The forecast for prediction markets

0:06Rob Armstrong: PUSHKIN. Prediction markets let you bet on pretty much anything. You can bet on sport and politics, both things that Brits have been used to for years, but that Americans have gone absolutely bonkers for more recently. Not sure how healthy that is. But anyway, those clever young things in Silicon Valley think we should be betting on everything. Every life event is something that you can bet on. One thing that's becoming increasingly popular is betting on markets, financial markets. So will the US raise interest rates? Will the UK? What will the euro be doing in the next few days? Will it be up or down against the dollar?

0:47Rob Armstrong: At a certain point, this starts to look and smell a lot like mainstream wholesale derivative markets. So today on the show, is this a disaster waiting to happen or actually a useful way for investors to gauge the mood? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist in London. And by the time you hear this, I'll be relaxing on a sun lounger in Greece. Hooray! Joining me from New York City is the big man Rob Armstrong off of the Unhedged newsletter. um rob like the us has gone kind of gambling crazy right like sports betting is quite new

1:31Katie Martin: for you guys isn't it it is i was shocked when i moved to the uk and there were betting shops on every street whereas in america there's like one dreary place that you were allowed to bet on horse racing in every city they called these things off-track betting and it was like 80 year old men chain-smoking cigarettes and losing money. But it's a different story now, and everybody can do it from their phone. And you watch any sporting event, half the ads seem to be for sports betting products. As a sports fan, I think this is a complete disaster, and I don't approve of it.

2:07Rob Armstrong: No, but it sounds like... So when was it permitted over that? This is something that's quite recent in the past couple of years, isn't it? It does sound like the Americans have jumped in with both feet. There's a lot of people with sports gambling problems all of a sudden that weren't there before.

2:22Katie Martin: Yeah, I think that is all true. And I don't claim not to be a hypocrite on this topic. You can't be interested in finance like you and I are without having some admiration for the principle of settling a disagreement about what the world is going to do by putting some money on it. You think you're right and the rest of the world is wrong. You have two options. You can gas on about it until everybody throws you out of the house. Or you can put some money down and see who's right and who's wrong. And so I think betting, in the broadest sense, is a really good way to clarify your thoughts.

3:05Rob Armstrong: There are some, like, bad things that come from this. Very bad things.

3:11Katie Martin: Yeah, no question.

3:12Rob Armstrong: These prediction markets allow you to bet on things like wars. And to me, that's like uncool. You shouldn't be betting on wars. And then there was that whole thing recently where some people have bet on one of these prediction markets that the U.S. was going to invade Venezuela. And then it became this whole dispute because it was like, well, did the U.S. invade or not invade? What is an invasion really? Does it require boots on the ground? How many boots on the ground actually counts as an actual invasion? So a bunch of people who had bet on the US invading Venezuela were cross that they didn't get paid out by one of the big betting platforms.

3:49Rob Armstrong: It was just a kidnapping, not an invasion.

3:56Katie Martin: So to me, some of this is like deeply nihilistic and awful.

4:01Rob Armstrong: The other thing that I think is deeply nihilistic and awful is that apparently some betting platforms are at least considering allowing you to bet on wildfires. So will Rob Armstrong's house catch fire, for example? Like, what does that incentivize people to do? What could that possibly mean?

4:20Katie Martin: Well, I mean, look, you know who else bets on wildfires? Insurance companies. And we're glad they're around. You know, my point being that having ways to make a market for future events is a very important way for people to transfer risk. I think the kind of concerns you're talking about, betting on the wrong kind of events, disputes about what counts as an event or not an event, a lot of that boils down to concerns about what we call in the financial markets insider trading. And so it is bad to bet on a war. It's really bad to bet on a war if you're one of the people participating in it and you have information other people don't have.

5:09Right.

5:10Katie Martin: And we have reasonably clear rules for what that means for people who participate in financial markets. You know, if you are a company and you know what earnings it's going to report in a few days, you're not allowed to buy and sell the stock on the basis of that information. Does the same apply to a soldier who's part of the unit that is being prepped to go do something? I don't think we know the answer to that question. I mean, the regulatory regime has to catch up with the reality of these markets. And it should be noted that prosecutors, quite rightly, are going after this kind of trading on prediction markets.

5:51Katie Martin: So here from the FT in May, a Google software engineer allegedly used confidential information to make more than$1 million on prediction market, polymarket, according to criminal charges unsealed in New York federal court. So it is, there is a door here for insider trading. And it's no help to say only I only did it on polymarket. Insider trading is insider trading.

6:21Rob Armstrong: So, well, companies are kind of talking to their staff about, look, you cannot use information about how the company is doing to inform anything that you do on prediction markets.

