Canada and Mexico are rebuking the top Democratic presidential candidates, senators Clinton and Obama, for vowing to renegotiate the North American Free Trade Agreement and threatening to pull out of the pact altogether if America's neighbors refuse.

"Nafta has been a win-win-win for Mexico, the United States and Canada, proving that a rising tide can lift all boats," the Mexican ambassador to America, Arturo Sarukhan, said in a written statement. "Mexico does not support reopening Nafta. It would be like throwing a monkey wrench into the engine of North American competitiveness."

Canada's finance minister, James Flaherty, said he was troubled that the candidates' anti-Nafta rhetoric was departing from reality. "It is a concern," he told reporters in Toronto, according to the Canadian Broadcasting Corp. "I realize they are in the middle of a presidential nomination race so they have many things on their mind. But I would think that it's very important that whoever the nominee is enters into a discussion with those who are very knowledgeable about Nafta."

Obama is rattling sabers at two nations who happen to comprise our biggest, best non-domestic sources of natural gas and oil.

It’s damn near impossible to sell the positives of free trade these days. All we have are facts, and facts are just no damn good when feelings are so raw and negative.

No one should underestimate the potential dire consequences of a reckless, needless, fruitless trade war.

Obama threatens to end NAFTA in order to renegotiate its terms, ignoring that the Canadians and Mexicans won’t just go along because he’s not George Bush. Weren’t the Democrats promising to mend fences with other nations, not erect them?

Wonder if the hapless consumer will ever figure out that Obama’s subservience to the union leaders is about to turbo-charge their home heating and gasoline costs?

Not a single word on the concept of probabilistic prediction:

The financial incentive to get it right, and the ability to draw on bettors from around the world — anyone who might have any information on whatever proposition is being bet on — is what gives these markets their uncanny predictive power.

Mixing prediction markets (a reality) with decision markets (a utopia):

Economics professor Robin Hanson, who has studied prediction markets extensively, told me he envisions a “futarchy” — government by futures contracts traded in a prediction market.

Claiming that these information aggregation mechanisms (the prediction markets) will supplant the advanced indicators that they feed on:

Today prediction markets are threatening to replace political polling — they’re certainly doing a better job. Tomorrow, who knows? Prediction markets might replace politics itself.

Here's the relevant section from the Herald story, published 18 months ago, with the portions purloined by the Times italicized:

Paco is highly addictive because its effect is so short—a couple of minutes—and so intense that many users resort to smoking 20 to 50 cigarettes a day to try to make its effects linger. ...

Paco is even more toxic than crack cocaine because it is made mostly of solvents and chemicals, with just a dab of cocaine, said Jim Hall, executive director of Up Front Drug Information Center, a Miami nonprofit that has been tracking cocaine abuse for more than two decades.

Paco is highly addictive because its high lasts just a few minutes—and is so intense that many users smoke 20 to 50 paco cigarettes a day to try to make its effects linger. Paco is even more toxic than crack cocaine because it is made mostly of solvents and chemicals like kerosene, with just a dab of cocaine, Argentine and Brazilian drug enforcement officials said.

Herein is a formula for making a lot of money as a money manager. Have a shtick, get known, wait for your sector to get hot. In the 1970s James Dines acquired fame and fortune by being a gold bug. In the 1990s George Gilder minted money as a fan of technology stocks. In the past six years Renee Haugerud's Galtere International Fund...has grown from $1 million in client capital to $1.5 billion by being in commodities.

An antidollar routine is sure to have its day in the spotlight. Over the past 40 years there have been four stretches of at least three consecutive years when the dollar sank pretty steadily against foreign currencies, the most recent episode the one that began in 2006. Someone recommending gold or foreign stocks during those periods would look like a genius.

Schiff's Chicken Little take on the U.S. economy--that it is on the brink of collapse--isn't new. He's been serving up the same spiel for a decade. But these days he's getting more applause than eye-rolling from jittery investors. He's also getting a lot of attention from financial media outlets, in part because he has mastered the delivery of three-alarm sound bites. ("The consumer is in great trouble!" "Things are worse than in the 1970s!")

Schiff perfected his rant in stock newsletters in the late 1990s, when few investors had heard of him or Euro Pacific. He posted commentaries on his Web site and started sending them to CNBC. His first big media hit came in April 2005, when CNBC asked him to appear on Squawk Box. Schiff faced a hostile panel when he said the dollar would lose half its value--which still hasn't happened.

You can buy a futures contract betting that McCain, or Clinton -- or any other candidate -- is going to be the next president. Or you can bet on whether the GOP will recapture the House of Representatives. Or whether the US will bomb Iraq. Or capture Osama bin Laden. You can do it all in the brave new world of online prediction markets.

