Last updated on October 24, 2024
With Flip Pidot, American Civics Exchange
Flip Pidot, founder of American Civics Exchange, joins the podcast to discuss trends in polling and prediction markets and why these are increasingly pointing to victory for Donald Trump — and a Republican sweep of Congress.
This podcast episode was recorded on Oct. 22, 2024, and made available for premium subscribers that same day — without ads or announcements. More information on premium membership options is available on our Substack page.
Content Highlights
- What started as a toss-up has quickly moved to resounding victory for Trump (1:38);
- About $40 million-worth of pro-Trump bets have flooded prediction markets in recent weeks (4:55);
- Early vote data is also clearly favoring Trump (12:58);
- Background on the guest (23:05);
- If the outcome of the election is close, either side is likely to immediately challenge the results in court (34:30);
- Fortunately, the guest views the likelihood as remote (40:28)
More From the Guest
- Website: AmCiv.com;
- X: @FlipPidot;
- Prediction/polling aggregator: TheSupermodel.com.
Transcript
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Nathaniel E. Baker: Flip Pidot, of American Civics Exchange. Thank you for joining the contrarian investor Podcast today.
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Flip Pidot: Oh, you bet! Thanks for having me on.
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Nathaniel E. Baker: Yeah, thanks for coming on. I’m very excited about our conversation.
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Nathaniel E. Baker: We are going to talk all things, Us. Election.
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Nathaniel E. Baker: We are possibly going to veer a little bit
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Nathaniel E. Baker: from the financial markets and talk just about the outcome of Tuesday, November 5, th
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Nathaniel E. Baker: and the various ways that this can play out.
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Nathaniel E. Baker: and we’ll talk later about your your firm and what you do, and how you’re able to track
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Nathaniel E. Baker: the various bets
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Nathaniel E. Baker: on the various outcomes. And what? But let me start off just by asking you, what are you seeing here in terms of the election, in terms of
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Nathaniel E. Baker: how investors and you have access to some, you know, institutional investors as well are
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Nathaniel E. Baker: playing this.
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Flip Pidot: Yeah, I mean, the sort of top line. The headline is that what had seemed kind of like a toss up in the polls, in the markets, and conventional wisdom has has more genuinely changed. Now, in just the last couple of weeks, basically since the beginning of October to one where trump has a meaningful lead, where where he can be considered a favorite, you know, outside of what would be a true coin flip, not a heavy, heavy favorite, maybe 60, 40 trump, but that seems to be borne out in the in the
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Flip Pidot: battleground state polling, especially more so than in the in the national polling. Certainly in the prediction markets there’s been a pretty wild swing, at least, you know, compared to how relatively stable the race has been, at least since the point of greatest instability, when Biden was withdrawing or considering withdrawing. But just in the last couple of weeks it’s gone from Harris, being slightly favored to trump being
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Flip Pidot: quite a bit more meaningfully favored. And it and it’s moving fast. Now it’s it’s moving, you know. Maybe even a percentage point a day in terms of that gap
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Flip Pidot: expanding. So between that rumors from inside the Harris campaign, they’re getting really worried about states like Michigan and North Carolina, which, if they, if they can’t hold those
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Flip Pidot: along with, you know, potentially Pennsylvania as well, it might not even be that that close of a race so 2 weeks to go. Lots can change. But but overall we’re starting to see a bit more conviction now that that this is Trump’s to lose.
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Nathaniel E. Baker: And as far as the control of the House and the Senate. Where are things shaping up? There.
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Flip Pidot: Senate. Seems like it’s it’s almost a lost cause. At this point we’ve got Republicans at about 80% to win house a little bit closer, I think. Still.
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Flip Pidot: I actually pulled up here as we’re as we’re talking Republicans still favored to win. But this is looking at Polymarket, which is often the highest volume market in in any of these contracts. They’re showing actually, exactly 50 50 chance now, but that’s down over the last, say week from from
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Flip Pidot: Democrats being favored, say 55, 45. So it looks like a true Republican trifecta, you know, while not the odds on favor in terms of the overall outcome. Balance of power is is a real possibility. Now.
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Nathaniel E. Baker: It seems to be. That’s where things are trending.
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Flip Pidot: Yes.
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Nathaniel E. Baker: Yeah, well, and so what does that mean? In terms of the types of.
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Nathaniel E. Baker: I guess, unknown unknowns and geopolitical events and political risk that people are looking to hedge assuming, let’s assume that trump wins, and that the Republicans sweep the the Senate and House.
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Flip Pidot: Yeah.
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Flip Pidot: so it really depends who you are, what your, what your business prospects are, how your portfolio is positioned. I mean, there’s certain things that both candidates make clear are their priorities, whether or not they make good on them. But things like you know, extending the the trump tax cuts. That will happen if the Republicans have a trifecta clearly. To you know one of Harris’s earlier proposals that she actually backed off of because of bipartisan, you know.
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Flip Pidot: blowback. But the idea of taxing unrealized gains on investors that would have, I think, a pretty across the board negative impact to anyone with significant, you know, equity or other financial market holdings. And so
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Flip Pidot: that could be something that people are wanting to hedge on Harris’s side.
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Flip Pidot: There’s an interesting dynamic at play, actually in the in the prediction markets, especially poly market, which I mentioned previously. We don’t have to go all the way down this rabbit hole yet, but just because it relates to your issue of hedging, there’s been about 40 million dollars pushed into
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Flip Pidot: pro-trump or anti-harris positions on Polymarket over these last couple of weeks we’ve seen the prices diverge, and there’s a lot of speculation about. Is this someone trying to, you know, falsely push the price in Trump’s direction. But those that suggest that aren’t even sure. Some say it’s because they want to pretend Trump has momentum than he does. Others say, no, no, it’s to make the Harris campaign, and Harris supporters not get comfortable and get motivated. Knock on doors and give money, or is it a natural hedger.