6:31Katie Martin: I mean, if I was running a bank, I would be scared about this stuff, right? I'm the head chief compliance officer at one of these things. This is one of the things that keeps me up late because it is an open temptation to your people to do something that either looks awful or is awful. So this is a recent story from the FT. Goldman Sachs has warned employees to limit their bidding on prediction markets to sports and entertainment categories as it confronts compliance risks posed by wagers on everything from elections to interest rates. So that is good. You can bet on Katy Perry or whatever, but not on anything more serious than that.

7:09Rob Armstrong: So my sort of my starting point for this whole thing is I feel like prediction markets are bad. I just I don't like them. I just think there's a lot of poor behavior that can come out the back of them. But I've had a few conversations recently with investors who are like, oh, no, sure, we use them all the time. Like not to place bets on them, but to use them as a way of figuring out who is likely to be the next chancellor, the next finance minister in the UK. What is the Bank of England likely to do next? You know, where is public opinion on these things? And one of the reasons why I think this is interesting is that they, you know, I was chatting to someone the other day who was saying sometimes the prediction markets are actually better than normal financial markets at giving you a steer about some of these things.

7:59Rob Armstrong: So, for example, you look at, I'm sure you remember, Rob, regular listeners will remember, at the start of the war in Iran, short term government debt markets in the UK and Europe just got absolutely smoked. right so there were lots and lots of hedge funds that have been betting on interest rate cuts in the uk for example and when they got fried by the massive jump higher in oil prices they had to rush in the other direction and so if you look at mainstream financial markets they were telling you that expectations have gone from two interest rate cuts in the uk to four interest rate rises in the UK in a straight line.

8:39Rob Armstrong: Now, there is no universe in which the Bank of England was going to raise interest rates four times. But because financial markets have become so crowded and were behaving so stupidly, that's what it looked like the market thought was going to happen.

8:55Katie Martin: Everyone ran from one side of the boat to the other side of the boat, and the boat capsized. Is that called keeling when a boat falls?

9:02Rob Armstrong: I don't know. Our friend Brendan Greeley would know. He knows a lot of things about boats. Brendan, if you're listening, let us know. But prediction markets will give you a much more sensible read. They will say, look, okay, maybe the Bank of England will raise rates once or twice, and that'll probably be enough. So I do think there are more and more kind of instances where it does make sense for traders just to keep half an eye on where prediction markets are. Because actually maybe they do tell you something useful.

9:32Katie Martin: Look, there's three things that markets basically do. The first thing is if you have too much savings and I have an investment project, we can swap. You have too much money. I need money. We use markets to swap. That's efficient for society in general. The second thing they do is they let people lay off risk. I have a lot of risk, more than I can handle. You have less. You know, and that's insurance companies, right? We can trade risk. But the third thing that markets do that they don't get enough credit for is they provide information. right they they are they they are a way they're a kind of voting machine and we can watch the voting machine in real time and that can be very informative and so i think prediction markets are useful and i i i participate you know i've had the flutter the random flutter on u.s politics at different times and uh you know using one of these things and i watch them closely when i'm writing you know i'm wondering what the world thinks about what's going to happen i will look up at what the bets say.

10:35Katie Martin: I have real concerns about the insider trading questions you mentioned, but I like worlds with more information and I like worlds where people can take a belief. I have a contrarian belief. I think I should be able to monetize that. I'm not against that. You know, I agree with you. It's creepy when people are betting on fires and on wars. Totally creepy. Well, Katie, we live in a creepy old world, you know?

11:03Rob Armstrong: We do. We do live in a creepy world. But so now we're at the point where quite a few sort of trading platforms for things like bonds and currencies and other things, they have widgets embedded in them that enable you as a trader to sort of check on, you know, where is public opinion on this? You know, where, who does Polymarket think is going to be the next, you know, chancellor in the UK? You know, and actually, you know, I feel icky about the whole using insider knowledge thing. But actually, for a lot of traders, that's what makes it even more useful. So do you remember in the run up to Trump picking Kevin Walsh to be chair of the Fed?

11:41Katie Martin: Yes, I was watching the prediction markets very closely on that very topic. I remember it well.

11:46Rob Armstrong: Because maybe somebody who genuinely does know who's going to get the nod from the president will put a bet on it. And so that is extremely useful information.

11:56Katie Martin: Yeah, so for traders who mutters, they have to hope that there is insider trading. And there are, by the way, free market extremists who think insider trading is good, right? That that information should be released into markets for just the kind of reason you described. Does the CFO know how good or bad the numbers are? Let her move the market. And that is information about reality being released into markets. I do not believe this is true. I just want to pour one out for the laissez-faire extremists who take this view, right? Because they're out there, right?

