more likely be for alleged corporate misdeeds rather than political ones.
If Trump is bracing for this and suspecting he has a card to play in pledging not to run again (whether this is, in truth, a persuasive chip or not), that may further delay his bowing out of the 2024 race, depending on prosecutorial timelines.
Hunter Biden indictment
All cable news ad reps can rejoice because there will be endless schadenfreude-laced popcorn for both camps. As Republicans reclaim the gavels in Washington, hearings and investigations will bloom.
The prize they’re after will be to tie the president (and specifically his international portfolio as former President Barack Obama’s VP) to his son’s misadventures. But it’s more likely they’ll string him up only on one or more alleged tax and gun violations.
Politically, that’s largely baked in by now and will be rendered all the more moot once Biden announces he’s not running.
No nuclear armageddon
Lest you think it’s all bad news, we won’t all die in 2023.
While the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 prevents regulated prediction markets and event futures exchanges from listing markets tied to acts of war, that hasn’t stopped some of the smaller trading venues and forecasting platforms from asking users to handicap the odds of World War III.
Some enterprising modelers have attached low-ish—but terrifying—odds in the mid-teens of the Russia-Ukraine war spilling into at least a limited nuclear exchange. Still, probabilistic, Bayesian forecasting tools are less useful at predicting events that have never happened before.
But doesn’t that mean such forecasts might just as likely be underestimating the risk? Well, maybe. But I’m still confident in predicting we won’t see a globally catastrophic escalation—if for no other reason than because I won’t be here to be held accountable if I’m wrong.
HOW PREDICTION MARKETS WORK
⊲ Traders use prediction markets to bet real money on how events will turn out. Contracts trade between 1¢ and 99¢, and the price reflects the market’s consensus forecast of the probability of a specific outcome. A contract trading at 43¢, for example, suggests the market believes the outcome has a 43% probability. When an outcome is reached, correct contracts pay out $1, and incorrect contracts expire with no value.
Flip Pidot, managing partner of Sharp Square Capital and CEO of the American Civics Exchange, focuses on event-based futures. He formerly served as market curator at PredictIt and as a forensic accountant for Arthur Andersen. @flippidot