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Flip Pidot: Right? Is it someone who has a lot of exposure in? Maybe. Djt, the Trump Truth Social Holding company? Is it someone who is subject to tariffs? In other words, they might have a significant overseas business. There’s actually one person that’s a
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Flip Pidot: you know, a rumored you know, possible string puller behind these big polymarket accounts. Who does does and did experience a significant financial loss.
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Flip Pidot: at least in their equity holdings during trump because of tariffs on luxury goods, so it’s hard to know we may never know, and if we do ever know, it probably won’t be till after the election, you know who are the folks that in this really kind of golden age, now of real money prediction, markets who are the ones availing themselves not simply of the speculative or sort of entertainment angle of these markets, but actually using them for what’s really their
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Flip Pidot: their ostensible purpose. Right is as a risk management, tool information markets, future markets to be used for commercial hedging. So I think it’d be really fascinating if we do learn that at least some of the major institutional money going into these markets is being used for exactly that purpose. In other words, that you’re betting on the candidate you’d prefer not to win, or the party that you’d prefer not to be in power because you want some insurance against the financial downside you’d experience should they win.
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Nathaniel E. Baker: Yeah, one suspects what is it? Oakum’s razor or the most logical most reasonable explanation is also, the most likely one, right. So it. It probably just is like you, said somebody one would suspect maybe somebody just looking to
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Nathaniel E. Baker: hedge their bets, or even maybe just make a little money on on
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Nathaniel E. Baker: based on where the polls are going.
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Flip Pidot: Yeah, exactly. It could just be someone who’s a true believer, not necessarily an ideological believer, but someone who believes that trump really is favored. And it’s been interesting, too. We track this a lot on one of our sites to see the prediction markets versus the polls versus the poll centric forecasters which one is leading, the other right? So if you’re arguing that the prediction markets are manipulated by someone who either has the incorrect thesis that one candidate is underpriced.
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Flip Pidot: or by someone who actually wants to manipulate the electoral outcome by falsifying momentum. Then you shouldn’t probably see the pollsters and forecasters follow suit. If, on the other hand, you think that markets are efficient, and the best distillers of a lot of
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Flip Pidot: you know, heterogeneous, disparate information that the pollsters, which have a temporal lag and the forecasters that derive their forecasts from the polls. Then that’s what you would expect to see right? You’d expect to see these trends emerge more readily in the prediction markets than you would in the pollsters and forecasters. So that’s the side that I, as a general heuristic, tend to come down on.
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Flip Pidot: especially now you’ve got more and more data. You’ve got early vote and mail vote data that pollsters aren’t going to see, or they’re not going to incorporate into their numbers, nor most forecasters, anyway. So I’m hopeful that
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Flip Pidot: that we’ll continue to see that the prediction markets tend to be leading indicators rather than laggards, or
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Flip Pidot: in. In the worst case, you know false signals by by would be manipulators that are not then borne out in the polls forecast, and of course, ultimately, in the in the actual vote, results.
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Nathaniel E. Baker: Yeah, what what does the history tell us about this? I mean, these prediction markets are pretty new, unlike polls.
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Nathaniel E. Baker: Have they been proven to be accurate at all? Or do we know, how much do we have.
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Flip Pidot: Yeah, they’ve proven to be pretty accurate. I mean, in recent cycles. You’ve got a couple of
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Flip Pidot: sort of surprising outcomes, right? Or surprise one side and not the other, I guess in 2022 you had the rumored red wave turned into the red trickle, the red mirage, whatever you want to call it 2020. You had sort of the ultimate. I’m sorry. 2016. You had the ultimate Black Swan event of trump winning. And yet, if you look at the prediction markets, they might have been saying 2025% chance that trump would win
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Flip Pidot: 2016, which was a higher chance than virtually any other forecaster. I think. Nate Silver, then of 5, 38 now of his own shop. Silver Bolton.
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Flip Pidot: you know it depends on exactly when you measure it right midnight going into election day, but he, at least at certain periods, had trump at an even higher percentage to win. But but by and large. If you look at the prediction market pricing writ large versus the sort of pro black box forecaster you know, community writ large
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Flip Pidot: prediction. Markets have done quite well. It’s not to say they aren’t without their, you know, big egg on their face, misses, but and also, as you said, they’re new, and so it’s hard to read too much into a track record, especially when the last 2 cycles, if you include the 2022 midterms.
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Flip Pidot: were beset by so much covid, specific, anomalous factors that it’s hard to draw too much of a lesson in terms of their overall accuracy. But you know, I think those who are general believers in the efficacy and efficiency, informational efficiency of markets.
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Flip Pidot: We’ll probably take it almost on faith that they’re going to be as accurate over time as anything else, because, of course, the markets, the prediction markets are all downstream of every bit of public information coming from pollsters and forecasters. Right? So, except for internal polls which often get leaked. Anyway.
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Flip Pidot: the markets have access to every bit of information that the forecasters do, and probably more. And so, if the signal coming from the forecasters and from the polls is consistently worth anything that’s already baked into the prediction market price.
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Nathaniel E. Baker: What about early voting? And obviously we don’t get the the
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Nathaniel E. Baker: States don’t release early polling, but we have exit polls which are pretty reliable, usually. And what is that telling us? Could that also be driving things here.
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Flip Pidot: I think it could. Now again I’ll come back to it again. The the
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Flip Pidot: mid covid versus post covid eras are so apples to apples that I certainly can’t disaggregate them. But we are getting a lot of information coming from Nevada, especially as one Florida is, may not be a, you know true swing state this year, but they’re giving a lot of very good granular information, and thus far I think it’s safe to say, across the board at least the numbers I’ve seen from the swing State. Early vote and mail vote is, the Republicans are doing not just better, but much better than they did in in
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Flip Pidot: 2022, just in terms of their return rates, their their participation in the early voting methods, and yet in 2020, and maybe less so in 2022
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Flip Pidot: Republicans were actively discouraged from using those methods, and told, you know by trump that they were not safe, not reliable so, and and this cycle for the 1st time, they’re being actively encouraged to use it. Right? So so yes, Republicans are doing significantly better, I think, at least just based on the numbers. That’s pretty universally agreed at this point.