12:34Rob Armstrong: One thing that I am kind of pleased about in relation to prediction markets is, like I say, when there was that whole massive argument about has the US invaded Venezuela and should these people get paid out on their predictions that the US would invade Venezuela, it came down to, well, you know, really what is an invasion? This is why proper financial markets like stocks and bonds and derivatives and all that regulated stuff in between. That's why it employs thousands of extremely well-meaning, extremely boring people. And I say this with love in my heart, who spend a lot of time defining things.

13:14Rob Armstrong: Yeah, writing contracts. If you are buying a contract that is based on the euro being at a certain level, at a certain time in future, you're looking at a certain exchange rate, the nerds will say, what do you mean by a euro? How are you measuring that euro? Are you just using this data source or are you using a combination of data sources? And what if one data source is different from the others? Then how do we treat that? So this very legalistic, very technical, unbelievably boring stuff, that's why that's there. It's so that you don't have people who are like jumping up and down and saying, well, that's not fair.

13:53Rob Armstrong: You know, I think the euro was trading at$1.25 on this day. You can get out, you know, shuffle your papers from the very, very boring documents from the International Swaps and Derivatives Association and say, look, says here, black and white. Yeah. This seems like a solvable problem for me.

14:11Katie Martin: You know, if the prediction market grows, there is going to have to be, they're going to have to hire those same very well-meaning, boring people to write the contracts and you're going to have to sign on the bottom line. I mean, for me, the salient question isn't technical. There's a bit of a moral question here, which is, and this is true of so many things, where does a marketplace for information where people can place bets turn into like a speculative hazard, right? In a way, in the very same way that, you know, it's fun to bet 10 bucks once in a while in Vegas or whatever on a college basketball game.

14:54Katie Martin: But at what point are you creating gambling addicts, which are a real thing and which we know exist, right? So there is a larger, you know, I'm less worried about the technical stuff. I think we can make rules about insider trading and, you know, how these contracts work and so forth. That's a solvable problem. But the like society of speculators thing, the society of gamblers thing, that's a much harder question. And I feel very torn about it myself because I love to take a flutter, as you British people would say. but at the same time I know you're this stuff is fire and you can get burned at the same time so

15:35Rob Armstrong: I feel very torn about it and I do think some things should just not be up for kind of light hearted jokey debate like this like wildfires so on that cheerful note we're gonna be back in just one second with Longshot

16:02Rob Armstrong: Okie doke, it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what are you saying?

16:11Katie Martin: I'm very much long cash these days. You know, Katie.

16:15Rob Armstrong: Are you?

16:16Katie Martin: I love cash right now. Now, you know, Katie, that I always believe that everyone should always be exposed to the equity market. No matter how big a bubble you think you're in, you can't afford to leave the table altogether. their equities are a long-term wealth builder. I love them. But for a long time now, I've had too much cash in my portfolio because I'm a bit of a scaredy cat and I go through waves of feeling, God, I have too much cash. Right now, I tell you, I'm feeling pretty good about my above average cash allocation.

16:45Rob Armstrong: I thought you were talking about like physical cash. I thought you were weird. Oh, I like that stuff too.

16:50Katie Martin: I love the feeling of walking around with like, for no particular reason, a huge amount of cash in my pocket. It makes me just, makes me feel powerful. You're a weirdo.

16:57Rob Armstrong: I don't get it. I'm so over paper money and coins and stuff. I don't get it at all.

17:02Katie Martin: I love to take out a$100 bill just for the feeling of pulling a $100 bill out of my wallet. I love it.

17:08Rob Armstrong: No, it does nothing for me. I am long London mansions. They're going cheap. So we have a story in the FT just the other day, which focuses in on Montpellier Square, which is a very bougie, I believe you Americans would say, Tony neighborhood, around the corner from Harrods, dead posh. One house there recently sold more than 30 % below what it might have gone for a decade ago. And once you take into account inflation, the price had more than halved. Like there's a real issue going on with super prime mansions in London.

17:46Katie Martin: Love a good mansion.

17:48Rob Armstrong: Love a mansion.

17:49Katie Martin: That's why I got into journalism.

17:52Rob Armstrong: So let's just pick up some nice cheap mansions and then we can have some fun housewarming parties and it's all going to be great. Listeners, please go straight ahead and purchase a mansion. Let us know when the party is. We will be there. In the meantime, we're going to be back in your ears in a few days. So listen up then.

18:15One Elliott.