Obama’s Cabinet Used Prediction Markets
Inside the strategy of the former President's Administration
We have some explaining to do. It's hot off the heels of getting the seal of approval from Obama’s Chief Economist. But before we deep dive into a previous administration, let’s recap the current state of the economy:
U.S. homebuilder sentiment declined for a ninth straight month this September. As mortgage rates continue to climb, the housing-market continues to cool down.
A competition of who can hike faster: Tomorrow, the Fed is set to lift its key rate by 75 bps. The Bank of England is predicted to boost its benchmark by 50 bps, and hikes are also expected in Indonesia, Norway, the Philippines, Sweden, and Switzerland, among others.
Wall Street recently trimmed its optimistic earnings estimates slightly, but they’re still nowhere close to acknowledging the threat of a recession. The market may become especially vulnerable if other companies follow FedEx’s move to withdraw its profit guidance by lowering their own outlooks.
Deep Dive: Prediction Markets Got the White House Seal of Approval
Our proposal to the CFTC for election contracts just got the seal of approval from Mr. Obama’s Chief Economist and former Chair of the CEA, Jason Furman. As a refresher, here are just a few legislative matters he oversaw (and that prediction markets helped inform):
The Administration’s response to the Great Recession
The American Recovery and Reinvestment Act
The Affordable Care Act
The debt limit and fiscal cliff in 2011 and 2012
The now-Harvard Professor Furman details how prediction markets benefited the White House under Mr. Obama's Administration. The former Chief Economist leverages prediction markets in three crucial ways. Let’s discuss each use case.
1. For forecasting electoral outcomes and specific events.
Under Furman, the White House and its economic team used prediction markets to help inform their understanding of how political and economic developments would affect economic policymaking.
Example: What are the risks of a government or debt limit shutdown?
Prediction markets help us understand what informed traders with money at stake would expect. They provide a method of understanding probabilities that, in Furman's perspective, research has consistently shown is superior to other ways of summarizing and updating based on information.
2. For economic research.
Example: How do elections affect financial markets and the economy more broadly?
To Furman, some research on financial markets and the economy would be impossible without prediction markets. A statistical model such as FiveThirtyEight’s can only reflect the impact of an event on the political race once it starts appearing in polls.
In contrast, a prediction market can react immediately. This near-real-time probability calibration can be highly useful for researchers, whose event studies rely on a quick turnaround between the event occurring and the change in the data.
3. For teaching at Harvard.
Furman co-teaches Harvard’s introductory economics course. Here, he introduces students to prediction markets. But why in an introductory course?
Political prediction markets are superior to other tools for everything above because they incorporate a wide range of information quickly and efficiently. Elections can have profound effects for businesses. Specifically, election prediction markets can catalyze businesses through two main levers:
1. Facilitate more accurate price discovery in other markets, so businesses are able to make better predictions about elections.
2. Hedge against the consequences of elections.
Even people not actively participating in the election markets can benefit from their data. A liquid, well-regulated prediction market offering an accurate probability estimate of who is likely to control Congress would thus be highly valuable to price discovery.
Election markets can also allow businesses and others to participate directly and hedge against the consequences of elections. Without prediction markets, businesses have no simple and transparent way to hedge against these risks. Millions of businesses are affected by changes in Congressional control. It impacts legislation, policy, and the business environments.
Almost all businesses have a regulated component to them, either directly via regulation or indirectly via policies. Prediction markets allow businesses who are impacted by government decisions to hedge themselves from them.
This hedging utility, crucially, is what distinguishes prediction markets from the CFTC’s concern of “gaming.” Gaming contracts (i.e. # of touchdowns a player scores) cannot reasonably be used for risk reduction purposes. An event contract on Congressional control can. And it clearly relates to an event of economic importance. Elections are not games, and the outcome of political control of Congress has enormous public interest ramifications.
Furman summarizes the letter the best himself:
In the News 📰
Business Insider named us one of the most promising startups changing the world of financial technology.
Ron Conway, founder of SV Angel, voiced his support to the CFTC yesterday for our proposed Congressional Control Contracts.
Our co-founder and CEO Tarek joined Bloomberg yesterday to discuss prediction markets and our election contracts proposal to the CFTC.
Bonus: In Our News 📰
Kalshi is halving fees on all S&P 500 and Nasdaq-100 markets. Pending regulatory approval, the fees are dropping from from 1.75c to 0.875c per contract at the midpoint price. Rounding applies. The fees will go into effect in under 48 hours on Thursday, September 22nd.
Market Watch 👀
West Texas Intermediate oil settle price🛢️
84-84.99? Yes: 39¢ No: 61¢
Kalshi markets are forecasting a 61% chance that the average price of WTI oil will be outside of the $84-84.99 range by 2:30PM EDT today. On the flip side, markets are predicting a 39% chance that the price of WTI oil will settle within this range.
The target date for selling 180 million barrels of crude oil from the U.S. Strategic Petroleum Reserve (SPR) appears to have been extended beyond October. The Department of Energy announced Monday that it would sell up to 10 million barrels for November delivery.
WTI oil prices edged slightly higher in volatile trading on Monday, as worries of tight supplies outweighed fears that global demand could slow due to a strong U.S. dollar and possible large increases to interest rates.
S&P500 Weekly Close Price📈
3800-3849.99? Yes: 22¢ No: 78¢
Kalshi markets are predicting a 78% chance that the S&P 500 index value will fall outside 3800 and 3894.99 at the end of September 23, 2022 (4PM ET). On the other hand, markets are forecasting a 22% chance that the index will fall within the 3800 and 3894.99 range by market close.
According to BlackRock's co-chief investment officer, the shoe is set to drop for stock traders grappling with a hawkish Federal Reserve and a looming recession. In his perspective, the latest rebound in stocks was “just a bear market rally” and that a slowdown in consumer demand and a “hawkish-for-longer” Fed will spark new lows.
A stronger-than-feared second-quarter earnings season fueled a sharp summer rally in equities. Analyst forecasts for corporate earnings have proved resilient so far and profit margin estimates have only just started coming off historic highs.
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