US recovery and other things on Prediction markets

I just looked at intrade and saw that the majority of traders seem to expect that the US will recover in Q4 2009 (price is 64.5 out of a possible hundred), and the spread is 56-73 for a Q1 2010 positive GDP figure.

Anybody else know more about prediction markets? AFAIK, they have a good reputation for getting things right. (Not to mention it chimes in with my own expectation of a US recovery)

Ireland still needs to get its house in order before we have any hope in participating in a mild recovery.

As we’re one of the most globalised nations on Earth, we can expect to feel some of the upturn regardless of public policy (within reason), just as we’re exposed to the downturn.

Prediction markets have been saying the upturn is six-nine months away since before the downturn happened (they didn’t spot the downturn, they had first Ms. Clinton and then Mr. McCain in the White House).

I think there is a fundamental problem with them in that they, in theory, work based on the sum of the independent parts of knowledge being greater than the individual parts. So in the wisdom of crowds theory, 100 people guessing the number of sweets in a jar will independently be right.

But what if there was a TV tuned to, say, CNBC that was shouting “there are 189 sweets in the jar” next to the jar? Guess what, the average would be around 189…

So what I think these prediction markets are showing is what the herd thinks.

Now, this isn’t necessarily useless information, IMO; in fact, if you like your Keynes (and I know you do), he was of the opinion that markets are a beauty contest and the way to win is not to pick the beauties, but to figure out which beauty everyone else will pick and to pick it first. So, if the prediction markets see Q4 2009/Q1 2010 as the upturn, it should be possible to trade on that information…

Of course, Mr. Keynes lost a packet in the 1930s. And the upturn was going to be August 2009 a couple of weeks ago. As I said to you before, the models that are used can only reliably see six months ahead. And they don’t work well with negative numbers (they have been developed in a time when most numbers were positive).

BTW, I expect US GDP to be positive some time in the summer as the stimulus packages take hold. I will be horrified if it doesn’t happen as it means that the US has entered Japan territory. And that would be rather bad.

Has enyone created a dirivative on this yet? I want to bet against it. :slight_smile:

Prepare to be shocked. One word - productivity, that’s the only way out, that’s the only way to earn money.
I don’t get how government spending, borrowing, and taxing is going to resolve the situation, this all costs more money when the productivity is not there to back it, this depression is going to be reinforced.

Pump priming can work in a large economy.

Saying it works depends on what the objectives are.

If the objective is return the world economy to a more normal position then I can’t see how a crisis caused be excessively low interests rates can be solved by ZIRP.

Only if the economy is coming out of the downturn and productivity is already improving, then yes it can, until we get to the next recession.

Surely US wages are plummeting? Will this not help US productivity?

Intrade is a betting market, you can just “sell” or bet against the outcome


Just looking at Intrade now, the spreads on most of the events are crazy, including the spread highlighted by the OP 56-73?? , I presume this means theres virtually no liquidity meaning its of little predictive value at the moment

It is ultra moneterism that got us into this MoFo though, not Keynes.

Sorry, I should clarify my comments - by the stimulus package, the government converts long-term debt into immediate money (through the tax rebate cheques). This will cause an instant wash of money through the economy. Some of it will be saved, some of it will be spent. So I expect GDP to be positive as a result of the stimulus package, but to revert to its downward trend once the stimulus effects have washed through. With the overhang of debt, no amount of income related cash is going to have a signficiant effect until the debt has reduced.

The Japanese tried any number of stimulus packages, but none worked (despite the rest of the world economy being in good condition).

Exactly what happened when bush2 sent out his tax rebates - short term gain, long term pain.

In theory, if the government spends on infrastructure then they should get a return on investment.
Unfortunately for Japan & the USA, their infrastructure is already in place so the marginal return on further investment isn’t all that great.

The Japs tried it (e.g. building airports in their versions of Leitrim or Longford) and have failed miserably because it adds no real capital to the economy at all.

The only way to get out of a recession (for advanced economies) is to cut your spending, improve productivity and trade your way back.

The magic word I hear is “cut” followed by large doses of “improved productivity” which for a lot of people means pain but there is no alternative.