A quick note for any readers in Great Britain: I will be appearing on Bloomberg UK 7pm local time.
The subjects: Oil, Semiconductors, Jobs, Earnings . . .
Last Thursday’s presidential debates surprised many of the 63 million Americans who tuned in by offering substantive policy discussions. The candidates were relatively light on rhetoric and theatrics. That represents an improvement over the style-heavy focus so common most election years. What was also interesting is how the outcome of the debates diverged from the political futures exchanges, which have become the darlings of the economic and political punditocracy.
These exchanges have a host of inherent weaknesses:. They have a very small number of active participants; The dollar amount wagered is tiny; and, and upon closer inspection, these markets have what can only be called a mixed track record. That should be of little surprise to students of the capital markets, as the liquid, cash-rich exchanges offer no better utility in predicting the future. Investors who make financial decisions based on what these “prediction markets” suggest are engaging in risky financial behavior – despite the fact they have become de rigeur among the talking heads.
What are the reasons for relying on markets as predictors of the future? I consider the following concepts as key to the belief that futures markets can be used as predictors:
· Price contains all the information one needs.
· Human beings are rational economic players.
· Information distribution is highly efficient.
· Market participants capitalize on that information.
· Markets are free from manipulation.
It should be apparent to most market observers that each of the above items is, at best, only partially true: Investors are hardly unemotional; The markets may be efficient – eventually – but often contain pockets of false or poorly disseminated information; and. And, while it may be difficult to manipulate the giant U.S. equities markets, the diminutive futures exchanges are much more easily influenced.