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Flip Pidot: But it’s how do you disentangle? That? Is it because it’s now post covid? And they’re being encouraged to use it? Or is it because they’re really, really in a much stronger position? And
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Flip Pidot: that’s not to say they’re not disentangleable. That doing so is beyond me, at least, but it certainly would be plausible that as that early vote data has been coming out now for the last few days and Trump’s, you know. Divergence from that, you know, soaring above that 50 50 line has only accelerated. It would certainly seem plausible that that could be a factor that folks are looking at that and are saying, Yes, okay, sure. Maybe some of this is a post covid effect. But this is a big enough swing
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Flip Pidot: from those sort of very early telltales that maybe
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Flip Pidot: you know may maybe you know, even though Trump’s ahead by, I think, on average, about 1 point in all the key battleground states, at least on average. Maybe there is going to be another trump friendly polling, miss this time around that we that we don’t necessarily need to trust that the pollsters have figured that out. And if there is, if there is anything like the polling miss in 2022 then Trump wins
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Flip Pidot: pretty handily right, because Clinton won by what 2 points in the popular vote obviously lost the electoral vote.
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Flip Pidot: but was ahead, and I’ve forgotten the the kind of final analysis. 5.6 points, something like that going into election day. Same with Biden. He was ahead by 10, going to election day and won by 4 and a half or 5.
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Flip Pidot: So if you have a similar magnitude of 4 or 5 points toward trump, and he’s up one already in battleground states.
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Flip Pidot: Then then we’re not going to have that protracted aftermath of
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Flip Pidot: of of litigation in trying to deal with this after election day. But that’s the big, if right. The pollsters have tried to fix it, and they have different ways of weighting their samples now. And you know. Is this the notion that of the shy trump voter gone anyway, or people now just sort of all out of the closet, or loud and proud they certainly are in terms of rallies and everywhere else. So maybe they’re even over correcting right? Maybe there’ll be a pro-harris polling, miss. It’s 1 of those things that’s really hard.
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Flip Pidot: It’s really hard to disentangle with any kind of real confidence, and against whether I think the best we can do
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Flip Pidot: is look at the markets where you do have people putting down real real money with real stakes that have a real incentive to comb through all of this granular disparate information, including what all the polls show, what all the forecasters suggest. The polls mean, what all the early voting data means, and just like in the stock market or any other public financial markets.
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Flip Pidot: that sort of mosaic analysis of millions and millions of different data points, and at least in this case, tens or hundreds of thousands of individual traders that ought to give us the best indication of what are the fair odds of any of these outcomes?
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Nathaniel E. Baker: Yeah.
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Nathaniel E. Baker: tell me about the American Civics Exchange or this website, and the type of I know it deals with derivatives, and and where institutional investors, at least not the public can, can, I guess, bet or trade.
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Flip Pidot: That’s right. Yeah. So so our so our site, our platform is is different from the sort of traditional exchange model prediction markets which are public facing. They expose an order book.
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Flip Pidot: You trade against other traders. You can see what the current price is. Ours is a much more sort of niche offering where it’s only eligible to very strictly qualified high net worth individuals or institutions.
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Flip Pidot: And so it’s a much smaller population that we can deal to. And so we deal these products which structurally look quite similar, the binary outcomes based on a political or economic event. But we deal them as over the counter swaps rather than trading them on an exchange where anyone can come and fund an account and
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Flip Pidot: you know, buy and sell against other traders. But you know, on one of our other sites, or one of our content and analysis sites, which is called the supermodel@thesupermodel.com. We actually seek to aggregate. It’s really new, but I encourage people to take a look at it, because it’s become, you know, I’m biased. But my favorite dashboard for looking at the election. So we’re looking at all of the
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Flip Pidot: prediction markets from the regulated ones like calci and interactive brokers to the Crypto Exchange. I’ve mentioned a couple of times. Polymarket, which is by by far the volume leader of all these markets.
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Flip Pidot: then to more established ones, albeit smaller ones like, predict it, but also play money markets like manifold markets, non money markets like prediction platform meticulous. And we even throw in Nate silver silver. Bolton forecast there for a little bit of a little bit of flavor, because again, our our goal there is to provide the single
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Flip Pidot: best indicator of what are the true odds, and while that in, you know, informs for our purposes a very heavily market driven signal. We’re not simply trying to be a market aggregator, although it’s most of what we’re doing is applying a a subjectively weighted average to all these different markets and prediction platforms.
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Flip Pidot: but we also recognize that there are times when markets will hurt or become temporary, rational, or can even potentially be manipulated. And so we like to have a little bit of a kind of stick in the ground there to hang on to in those cases when markets may get a little wonky, and when the forecasters that are digging through the fundamental data may be on to something to the extent that they diverge. But you can see all that in visuals. That sort of show our aggregate
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Flip Pidot: flowing within this band that shows the whole spread of all of these different aggregate constituents from the actual prediction markets to play money platforms, to to nate silver.
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Flip Pidot: And again as we sort of talked about at the top. The headline is really unmistakable from at least you know, the course of month to date, which is now what 3? We’re 3 weeks into into October. Prior to that it was sort of that slight Harris edge. Then it sort of flipped went truly 50 50, and just the last couple of weeks you’ve seen this major major divergence where trump is now over 60 cents, you know, over 60%
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Flip Pidot: to win on most of the real money platforms, or at or above 60, and even the play money ones that tend to lag a bit. Nate silver, which tends to lag a little bit more
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Flip Pidot: they all have. Trump favored. It’s so. It’s just a question of of by how much. But but for us it’s been, and I think from our from our readers and and folks who are sort of eagerly subscribing. As we’re we’re putting this out are finding it. It’s not that what we’re doing is brilliant. It’s that the story that’s that’s being told by the underlying data. When you do aggregate it and put it all in in one place
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Flip Pidot: it it it it’s speaking with a very really loud voice about what the the market writ large thinks
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Flip Pidot: is happening here. And it it it’s it’s no longer that. You can’t tell. It’s super close. It’s a coin flip.
