I propose to Bob the following bet:
==> “I bet that by May 27, 2020, the S&P 500, adjusted for inflation measured by the CPI, will not be more than 10% lower than it was on May 27, 2015. Even odds with a bet of $500.” <==
Of course, you could argue that Bob and I have already made much bigger bets than that. I haven’t checked exactly, but about 45% or more of my net worth is in stock funds, both U.S. and international. I’m guessing that, given his views, well under 25% of his net worth is in stock funds.
So why bet with each other? The main reason is that it’s fun. The other reason is that we save all the transactions costs that would be involved with buying, and renewing, puts and calls.
So, Bob, do we have a deal?
Here was the answer I gave David on Facebook:
In terms of the actual bet, it’s not appealing to me at all. For example, suppose in May 2008 I said, “I think the stock market is in a bubble and could crash at any time.” David says, “Oh yeah? Bob I bet you in May 2013, the S&P is up 20% compared to now.” He would be right. (I’m not adjusting for CPI.) And yet, in our scenario, surely I could claim, “I told you so!” when the market fell in half (from that point) by March 2009.
To put it in other words: The stock market could crash in the next two years (say), and then the Fed might come in and blow up another bubble, poising it for still a fourth big crash even further down the road. That outcome is consistent with David’s proposed bet. (Also, it’s hardly a vote of confidence for “buy and hold” to know that over the next five years, you probably won’t lose more than 10 percent in real terms. Stocks are more volatile than bonds and “cash,” so I’m surprised that David put such a low bar for equities into his proposed bet.)
However, I don’t mean to suggest that if David and I went back and forth a few times, we might come up with a suitable wager. The fundamental problem here–as we learned last time–is that this is foolish in terms of the broader blogospheric discussion of economic policy. Last time, David (who has written a policy study for Mercatus pushing for “fiscal austerity” through spending cuts and using the Canadian example as a model) bet me that CPI inflation would be modest, while Krugman predicted accelerating deflation, and then when David won Krugman & Co. ran around saying it proved the success of the Keynesian model. (Furthermore, I often see people referring to my failed predictions on “hyperinflation.”)
The famous Julian Simon / Paul Ehrlich wager made sense, because they were on opposite sides of the ideological spectrum. But in this environment, I have learned it’s not wise to make public wagers with your friends. No matter which of us won, our opponents could claim, “Ha ha, the free market guy just botched another prediction, this story is getting old at this point.”