It's Sunday night and below once again is the weekly summation, the main positives that Q3 GDP growth rising 33% (after falling 31.4% in Q2, so we're even again) and early voting setting records. The main negatives, as always, are the COVID spikes which this week includes the new lockdowns in Europe and the worst weekly market sell off since June. The bonus this Sunday night is a prescient article from Medium that offers an explanation for the crazy stock market ride we're on and how election junkies can turn it into profits.
Succinct Summation of Week’s Events for 10.30.20
Succinct Summations for the week ending October 30th, 2020
Positives:
1. Early voting sets record; We are closer to the end of the cycle then the beginning.
2. GDP growth rose 33.1% in Q3 after falling by 31.4% in Q2.
3. Durable goods orders rose 1.9% m/o/m, above the expected increase of 0.4%.
4. New home sales came in at 959k for September, above prior revisions of 994k.
5. Jobless claims fell 40k w/o/w from 791k to 751k.
6. Home mortgage apps rose 0.2% w/o/w, above the previous decrease of 2.0%.
7. Personal income rose 0.9% m/o/m, above the expected increase of 0.3%.
8. International trade deficit came in at $-79.4B in September, above expectations.
Negatives:
1. Covid Spike in US (and Worldwide) threaten recovery; Lockdowns imminent in Europe.
2. Markets sell off more than 5% in worst week since June.
3. Pending home sales fell 2.2% m/o/m, below expectations.
4. Wholesale inventories fell 0.1%, below expectations.
5. Chicago Fed National Activity Index came in at 0.27 for September, below expectations
6. State Street Investor Confidence Index came in at 80.1 for October, below previous 83.9.
7. Consumer confidence stands at 100.9 for October, below expectations.
8. Chicago PMI stands at 61.1 for October, below the previous 62.4.of 0.3%.
Inside the Wild Stock Market for Politics Where Traders Bet On Our Next President: How PredictIt turned a chaotic election into a haven for political junkies looking to make a buck (Medium)
10-31-20 How PredictIt Became the Biggest Winner in the 2020 Presidential Election | Marker
Right now someone, somewhere, is trying to make money
off the latest news cycle. When the coronavirus pandemic began sweeping
the globe, people began flipping hand sanitizer, while fashion brands pivoted to selling masks. When
nationwide protests against police brutality and systemic racism erupted in the
wake of George Floyd’s murder, some retailers saw an opportunity to sell merch,
such as Black Lives Matter–themed wine stoppers and garden gnomes.
And when President Trump tweeted on October 2 that he had tested
positive for Covid-19, traders looking to earn quick cash on yet another
campaign hiccup turned to PredictIt, an online prediction market where people
buy and sell shares of what are essentially futures contracts for political
events like elections, nominations, and presidential pardons.
I was one of them. Around 1:00 in the morning of October
2, I checked my phone one final time before going to bed and saw the news.
While the rest of the waking world lit up social media, I lay in bed
frantically refreshing PredictIt. There, prices were rising for bets that Mike
Pence or Kamala Harris would win the presidential election — some traders were
presumably considering the possibility of Trump having infected Biden at the
debate earlier that week and either candidate dropping from the ticket. I followed
the spike for a few minutes before jumping in to buy shares of both VP
candidates, hoping to sell them off later that day as more traders heard the
news and drove a second spike. Instead, the spike was already nearing its peak
by the time I invested; I bought high and was stuck with more than 200 shares
whose prices plummeted back to reality by the time I woke up.
Political chaos is generally bad for markets. That is, unless the
markets are specifically designed to quantify political uncertainty, as
PredictIt is. Just as companies like Robinhood and DraftKings have capitalized on the
gamification of day trading and dearth of entertainment while millions found
themselves stuck at home and in need of a distraction from the pandemic,
PredictIt has benefited from an unprecedented election cycle. The site,
launched in 2014 as a sort of educational experiment about the predictive power
of markets, is a partnership between Victoria University of Wellington, New
Zealand, and Aristotle International, a political data company that manages the
site. Since then, it has grown into a thriving marketplace, with around 100,000
traders who have funded accounts on the site—a number that has grown as the
2020 election draws closer, with many new traders drawn to markets related to
the presidential race.