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Flip Pidot: that may be the underlying reality. But it’s not the reality, it’s not the consensus of all these market participants. It’s quite different and quite better news for Mr. Trump.
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Nathaniel E. Baker: Yeah. Do you look at the Fx markets at all? Because the Mexican peso trade in 2020 famously kind of did predict?
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Nathaniel E. Baker: No, yeah. In 2016. Sorry did?
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Flip Pidot: I’m sure.
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Nathaniel E. Baker: Do you? Do you factor that in at all, or not so much.
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Flip Pidot: We don’t. It’s certainly an interesting place to look. And I and I would certainly expect that that is an input into a lot of predictions, at least larger prediction market traders, trading activity. Those are much, much deeper, more liquid, broader markets than even the largest multi-billion dollar prediction market platforms.
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Flip Pidot: And so if there’s edge to be gleaned from those insights, they’re going to make their way into the prediction market, pricing pretty shortly thereafter, I would think so, I hope and expect that a lot of that, to the extent it is good. Signal is already imputed in our aggregates. But no, it’s not something that we look at, you know, in isolation.
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Nathaniel E. Baker: What about on the derivative side, the institutional side, like, what kind of stuff can you talk about? What kind of traffic you’re seeing there. What kind of
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Nathaniel E. Baker: risks people are looking to hedge.
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Flip Pidot: Yeah, I mean, we traditionally have actually seen more interest in the non-electoral related
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Flip Pidot: outcomes. So things like fed policy, regulatory regulatory policy tax policy. Sometimes it’s it’s personnel driven. So we we had a lot of interest in, for instance, of those 3 weeks between
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Flip Pidot: the the famous debate and Biden’s withdrawal. Of course this electorally related
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Flip Pidot: tangentially in that there was a contract on who would become the Democratic nominee formally at the Convention. You know all the States that had their primaries and caucuses. Biden was the presumptive nominees, but it was no longer an electoral question. At that point is, will the question effectively obviously was, Will Biden withdraw before the Dnc. So we find things like that tend to be, at least for our traders, which again are quite
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Flip Pidot: different from the typical trader you’d see on a on a public facing prediction market or regulated market or play money market. But that’s tended to be where we’ve seen outsized interest is in these sort of discrete but very economically impactful outcomes to do with.
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Flip Pidot: you know, again, fed policy, regulatory policy, or sort of big one this year of whether Biden would remain in or not. And it, you know, it’s interesting that all these things that that boil down to one binary
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Flip Pidot: political or socioeconomic outcome.
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Flip Pidot: You never really know what people sort of downstream impact of. That is right? So if people thought, Okay, I do think Biden’s going to withdraw.
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Flip Pidot: and I think it’s underpriced here.
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Flip Pidot: What are the implications of that happening? Does that mean that trump becomes more likely to win? Or does that mean? Biden’s successor, whoever it would be, would become more likely to win, because they wouldn’t have the anchor of of, you know Biden’s apparent unfitness, and even downstream from that. Okay, so what does that mean? If the Democrats are more likely to win? Is that good for me or bad for me. But that’s why, having this really increasingly rich
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Flip Pidot: complex of contracts, being traded on so many different platforms
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Flip Pidot: enables traders to really target whatever the the outcome is that they, a either feel the need to, and would like to directly hedge against or B feel is in isolation, underpriced or overpriced. Right? I may not know who’s going to win the popular vote who’s going to actually become elected President. But I used to work in elections in North Carolina, and I sort of know how to read these early tea leaves better than anyone else. This is hypothetical. This is not me.
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Nathaniel E. Baker: Yeah.
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Flip Pidot: You may feel that you really have a better sense of who’s going to win that one particular race right? Or you may feel oh, the tipping point! State the one that’s going to decide. The Presidency is not Pennsylvania, it’s going to be, you know, Michigan or Wisconsin, and you see, sort of better alpha there rather than playing the overall head-to-head outcome, you know, and everyone playing their own insight, analysis, and and sort of economic preference
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Flip Pidot: hopefully, ideally, and as these things grow and become more diverse and well understood and well accepted,
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Flip Pidot: will yield an increasingly actionable
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Flip Pidot: complex of of of data points. I think I think this year versus 2022 even, has been remarkably better or or more. We don’t know better. We don’t know if it’ll be more accurate, but better in terms of just having so many more signals to look at, and it’s part of why we launched
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Flip Pidot: the supermodel. To begin with, is there? There is so much more seemingly good, or at least relatively stable and high volume signal out there, and yet it does diverge. You do have a house effect, or perhaps bias associated with real money versus crypto versus overseas versus domestic versus play money that you do see the prices diverge. And so, while we don’t yet know who’s
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Flip Pidot: pricing is going to be better aggregating that at least it’s our thesis is probably better, probably more reliable than looking at any one signal in isolation.
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Nathaniel E. Baker: Fair enough. All right, Flippy DOE, I want to take a short break and come back and ask you some more questions about the upcoming election, maybe other things. But let’s 1st take a quick break and give our sponsors a chance to be heard. If you are a premium subscriber, you will not get the break. Do not touch the dial. We’ll be right back. In fact, we already are.
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Nathaniel E. Baker: and everybody else to become a premium subscriber. Visit the website, contrarianpod.substack.com, and sign up
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Nathaniel E. Baker: alright cool. You want to take a drink of water real quick, or something.
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Flip Pidot: Sure. Yep.
