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Online Recession Betting Not Quite What It Seems

by: Larry MacDonald June 10, 2008    
Larry MacDonald

Larry MacDonald

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The Intrade.com prediction market taking bets on the probability of a U.S. recession ticked up to 36 from 32 in response to the negative turn in news on the U.S. economy last week (as summarized in my earlier post). My feeling is that it should be trading higher given the contract was at 75.0 in March when crude oil prices were much lower, the job market was stronger, and house prices higher.

But when I looked at the possibility of buying contracts, the native hue of resolution was 'sicklied o’er'. Not with the pale cast of thought but disappointment over the depth of the market. It’s difficult to place a bet of any significance.

The current ask price is 36.2. But there is only one contract on the order book and given a point equals 10 cents, it can be purchased for $3.62. At the next ask price of 36.3, there are 5 contracts available, costing $18.20 in total. Indeed, one can buy all of the 200 or so contracts offered at ask prices up to 39.0 for less than $800.

Then there is the warning in the rules section on the need to check the legality of trading on Intrade.com in your country of residence. If there are any doubts, “then you should not use our service until you take suitable professional advice,” says the website.

That’s a shame. It could have been fun playing these prediction markets. Furthermore, the ones with low volumes, like the recession market, will not necessarily live up to the findings from academic studies that prediction markets provide better forecasts than opinion polls.

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This article has 6 comments:

  •  
    Jun 10 09:54 AM
    The US is already in recession. Even if the numbers don't say that. Inflation in understated mean GDP is lower than stated. Bill Gross say that GDP is 1 point lower than stated. I will tell you why @
    theinvestingspeculator...
    Reply
  •  
    Jun 10 11:35 AM
    Speculator: You are probably right. Indeed, preliminary GDP estimates during a dowshifting phase like now usually get revised down. As the Intrade contracts are based on final estimates, that was another attraction to trading them. The Q1 estimate of 0.8% growth in GDP, for example, could be revised to a negative number by the time revisions are finished.
    Reply
  •  
    Jun 10 04:34 PM
    Whether recession now or not, I want to point to the future. With the new Democrat Congress we can expect both added taxes and increased spending. We will muddle along to fall when the bottom will drop out. Skip the niceties of current reports and gaze at the lights at the end of this tunnel. We are trapped in a situation that is known as a ruin path.
    Reply
  •  
    Jun 11 02:45 PM
    Check out bet2give.com
    It is a charity driven prediction market - completely legal. You can trade on various topics and all of the winnings are donated to your designated charity.
    Reply
  •  
    Jun 11 02:56 PM
    Check out bet2give.com It is a prediction market that it is charity driven. You can trade on a variety of topics and all of the winnings go to your designated charity...competely legal!
    Reply
  •  
    Jun 14 01:43 PM
    Why would anyone want to "trade" in contracts that relate to yes there is a recession or there is no recession? Are you As HOL s?

    Where do people get their smarts from? Go read what Bill Gross thinks about the financial literacy of most Americans.

    The jerks that put us into the housing mess should go to jail and have their licenses and diplomas revoked.

    The speculators in commodity futures trading should be legislated out of business.

    And everyone should be made to take a course in ethics.

    It really makes me angry as to how many people spout B/S. and cause all kinds of economic hardships for our country.

    Fools
    Reply
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