That kind of gamble may not be for you. But the market prices of political candidates and current events have remarkable predictive power. Academic studies have shown that they have a far better track record than traditional polling. And they ask questions that traditional pollsters would never think of.

The prediction markets nailed the GOP sweep in 2004, when the polls were showing that John Kerry was going to win and that Republicans were going to lose ground in congress. This year they predicted Barack Obama's surprise win in the Iowa caucuses. And before Saddam Hussein was captured, no one was taking polls on when people thought it would happen -- but the online futures markets predicted it. The internet has made modern prediction markets possible. But before modern scientific polling techniques were introduced in the 1940s, betting on political candidates was widespread in America. Bets were traded on stock exchanges, and were reported in newspapers every day just like polls are now.

The New York Times wrote in 1924, "Wall Street betting odds are ‘never wrong.’” In fact, from 1886 to 1940 they correctly forecasted the outcome in every presidential election with the exception of one -- Woodrow Wilson in 1916.

Here's how modern online prediction markets work. Let's say you want to be that John McCain will be the next president. To start, you'd get online and go to Intrade , the Dublin, Ireland- based website that dominates prediction markets the way Ebay dominates auctions. Intrade CEO John Delaney told me that last year his exchange "traded about 65,000 markets, 1,200 operating at any given time, with more than 500 on politics. There's a trade done every 8 seconds from traders in 128 countries."

You'd click on the link that takes you to the 2008 US presidential markets, and you'd check the market for futures contracts on John McCain to be the next president. And like any futures market, the first thing you'd see is the price. For the sake of a simple example, let's say the price was 40. What exactly does that mean?

Each political futures contract is worth $10 if you win, and worth zero if you lose. So if you buy the McCain contract and he wins the election in November, your contract pays you $10. But if he loses, it's worth zero and you get nothing. The quoted price of 40 means you have to pay 40% of $10 -- which of course is $4 -- for the contract. If he wins and you collect $10, then your profit was $6 (the difference between your price of $4 and your payoff of $10). If he loses, you're out the $4.

The person on the other side of the trade -- who sold you the contract for $4 -- takes the exact opposite side of the bet. He loses $6 if McCain wins, and he pockets the $4 you paid him if McCain loses.

That price means that the market is saying -- in a continuous, ever-shifting global referendum drawing on the collective knowledge of the entire world -- that John McCain has a 40% chance of winning. A price of 60 would mean he has a 60% chance. A price of 20, a 20% chance, and so on.

A traditional poll just measure how a sample of voters say that they themselves will vote if the election were today. But the election isn't today. And who's to say that poll respondents are being honest in the answers they give to pollsters?

A prediction market tells you what people willing to put their money at risk think will occur in the future, taking every possibility into account for what could happen between now and then. There's no motive to lie, or to indulge in wishful thinking. There's money at stake. You may want Hillary Clinton to win, but if you think John McCain will win, you'll buy the McCain contract and you'll sell the Clinton contract.

The financial incentive to get it right, and the ability to draw on bettors from around the world -- anyone who might have any information on whatever proposition is being bet on -- is what gives these markets their uncanny predictive power. Who do you suppose made the bets that Saddam Hussein was about to be captured, just before he actually was? Somebody knew something -- and these markets provided an incentive structure that drew their knowledge into the public domain.

Prediction markets have potentially far-reaching applications. Some corporations are using them to make product development and marketing decisions.

Economics professor Robin Hanson, who has studied prediction markets extensively, told me he envisions a "futarchy" -- government by futures contracts traded in a prediction market. Instead of traditional democratic representative political processes, under futarchy the prediction markets would be how the electorate "decides what to believe."

For example, you could have a betting market on whether or not a particular tax cut will stimulate economic growth. If the market ends up giving you a high enough probability, say 75%, you'd go ahead and implement the tax cut. If it works, and growth picks up, the people who bet on it would will win (and the people who bet against is would lose).

Maybe that makes more sense than letting congress make those decisions. At least the bettors in the prediction markets would be directly accountable, so they'd have a very tangible motive to do the right thing.

Today prediction markets are threatening to replace political polling -- they're certainly doing a better job. Tomorrow, who knows? Prediction markets might replace politics itself. They might do a better job at that, too.

Posted by Donald L. Luskin at 12:36 PM | link  

Posted by Donald L. Luskin at 8:54 AM | link  

Monday, February 25, 2008

Posted by Donald L. Luskin at 11:39 PM | link  

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