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Nathaniel E. Baker: And like I said the second half of the show.
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Nathaniel E. Baker: It’s usually.
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Flip Pidot: Hi! Sorry I’m still here was that.
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Nathaniel E. Baker: Yeah, I was saying so then the second half of the show is what like? I said, when I ask you about your background.
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Flip Pidot: Yep.
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Nathaniel E. Baker: And yeah, and then we’ll take it from there. Yeah. So once.
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Flip Pidot: Okay.
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Nathaniel E. Baker: Too much, too much more of your time.
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Flip Pidot: Sounds good. I’ll be 30 seconds. One second.
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Nathaniel E. Baker: Yeah, take your time. Yeah.
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Nathaniel E. Baker: okay.
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Flip Pidot: I’m back, but happy to continue to pause. If you need a minute.
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Nathaniel E. Baker: No, no, that’s fine. No, I’m good. Okay, so we can continue if you’re ready, I’ll I’ll just start.
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Flip Pidot: Sure.
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Nathaniel E. Baker: Alright!
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Nathaniel E. Baker: Welcome back everybody here with Flip Pido of American Civics Exchange and the supermodel.com flip. This is the segment of the show where we ask our guests to tell us more about themselves, and how they got into
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Nathaniel E. Baker: the world of investing, to begin with.
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Nathaniel E. Baker: and in your case I’m not even sure if you are, have a background as an investor. But how you came to run these models. And and
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Nathaniel E. Baker: you know, study these things. So yeah, take it away and tell us.
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Flip Pidot: Sure, yeah. And I have been involved in investing although not not as a primary focus for the majority of my career. But I worked in a
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Flip Pidot: you know. Buy side research firm for a few years after business school I went to Darden business school Uva, and and have always kind of had this
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Flip Pidot: perverse combined interest in politics and
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Flip Pidot: financial markets, and in particular at the intersection.
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Flip Pidot: You know the 2, the influence of of one on the other. And this sort of founding
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Flip Pidot: philosophy behind American Civics Exchange, now quite a number of years ago, was that
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Flip Pidot: you know the same way that futures markets
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Flip Pidot: are used to hedge some kind of external risk by the price of
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Flip Pidot: precious metal, the price of an agricultural product.
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Flip Pidot: whether it’s going to be too hot in. You know the farmland this year to grow as much of your you know a crop that’s important to you. Interest rates, foreign exchange. Basically, you know, a method centuries old
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Flip Pidot: tried and true method of
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Flip Pidot: efficiently hedging virtually any standardizable external risk.
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Flip Pidot: my thinking was simply that well, politics and policy in particular public policy represent the absolute, largest, and otherwise fully unhedgeable, at least in ways that we don’t scoff at unhedgeable category of financial risk. And so it seemed to me when we started this actually back in 2,007
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Flip Pidot: that was sort of the the promise of these markets that eventually it would be a tough, regulatory road. But eventually the the demand would be so significant that it couldn’t.
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Flip Pidot: you know, fail to exist interminably and that, you know, once they once they matured, they they would become a really significant part of the of the commodity was seen as a more traditional commodity futures industry. We we by we I mean the the industry and and largely firms outside of ours.
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Flip Pidot: have made amazing strides in the last 3 years towards that. And of course, this year you’ve got well, 3 years ago you had Cal. She come online as a regulated Dcm. Trading. A number of non-electoral but still political and socioeconomic event futures binary event futures. And then, of course, just this year following significant court battles. Both Cal, she and now interactive brokers are listing actual
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Flip Pidot: election futures on on regulated markets. So I I still don’t think we’ve we’ve we’ve captured the
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Flip Pidot: the bulk of the
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Flip Pidot: in my mind, enormous institutional, natural hedging, exposure of public policy.
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Flip Pidot: The dam has really begun to crack, I think, and especially as we talked earlier in the program about what’s going on, a polymarket. Should that or anywhere else, turn, turn out to be a natural hedge, or putting real money behind this, to ensure against the perceived economic downside of one side, winning or another
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Flip Pidot: will be looked back on. If that turns out to be the case. We’ll be looked back on, I think, is the 1st real, significant use case that proves this longstanding thesis that these markets need to, and so strongly need to, that they ultimately will have to exist right alongside the. You know what we have come to know as sort of traditional commodity
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Flip Pidot: futures. So so that was sort of again, as I said, the original founding philosophy. But I’ve been involved in political campaigns, including having run for office a couple of times myself again. It’s sort of a longstanding, perverse interest in in both of these fields, and where where I sit now that that precise
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Flip Pidot: crossroads between the 2 is is just serve exactly where I, where I want to be working involves financial product, innovation, financial market, engineering, market microstructure, design. All the kind of stuff that sort of, you know, exchange nerds, love digging into, and what makes prices more efficient, what leads to bias and pricing? And how do you? How can you are between different markets? Or how can you design market mechanisms that are more efficient? Weed out some of those? Some of those inefficiencies.
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Flip Pidot: For a few years I worked as a as a consultant for doing market curation and data analysis for predicted back from their founding in 2014 through about 2019, and that was one of the things that that
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Flip Pidot: you know we were facing during that period is, how do you design a market mechanism here, wherein they had, and still have, certain other restrictions, like fairly low position limits, and
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Flip Pidot: a cap on the number of traders that can be in any market that at some point kind of stifles the signal of the smart money, or it makes it harder to counteract the signal of the dumb money right? If you have a position limit and you have only a certain number of traders can get in.
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Flip Pidot: So it came down to, okay, how can you more smartly, engineer. These contracts especially.
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Flip Pidot: This is a whole separate sub topic, but logically interrelated contracts to make liquidity and and pricing more coherent and and more efficient. So that’s just all stuff that I’m really interested in, and just the general
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Flip Pidot: spectator sport nature of politics that I think you know, a lot of people decry as a bad thing, and I don’t necessarily think they’re wrong. But it is still something I, you know, very much enjoy about the
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Flip Pidot: the field of of, you know, political science and and electoral handicapping and things like that. So we’re doing at American Civics exchange really fits nicely into that nexus between.