PredictIt is permitted to run these real-money political
prediction markets in part because, as stated in a 2014 Commodity Futures
Trading Commission no-action letter that helped distinguish it
from illegal online gambling sites, it is a “small-scale, not-for-profit,
online market for event contracts in the U.S. for educational purposes.” The
data PredictIt collects from users’ trades are made available for free to more
than 230 academic partners, which have used the data in research on financial markets, monetary
policy, and prediction markets. While Victoria University of Wellington is
a nonprofit institution, Aristotle is a for-profit D.C. firm that takes 5% fees
on withdrawals and 10% fees on profits to help cover costs for staffing and
managing the site. Besides managing PredictIt, Aristotle also offers technology
consultancy to PACs and advocacy groups; data and financial management software
to political campaigns; and voter, donor, and consumer databases to campaigns
and corporations.
Futures trading on political events is like catnip to
people who not only love trading and making wagers but also yearn to feel as
though their time-consuming habit of following political news and election data
has value that can be translated into material benefit.
Because PredictIt tracks the value of shares and the
volume of trades in certain markets over time, the site has gained authority as
a predictive tool, alongside forecasting models like FiveThirtyEight’s
election forecast and RealClearPolitics’
polling averages. For certain events, PredictIt market data has been
a more accurate predictor than media consensus: In 2016, when some political commentators and election
forecasts were overconfident in Clinton’s chances of winning the presidential
race (Huffington Post’s
forecast had Clinton at a 98% chance of winning on Election
Day), PredictIt’s odds for Clinton based on
trading were roughly 70% to 80% in the final month of the campaign.
Now, a week before the 2020 election, as FiveThirtyEight forecasts an 87% chance
of a Biden win, PredictIt’s odds for Biden are coming in at around
60%, with Trump hovering around 40%. This could simply be the result of ardent
Trump supporters pushing up the price of their preferred candidate, along with
pessimistic Democrats, hardened by a surprise upset four years earlier, hedging
their bets to avoid another crushing loss on their investments. Or, just
as some believe S&P gains can help predict
an incumbency reelection, PredictIt’s tighter odds could be another instance of
the market flagging something polls can’t see.
Futures trading on political events is like catnip to
people who not only love trading and making wagers but also yearn to feel as
though their time-consuming habit of following political news and election data
has value that can be translated into material benefit. If a primary role of a
market is to facilitate trades, most successful online markets can also boast a
secondary role of keeping traders feeling busy, entertained, and useful. But
while real-world markets often suffer (or cause suffering) from the fallacy of appearing stable and rational,
PredictIt’s intentional peg to political uncertainty and amateur
prognostication is in some ways a more genuine and authentic interpretation of
what markets truly are: a collection of messy individual bets, dependent on
luck as much as intuition, that en masse form a parsable, sometimes wiser
whole.
It was during the early phases of the U.S. coronavirus
lockdown in March that I first discovered PredictIt. Suddenly in need of
distractions, I turned to tracking how prices in PredictIt markets tied to the
Democratic primary and Trump’s reelection were shifting in response to a
national crisis. Like many of the millennials who’ve responded to the siren
song of investment apps like Robinhood during the pandemic, I quickly moved
past passive observation to taking comfort in buying and selling simplified
snapshots of a political system similarly careening into disarray.
One of the things I soon learned was how easy it can be
to mistake reading a lot about politics for having any honed ability to predict
political outcomes. A couple of my early trades reinforced this fallacy: I made
just over $3 wagering if Montana Governor Steve Bullock would file to run for
Senate by March 9 and flipping shares of Stacey Abrams as a possible VP pick to
take advantage of Biden’s sudden sweep of the Democratic primary, leaving me
feeling utterly triumphant. But a series of losses quickly negated those
profits: I messed up predicting if there would be a Biden-Sanders debate in
April and the degree to which Trump’s job approval rating would rise during the
crisis. When your own money is on the line, you suddenly realize how often
you’re wrong compared to how often you convince yourself that you were correct
from the start. If I’d been forced to wager on every political event I
confidently prognosticated over the past few years, I could easily imagine
being deep, deep in the red.
More than 100 million shares have been traded so far in
the “Who will win the 2020 U.S. presidential election?” market, while a
smaller, more niche market like “Will Trump grant clemency to Paul Manafort in
his first term?” has had fewer than 50,000 trades. Markets can range from broad
and national (“What will be the popular vote margin in the 2020 presidential
election?”) to minute and local (“Will California Proposition 15 be approved in
2020?”) to global (“Will Kim Jong-Un be Supreme Leader of North Korea on Dec.
