Online Recession Betting Not Quite What It Seems

by: Larry MacDonald

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.