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Nathaniel E. Baker: He’s.
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Flip Pidot: These 2 little worlds, and it seems to be one that that appeals to a number of other people too, just in terms of the the conversations we have online, with followers and subscribers and traders. And certainly the the
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Flip Pidot: increase and the increased awareness of participation in these other
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Flip Pidot: public facing prediction markets has generated, you know, quite a nice little.
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Flip Pidot: This is a cottage industry community. But it’s not even that anymore. It’s really burgeoning. It’s it’s
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Flip Pidot: and and increasingly
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Flip Pidot: interesting and entertaining. When you’ve got so many podcasts, Youtube shows, newsletters, twitter accounts, and other other content creators that are putting out really interesting, real time, thoughtful analysis on this stuff that
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Flip Pidot: it, it can suck you in on election day. We have, you know, a dozen different screens going with different things that we’re looking at. It’s election day now every day from about a week ago, through November 5.th So it’s frenetic. But if you’re if you’re into that kind of constant stream of
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Flip Pidot: of sometimes conflicting and obviously ideological, ideologically driven information and want to try and find a way that you can tease some actionable signal out of it.
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Nathaniel E. Baker: Yeah.
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Flip Pidot: Then, then this is the field for you.
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Nathaniel E. Baker: Well, that’s interesting. That’s very much what I try to do with this podcast. In part.
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Nathaniel E. Baker: not always successfully. But the. So how does it work your your site? So you’re are you basically like a broker dealer for institutional investors who say, like, Hey, there’s this outcome I want to hedge against. And you create like the, are these structured notes? Or how does it that work.
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Flip Pidot: No, they’re they’re structured, basically is binary swaps that we we serve as the central counterparty to. So we’re not. We’re not offering any brokerage services we effectively operate as a as a swap dealer for the technical term for the these
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Flip Pidot: qualified investors are eligible contract participants. So it’s folks that are that are legally able to, you know, engage in Otc swap products. But again, structurally, they they don’t differ really from
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Flip Pidot: what you’d see traded on a calci, or predicted, and that they are binary outcomes that are denominated in lots of $1 and priced at between one and 99 cents, or actually, in our case we have a thousand price points. Some of the markets have a thousand, some have 100. So, in other words, whole penny pricing or 10th of a penny pricing
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Flip Pidot: and so if you wanted to say take a position, for you know, a potential payout of $10,000 that the fed will do a double, you know. Rate. Cut the November
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Flip Pidot: meeting. You could. If you’re a user, you would initiate that by by bidding on that contract on our site, I mean post being on boarded and and and qualified as an eligible trader. And say, okay, I want the 10,000 over exposure. And I’m going to bid
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Flip Pidot: 35 cents on the dollar, you know, for for a cost of 3,500 and a potential payout of 10,000
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Flip Pidot: we then might, if that’s a if that’s a acceptable price.
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Flip Pidot: fill the order, in which case you have a position with us, the counterparty, or we might ignore it if we feel it’s a bad faith to sort of probative, you know, bid you know, bidding a penny on something that’s quite likely to happen, for instance, or if it’s sort of close, it’s in the ballpark. Then we might send a counter offer which you receive and say, Okay, not 35, but 38 fine. Or I want to rebid 38, or maybe I don’t want to go quit that highball rebid at 37
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Flip Pidot: but so again, one of the other ways that it significantly differs differs from what people probably have seen in other prediction markets is that we’re not then publishing an order book. There’s no trader to trader communication. We’re not matching orders between traders and we really don’t put out much, if any, actual pricing information. You know, we used to
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Flip Pidot: put out kind of a delayed aggregate so representative price as sort of a guidepost for what people would think about bidding on on things where they might not have a strong prior as to where it should be priced.
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Flip Pidot: But we found that you know we had to. We had to obscure it so much and make it so delayed and aggregated that it it wasn’t useful to people. So so we really it it, you know it.
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Flip Pidot: I’m sure it’s
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Flip Pidot: it’s
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Flip Pidot: frustrating for those who are looking at the site and hoping for it to be more of an inform informational
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Flip Pidot: outlet. The way that anyone can go to polymarket accounts, you predict it
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Flip Pidot: and and consume the data and and potentially make actual business or household decisions based on that data. Without even participating the markets. Not really the case with our platform, but certainly is the case on our on our the supermodel site. because that’s exactly what we’re trying to aggregate and and provide the best you know. Single measurement of is all of that facing. So it’s it’s it’s for sort of
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Flip Pidot: quite the opposite from our
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Flip Pidot: our actual Otc platform.
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Nathaniel E. Baker: Yeah, you know, one thing we haven’t talked about much is the possibility of a contested election. I guess we talked about it a bit. But you know that was obviously a big story. Back in 2020.
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Nathaniel E. Baker: And it seemed the the prevailing sentiment seems to be that if trump wins, then the Democratic party will just kind of fold up their pence, and go home and concede and and stuff.
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Nathaniel E. Baker: And do, do you? Is there? Is there no chance that you’re seeing or no concern that you’re seeing.
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Nathaniel E. Baker: that that may not be the case, that they may also try to contest things depending on how close it is. I guess.
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Flip Pidot: Yeah, I have no doubt that if it’s close.
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Flip Pidot: either side, whichever appears to be the losing side will try hard to contest it. And, in fact, even the winning side, if it’s close, may go and try and contest swing states where they narrowly lost for fear of potentially losing one or more of their winning states and having the election
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Flip Pidot: swing. So yeah, I I would be shocked if you don’t have both sides mounting some kind of challenges immediately after election day, likely in in multiple states, and whether whether they’re they’re they have merit or not, or whether they go anywhere or not is is obviously a whole other question. I mean, I think every virtually everyone would agree that we are hoping not to have a long protracted, you know.