31?”). This summer, PredictIt even launched several markets where traders bet
on whether Kanye West would make it onto the general election ballot in certain states. However, there are limits on
the types of political markets PredictIt can run. For instance, it can’t
facilitate trades made on questions about “death, disease, or terrorism,”
according to PredictIt spokesperson Will Jennings, so you won’t find any
markets directly addressing the president’s Covid-19 diagnosis.
Each share in a PredictIt market is priced between $0.01
and $0.99 and ultimately pays out at $1 if the prediction comes true and
nothing if the prediction is wrong, but traders can also buy and sell shares
anytime before a topic closes. Each share represents either a “yes” or “no”
position, meaning you are always betting that something will or won’t happen.
Some markets have numerous different “contracts,” each with their own “yes” or
“no” share options; the market titled “What will be the net change in Senate
seats, by party?” has 12 different contracts, where you can buy “yes” or “no”
in options like “Democrats +2”, “GOP +1”, or “No Change.”
Despite its academic applications, the site has some
noticeably gamified features to encourage betting: In return for selling
greater numbers of shares for profit, traders are awarded higher-level numbers
and new titles in the vein of a role-playing game like Dungeons &
Dragons or World of Warcraft that awards experience
points and levels up characters for completing missions. (I am Level 3, a
“Diviner.”) PredictIt also lists its traders on an esports-style leaderboard, ranked by the highest returns on
investment. Traders can earn “trophy icons” on their leaderboard listings for
achieving a certain number of “wins,” which is the act of selling a share at a
profit.
Each market also has its own comment section where
traders express frustration at certain prices being too low or high, explain
why their prediction will ultimately prevail, or do their best to convince
other traders to make investments that likely benefit their own positions in
the market, using persuasive arguments, links to polls and articles, and,
sometimes, completely fabricated information. “BREAKING: Rudy Giuliani is covid
positive,” one user posted the morning of October 9, possibly with the goal of
shorting Trump’s presidential bid. (As of writing this article, there has been
no news of Giuliani testing positive for Covid-19.)
I bought 22 “yes” shares in Kamala Harris in May at $0.42
and held them until the market closed, walking away $12.76 in profit (before $1.28
in fees).
One reason these seemingly absurd gambits (which,
admittedly, could also just be jokes) could influence traders in PredictIt’s
comment sections is that unless you know someone’s username, you have no idea
who’s making the comment. Almost any U.S. citizen or resident over 18 can trade
on the site, and unlike insider trading protocols around stock, a campaign
staffer who also trades on PredictIt could decide to bet on the outcome of
their boss’s chances of winning an election. Jennings points to PredictIt’s
investment cap (traders can only invest up to $850 on any single contract) as a
measure that helps prevent any one trader from taking advantage of the system.
If the chance that a politician is trading in their own
market feels unfair, it hasn’t stopped me from trading, though I exclusively
deal in small sums of money. I’ll usually risk only between $5 and $15 on a
single contract, but some traders have thousands invested across dozens of
markets. According to Jennings, around 500 to 1,000 of PredictIt’s traders may
be trading full-time. In 2018, CNBC reported that one PredictIt trader, Tom
Gill, was making 5,400 transactions and $25,000 in earnings in just one month.
The only time I’ve felt an urge to trade in larger
volumes was during the height of this year’s Democratic VP nomination market,
which offered “yes” and “no” shares on 34 politicians ranging from more-likely
options like Elizabeth Warren and Gretchen Whitmer to long shots like Andrew
Cuomo and Hillary Clinton. This was a particularly raucous market with numerous
spikes and dips; more than 89,000,000 trades were made and 180,000 comments
were left by the time it closed on August 20. I bought 22 “yes” shares in
Kamala Harris in May at $0.42 and held them until the market closed, walking
away $12.76 in profit (before $1.28 in fees). But I also tried to buy low and
sell high on Tammy Duckworth and Amy Klobuchar well before the market closed
and failed to time up my sales with any media-driven hype. I was convinced
that CBS News reports that the Biden campaign had
begun formally vetting Klobuchar would drive her price up; instead, I bought
high, like every other trader reading the exact same article, trying to pull
off the exact same trick.
While novices like myself largely tracked “yes” prices
up and down, more serious traders often substantially hedged their VP bets to
prepare for any outcome. “My strategy in the VP market was to mostly buy ‘no’
shares across the board,” says Jon Kimball, an active PredictIt trader and
co-host of Election Profit Makers, a politics podcast
centered around PredictIt. (Beyond PredictIt’s own comment sections, there is a
small but active online ecosystem for PredictIt traders stitched together
from Twitter threads, podcasts, Discord servers, and
an invite-only
subreddit.) Kimball bought the short position anytime a new
candidate got a bump in the news; by the end, he was maxed out on bets against
almost everyone except Harris and Rice. “I made about $1,000 in this market,”
he says, “which isn’t that great considering I had about $3,000 tied up in it.”
