The world’s most boring Almanac (but perhaps the most informative)


As 2012 turns into 2013, what could be more fun than looking ahead to what the new year might bring? War? Peace? Prosperity? Recession? If you’re looking ahead for the sake of information (rather than just for fun), then there is help at hand in the form of financial markets, bookmakers and prediction markets; these are some of the best mechanisms ever created for gathering and aggregating the views of everyone who cares. Anyone who thinks these markets are wrong in their assessment is free to participate and to attempt to profit from their insight; their act of buying or selling is then taken by the market and thrown into the mix in proportion to their conviction (as measured by the financial stake they are prepared to place.) Put everyone’s views together, weigh them, and out comes a market price. Markets allow us to follow the money which means that, while frequently far from perfect, they do provide a very special type of information about the future.

So, with little effort beyond looking at market prices1, I am pleased to present to you what is perhaps the most informative almanac available for 2013 – although arguably also the world’s most boring.

What will happen to interest rates? Based on current prices, the forward curve backs out the implied level of yields at any given future date (an explanation of how it does so is available here). And while the yield on a 10-year Treasury bond is currently 1.84%, the forward curve implies that this yield will be more than thirty basis points higher than that one year from now.

What will happen to the stock market? Here, we can look to the futures market but, because it’s easy to arbitrage between futures and physical stocks, that simply points to a return on the stock market equal to the return available on cash, i.e. a gain of just 0.16% over the next year. Now, because stocks are riskier than cash, we need to add something to that return for a true market expectation (that’s because if the consensus view was really an average return on stocks simply equal to that on cash, few investors would want to hold stocks) – both history and the general consensus would suggest this means an expected return somewhere in the range 2-6%.

Incidentally, the options market allows us to gauge how much uncertainty is associated with that average expectation: with the VIX2 at its current level, these prices imply a strong possibility (about one in three) of the stock market return over the next year being at least 17% different from that average expectation.

What will happen to inflation? Here, we can look to the price of inflation-protected securities to infer that inflation is expected to average slightly over 2% for the next five years.

Now, financial markets don’t give us a price for everything, but we can gather more market-based information from gambling markets and prediction markets. Justin Wolfers and Eric Zitzewitz supply a solid introduction to prediction markets here. (By the way, although it’s not the main focus of this blog, I did notice in researching it that the probability assigned to a Yankees World Series win in 2013 is currently less than 7%, information in which some readers may be interested. But before any Bostonians get too happy about that low probability, I should point out the Red Sox are even less fancied.) So, here is a selection of probabilities implied by the prices from those markets:

Will Greece leave the euro? The implied probability of Greece being the first country to leave the euro is around 70% (and those of it being Germany are 4% – higher than some might have expected). The implied probability of any nation announcing in 2013 its intent to leave the euro is around 15-20%.

Will the U.S. fall back into recession? The implied probability of U.S. growth being negative in 2013 is about 30%.

Who will win the 2016 Presidential election? It’s early days, but the current front-runner is Hillary Clinton (implied probability slightly under 20%) with nobody else being better than a 10% shot at this point.

The market price may be boring but it is a powerful place to start if all you want is information about what is likely to happen. Meanwhile, I wish you all the best for 2013 and hope that it leaves you healthy, happy and prosperous.



1 Treasury bond yields are as of December 18, 2012, accessed at Other probabilities cited are based on prices accessed on December 19, 2012 at and

2 The Chicago Board Options Exchange Volatility Index.

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