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Flip Pidot: overtime session here extra innings, if you will. But you know it’s nothing new, and you know I I don’t think Democrats can claim.
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Flip Pidot: you know, quite the clean hands or pure hearts that they would like to post, you know. January 6, 2021, because I mean going back to 20. I’m sorry. 2,000. You had sort of the most protracted battle with Gore Bush V. Gore, and the one that went to the Supreme Court, obviously over the the Florida outcome. So Democrats like to contest close elections, too, and for good reason, they’re huge outcomes huge implications to these outcomes.
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Flip Pidot: So no, I don’t think just because January 6th and the aftermath have been such a talking point in this election, democracy being involved, and all is going to give them any pause to to mount a very vigorous campaign, to challenge the results in any state where they feel they have a, you know, plausible case to make with the caveat, that you know, assuming that there is any meaningful chance that
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Flip Pidot: you know overturning those outcomes, one or more States would actually swing the overall electoral college vote. You know, hopefully, that turns out to simply be
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Flip Pidot: a matter of legal wrangling. Maybe it just means we won’t know for 2 days, 3 days a week.
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Flip Pidot: 2 weeks after election day. Who the actual winner is? Should it be close?
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Flip Pidot: and hopefully, it’s not the kind of thing where we get into actual constitutional crises, you know, who has the the courage or the ability to do certain things that are, you know, more clearly, coloring outside the lines. I’m not too bothered by
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Flip Pidot: a protracted outcome, more along the lines of
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Flip Pidot: 22,000, although hopefully, not that long but just again from the. It’s our perverse incentive to have
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Flip Pidot: not chaos, but volatility and uncertainty in an outcome. We’d like orderly uncertainty, because that’s sort of our our stock and trade is is, you know, again selling
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Flip Pidot: hedge against the risk of that uncertainty of outcome. So to that extent, extra innings are something we don’t particularly mind from a purely economic standpoint. But again, that’s what the caveat that it not be the kind of
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Flip Pidot: chaotic constitutional crisis that could attend such things. But
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Flip Pidot: you know, time will tell again. That’s all premised on the idea that the race is close enough to be meaningfully, plausibly contestable in the legal process thereafter, and I don’t think we really know enough, even though we’ve seen these things tend to trade at 50 50. Most of the cycle we’ve seen the polling tend to bop around the you know, the 2% Democratic lead ish that Clinton wound up with which was not enough to win. So even though
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Flip Pidot: most of these indicators do suggest a close election.
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Flip Pidot: there’s so much out there that it’s unknowable.
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Flip Pidot: Is the polling any good, or markets being manipulated? Are trump voters shy anymore. What does it mean when an incumbent President withdraws from a race right before the convention? I mean, there’s so many things that are, I think, truly unknowable to anyone who’s being honest about it. And yet, as soon as we know the outcome, it’s going to just be so utterly obvious.
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Nathaniel E. Baker: Just everyone.
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Flip Pidot: Harris lose. It’ll be well, of course she lost, because we’ve never had such thing happen where everyone knew that Biden couldn’t run. She knew Biden couldn’t run, and wasn’t honest about it. And then he, you know, withdrew. 3 months before the election. You never saw a chance, or
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Flip Pidot: should she win. It’ll be well, of course she was going to win, you know. Trump led in its direction. How could they possibly ever think so? You know, everyone’s going to immediately learn this lesson that they, of course, already knew all along, no matter what happens. But I think there is so much that’s opaque to us that to say that
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Flip Pidot: to
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Flip Pidot: to note the obvious outcome ahead of time is is a lot more difficult. And yet again, back to the theme here. That’s exactly what these big traders on prediction markets are.
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Flip Pidot: Trying to do. They’re they’re saying, now, this thing is 60, 40, and yet I want to go. Put a million dollars behind trump at that price, or you know, likewise on the other side, you know, for
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Flip Pidot: trader on one side there’s there’s 1 on the other side with the same size position. So it’s very hard to do reliably doesn’t stop people from trying. And we’ll have a lot more data you know, in about 2 weeks, or say 2 to 4 weeks to look back on, and actually score some of these
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Flip Pidot: forecast the markets versus the pollsters versus the forecasters, and you know.
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Flip Pidot: see who’s another genius and who has egg on their face when it, you know, could come down to 10,000 votes in Michigan. And we always tend to over learn these lessons, but it makes it exciting.
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Nathaniel E. Baker: But you don’t seem particularly concerned that this is gonna devolve into some kind of crisis.
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Flip Pidot: I I wouldn’t say I’m without concern. It’s not my base case in part, just because I do think it’s likely that
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Flip Pidot: it won’t I? I think it’s less likely that it’s going to be razor thin than I think is the conventional wisdom
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Flip Pidot: and razor. Thin, that’s what
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Flip Pidot: you know gives puts us in a situation where? Yeah, you may have actual chaotic.
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Flip Pidot: you know. More crisisy
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Flip Pidot: aftermath and and societal unrest and things like that that no one wants
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Flip Pidot: But again, just given the degree to which so many of these macro factors are opaque. This 1st post fully post Covid election.
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Flip Pidot: no incumbent. And yet 2 quasi incumbents in the current Vice President, the immediately outgoing President. The assassination attempts the late with Biden withdrawal instability overseas so much could change in literally the next 2 weeks.
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Flip Pidot: that I think the odds of it turning out to be a razor. Thin election, as we’ve sort of gotten used to being the base case is actually less likely than people think on either side. Now, again, the momentum clearly seems to be in Trump’s direction. He’s got all the tailwinds the last week or 2,
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Flip Pidot: but I don’t discount the possibility that it’s an outsized Harris win.
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Flip Pidot: No, now, people are much happier to tell pollsters they’re backing trump, or the pollsters have over corrected. And Harris is actually ahead by 5 right.