Despite its use in research and election coverage, a
heavy trader like Kimball doesn’t place much weight on PredictIt’s use as a
forecasting tool. “The fact that Trump is still trading at $0.40 to win the
presidency is insane in my opinion,” he says, referring to market shifts
following Trump’s Covid-19 diagnosis. During the same time period, FiveThirtyEight was
giving Trump a 13% chance of winning. “Trump can certainly still win, but his
odds are more like 10% to 20% if the election were held today, so I don’t think
the market is rational there.”
The gap between price and prediction may be especially
concentrated in the most popular markets, like “What will be the Electoral
College margin in the 2020 presidential election?” where novice traders bet
more with their convictions and emotions. “Where I might use PredictIt as a
forecasting tool is in the more esoteric markets, like a party primary race,
where inside knowledge carries a lot of weight,” Kimball says. “But most markets
on PredictIt are just reflecting the conventional wisdom at the moment.”
If anything, PredictIt can sometimes feel almost
cautious in its reversion to the historical mean. In congressional race
contracts in states with strong partisan leans, prices lean heavy on party
incumbents. Social media and news media have, for more than a year, covered Amy
McGrath’s record-setting fundraising in her Senate
race against Mitch McConnell in Kentucky, often framing McGrath as a serious
contender to flip the seat blue. The reality of this is very unlikely; FiveThirtyEight’s Senate forecast gives McConnell a 96% chance
of winning reelection. The shares of a McConnell victory are currently priced
at $0.94 on PredictIt — perhaps a very slight deal
for those hoping to earn a profit on the margins, but far from being unduly
influenced by speculation alone.
Just as I tell my friends they’re better off investing in
a boring mutual fund instead of gambling on individual stocks, I would probably
earn better returns if I treated PredictIt more like a spreadsheet than a video
game.
This correlation speaks less to PredictIt having a
unique ability to accurately predict events than it does to PredictIt traders’
ability to read the polls and visit other forecast models. In a world where no
methodological political forecasting or analysis existed, PredictIt traders
would likely be more heavily influenced by their own personal preferences and
assumptions, which could result in a market that acts more like a poll of a
certain subset of Americans who are more engaged with politics than the average
voter. Even with the aid of other prediction markets and models for reference,
some of that emotional betting still persists on PredictIt — what Kimball
refers to as “retail gamblers” who make bets “with their hearts.”
This mix of quasi-methodological, quasi-personal trading
is nothing new to markets. According to Bloomberg, 21,000 people with $40 million in
assets are copying the stock market trades of amateur English investor Jay
Smith through EToro, a “social trading” network. Smith gained his following
through impressive gains — his portfolio is up 62% this year — but the fact
that he is a real-life amateur makes following his trades and advice feel more
personal, fun, and aspirational than if he were a brokerage or fund. So too is
it more fun to make trades based on a mix of genuine research alongside the
emotions and gut intuitions that, correct or not, are largely impossible to
separate from any perspective into politics.
Just as I tell my friends they’re better off investing
in a boring mutual fund instead of gambling on individual stocks, I would
probably earn better returns if I treated PredictIt more like a spreadsheet
than a video game. And if I was a full-time trader, waiting for “no” prices to
dip a few cents so I could hedge my bets across a dozen contracts, that’s
probably what I’d have to do. But the lure of PredictIt for me still lies in
the hypothetical rather than the practical, even if I still occasionally feel a
certain moral uncertainty in making trades based on news of events and
decisions that affect — often profoundly, and negatively — the lives of real
people. I am no less bothered by it, however, than I am by the knowledge that,
right now, traders are buying and selling shares of companies working toward coronavirus vaccines.
If the 2016 election drew more Americans than ever into
regularly consuming news, the pandemic has required many of us to crank that
habit up to 11 as we’ve searched for ever-updating health expertise and
advising, economic indicators and progress reports, and reports of national and
local responses to the crisis. And if I feel a self-imposed obligation to
consume this information, I reserve the right to feel 1% less powerless in the
face of an unending tide of disasters by placing bets on how certain events may
turn out. If I earn enough money to buy lunch one day, that isn’t half bad,
either.
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