Monday, September 15, 2014

The Scottish Referendum: Do People Vote on Economic Rationale?

I guess hardly so. If they do, the Scottish Referendum is a no-brainer

But voting is much more emotional and political than based on objective for and against analysis

So take a break from all the talking heads on the net explaining to finest details on why the Scott should vote for NO. I think Felix Salmon got it closest

Thus are the lines drawn: on the No side, you have the hated Westminster elite, who have done a bad job governing the UK and a particularly bad job governing Scotland over the past 35 years. Many of them are Scottish themselves, which only really makes things worse. Meanwhile, the Yes side is young and angry and betrayed and proud and, most importantly, really Scottish: they live Scotland every day, and they want self-determination. They want to run themselves, to make their own decisions, rather than chafing under the rule of Londoners (of whatever nationality) who spend much more time thinking about Brussels or Berlin or Washington than they do about Glasgow or Aberdeen.
I still think it is close (being master of obvious!), but would lean on the YES side. That is of course not a preference, rather expectation of the outcome of the vote.

Wednesday, September 10, 2014

Probability Zombie Hunting: Mark Gilbert Edition

There are many ways to prognosticate what will the markets do

Getting the maths wrong is one of them. A bit lacking in intellectual support, but in any case as good as any other ways if you believe you cannot forecast the markets in the first place!

Here is an example. BTW, I have already written more on the underlying issue here

Unfortunately, Scotland has no bonds (or currency) of its own by which we might more clearly gauge the attitude of investors to the outlook for the country itself. Perhaps, then, the best guide is to be found among the bookmakers, still unanimous in backing the view that Scotland will reject autonomy, despite the recent YouGov poll that put the Yes campaign ahead for the first time. Betting five pounds on Scotland saying "no" will win you just two pounds plus your stake returned; a "yes" vote offers a potential profit of 9.38 pounds.
So on the basis that the house never loses, you'd back Scotland to stay in the union -- and you might also be tempted to buy pounds.

Well. Yes, the house never loses. That means they win if you get it wrong. Or if you get it right. And that is precisely why it gives no indication what so ever which outcome you should bet on! So you CANNOT ever bet on the "basis of the house never loses"!

Just to refresh your maths in case you need it (the author does, definitely!), The above odds means a (5/7) 71% probability of "no" and (5/14.38) 35% probability of "yes". The house always wins because the probability adds up to 106%, instead of fair 100%. So the house have a 6% advantage

All he probably meant that stick with "no", as "no" is priced in with a higher probability. In fact, that is also quite a useless investment thesis. It may have a higher probability, but it is compensated by a lower pay off as well. So your expected win (probability times the winning amount) should be same if the odds are fair (i.e. they add up to 100%). And since they are not in this case, actually the expected win is higher for betting on "yes"

And that is exactly the opposite of what the Mr Gilbert suggests!

Tuesday, September 9, 2014

The Scottish Referendum Trade: For AUld Lang Syne

Should one short the sterling pound betting on the Scottish Referendum? Even after the current sell-off?

Of the 4 million voting population, a 2% difference between the YES and NO means betting on 80,000 odd votes. The variation in expected turnouts may be more than that!

On the other hand the cable is naturally under pressure. With softer inflation and easing pace of recovery it is very hard to reason for a steady upward movement. The rates differential with the US has narrowed. The terms of trade does not point to any particular richness or cheapness. 

And as of latest data, the market positioning is favorable. The CME data shows the net speculative position even at the start of September was net long. So unlike yen and euro, not much pressure for a sudden short squeeze. 

If the vote is YES, there will be a large move for sure, at least in the short run. May be a sell-off worse than 5%. With a NO it can rally easily 3% to the 1.66 levels. So the odds offered will be a 37.5% chance of a YES vote.

The opinion polls put the odds at 50-50. But opinion polls are typically unreliable. Going by the wisdom of the crowd on public betting sites, the mood swung a bit recent time. The current going rate for the YES vote prices it at 32%. 

Either the wisdom of the crowd is skewed, or the market is wrong. Upside? quote a lot with the shock supported by the sell-off trends. Downside? Even if GBP goes back to the recent peak (which is, by the way, highest since 2008), it is 6%.

Pay off is asymmetric!