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Nathaniel E. Baker: And then.
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Flip Pidot: Trump does something asinine in the next several days, or Harris, you know, does something heroic, and she wins, you know, a relative landslide. Any of these things are plausible, and I think, more likely than frankly, the markets or forecasters are.
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Nathaniel E. Baker: Yeah.
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Flip Pidot: Indicating, I don’t think, 50 50. Pricing this, I have to credit one of our co-authors that the supermodel Harry Crane tipped me to this theory that he’d been kind of noodling with, which is that you know 50 50 odds
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Flip Pidot: on the market do not suggest I may mention something about this earlier do not necessarily suggest a close race. They may just mean that traders have no idea, and they’re defaulting back to the naive odds of 50 50 when you’ve got 2 candidates, and you don’t know anything else.
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Nathaniel E. Baker: Yeah, yeah.
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Flip Pidot: That’s.
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Nathaniel E. Baker: It’s hard to disattach.
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Flip Pidot: The list, too.
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Nathaniel E. Baker: Yeah, exactly. Yeah.
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Flip Pidot: You know.
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Nathaniel E. Baker: Yeah. Last question. Let’s assume that there is, you know, just play this out here and trump wins. The Republicans win Congress both Houses.
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Nathaniel E. Baker: What do you tell the Democrats in terms of how to do things differently
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Nathaniel E. Baker: next time.
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Flip Pidot: Well, I mean the big one. And again, as I said, everyone will be a genius in retrospect, and this will, I think.
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Flip Pidot: be the major headline in any democratic autopsy. But I think it’s actually will be a good one when we can. We can identify
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Flip Pidot: ahead of time.
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Flip Pidot: Is that it was keeping Biden on the ticket for so long.
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Flip Pidot: It was the absolute
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Flip Pidot: defiance of what was playing for everyone to see for so long that it eroded enough trust. But I think people, at least Democrats are sort of happy to go along and say, Okay, fine. Sure. You know, the facade is holding enough here, but we kind of all know what’s going on
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Flip Pidot: there. There is
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Flip Pidot: setting that debate in June much earlier than usual, with then still. What? 4 and a half months to go
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Flip Pidot: before election day
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Flip Pidot: meant that once the debate went, how it went that die was cast
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Flip Pidot: right. So yes, it was only 3 weeks later that he withdrew.
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Flip Pidot: But that’s 3 critical weeks when you’re talking about then a general election campaign that there’s only 3 more months of after Harris takes over
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Flip Pidot: or less, even after she became the official nominee. So 3 weeks, as we’ve been saying here, that’s kind of the moral of the story. That’s an eternity in politics. If they have those 3 weeks back, and could have done a more stage managed, withdrawal, or ideally do way way before the debate, because
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Flip Pidot: it wasn’t like the debate performance was the 1st time that Pelosi, or Schumer, or Jeffries or Harris saw that Biden, you know, as Clooney came out with his OP-ed and said, No, that’s the guy we saw at the fundraiser, and we’ve been kind of privately panicking behind the scenes. So if you wanted to give sort of
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Flip Pidot: what’s the advice post-election should Harris lose to the Democrats, it’s
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Flip Pidot: when something’s staring you in the face that obvious. And it’s clearly the center is not going to hold right. He was not going to for 4 and a half months if he’s if he’s regularly in that kind of a shape be able to make it. You can’t drag him across the finish line to election day, even if you could I? I’d argue. It’s a bad idea to do so if you’re dragging.
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Nathaniel E. Baker: Make for some great memes, though.
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Flip Pidot: Indeed.
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Flip Pidot: but I think that’s sort of the most obvious thing, and and that’ll be sort of the the what people take away from this, and remember in future cycles is, if Harris loses
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Flip Pidot: you know, and it’s it’s it’s a shame for for Biden and his legacy, too, because they will PIN that on him. I don’t think a lot of blame is going to be put on, Harris. Some will and some will be deserved would be deserved again. This is all premised on her losing. She’s not been a great candidate, and she thought she kind of just hide from the press and go on, go on vibes to election day and has had to emerge a bit, and that more recent emergence isn’t going so well is based on polling and and market prices.
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Flip Pidot: But
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Flip Pidot: that ultimately was the was the central failure of the Democrats campaign. Here the key decision makers obviously knew well before the debate Biden was not in shape to to handle the campaign or a second term, and when they knew that they should have had that hard conversation, that hard series of conversations that they had in early to mid July. They should have had them in January, February this year, so that they could have avoided the whole thing.
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Nathaniel E. Baker: Yeah, yeah. Well, I don’t think this is a partisan. Comment, but one hopes that if nothing else.
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Nathaniel E. Baker: this leads to younger men and women becoming the nominees of the major parties.
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Flip Pidot: That would be great.
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Nathaniel E. Baker: I would suspect. That may be what happens.
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Nathaniel E. Baker: possibly, but we shall see a lot of unknown unknowns out there, Flip Pido. Thank you so much for joining the contrarian investor podcast today.
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Flip Pidot: It’s been a pleasure. Thanks for having me.
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Nathaniel E. Baker: Yeah. Wonderful stuff in closing. Maybe you could just tell our listeners how they can find out more about you where you are on the social medias and such. I will put that information in the show notes along with the links to your website.
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Flip Pidot: Sure I’m on twitter at flipped OFLI, PPID OT. Our website, American Civil Exchange is at Amciv.
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Flip Pidot: amsive.com, and the supermodel is@thesupermodel.com.
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Nathaniel E. Baker: Cool. You ever get any people looking for like supermodels there rather than political.
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Flip Pidot: Probably probably get some people stumbling on the site by accident.
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Nathaniel E. Baker: Very cool, awesome. Thank you to flip. Thank you all for listening. We’ll be back here again next week with more talk about the election. Speak, then.
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Nathaniel E. Baker: bye, everybody.