MEMO TO INVESTMENT COMMITTEE

RE: Prediction Market Signal—The Tariff Case as a Study in Information Fragmentation

FROM: Research & Strategy
DATE: November 7, 2025
DISTRIBUTION: Partners Only

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I. The Setup

On November 5, 2025, the Supreme Court heard oral arguments on Trump's reciprocal tariff regime. The market signal that followed tells a remarkable story—not about tariffs, but about how capital allocates uncertainty across different frameworks.

Before arguments: Prediction markets (Polymarket, Kalshi, PredictIt) priced Trump's odds of victory at roughly 40-50%. Equities were nervous but not panicked.

After arguments: Odds collapsed. Polymarket now shows 23%. Kalshi shows 30%. PredictIt bettors see 80-20 odds for a striking down of the tariffs.

Equity markets, meanwhile, bounced. The S&P 500 gained 0.4%. The Nasdaq climbed 0.7%. Bonds rallied. The information asymmetry here is worth examining.

II. The Mechanism

Prediction markets operate on a simple principle: money finds truth. If you're wrong, you lose your stake. The participants aren't hedge fund strategists or TV personalities—they're people whose real capital is on the line, operating under rules that punish wishful thinking.

Stock markets, conversely, operate on multiple simultaneous narratives. One fund sees tariff collapse as inflationary relief (bullish for growth). Another sees it as evidence of policy reversal (bullish for risk-on assets). A third views the legal loss as a sign of executive constraint (mixed signals). All three can hold positions simultaneously.

What's instructive is which one is pricing reality.

On Wednesday evening, the three conservative justices appointed by Trump (Gorsuch, Alito, Barrett) asked the sharpest questions about the administration's legal theory. Gorsuch, the most libertarian of the bunch, was openly skeptical that the International Emergency Economic Powers Act (IEEPA) was intended as a tariff vehicle. This wasn't partisan theater. This was a court examining the limits of executive power.

The prediction markets read this immediately and repriced.

III. The Structural Question

Here's what bothers us: the equity market's delayed response to information that prediction markets priced in within hours suggests something about capital's time horizon has shifted.

Equities responded to the relief narrative—tariffs struck down means no trade war drag, better growth trajectory—without initially processing the implications narrative—the legal mechanism that just broke was one of the administration's preferred tools for shifting the geopolitical order. If this fails, what else does?

Prediction markets are forward-looking in a way equity markets sometimes aren't. They're pricing binary outcomes. Equity markets are pricing flows and multiples. When outcomes are genuinely uncertain, flow-pricing systems can move in multiple directions simultaneously. Binary systems cannot.

IV. What Happens Next (The Scenarios)

Scenario A: Supreme Court Strikes Down Tariffs (73% implied probability)

The administration faces a political and economic choice. They can either:

• Accept the loss and pivot to other tariff justifications (narrower in scope, but survivable)
• Attempt to refund $100+ billion in already-collected duties (essentially a fiscal transfer to importers and exporters—politically catastrophic)
• Do nothing and let the legal blow sit (reputationally damaging)

In this scenario, commodities sold off during the tariff regime rally moderately. Equities that benefited from trade friction (energy, basic materials, domestic manufacturers) pull back. The dollar weakens further.

Scenario B: Supreme Court Upholds Tariffs (27% implied probability)

If the court somehow reverses the legal skepticism shown Wednesday, equities get whipsawed. The tariff regime becomes indefinitely entrenched. That $195 billion in collected customs duties stays on the books. Consumers face persistent price inflation. The Fed has to remain higher for longer.

This is the scenario prediction markets are essentially saying won't happen. And frankly, the evidence supports their skepticism.

V. The Real Signal Here

The meaningful signal isn't about tariffs. It's about the cost of regulatory uncertainty being externalized into financial assets.

When prediction markets and equity markets diverge by this magnitude on a binary question, it usually means one of three things:

1. One market is wrong
2. The equity market is pricing flow and skew that the binary outcome doesn't capture
3. Capital is increasingly willing to ignore tail risk as long as flows remain positive

We suspect it's a combination of two and three.

The tariff outcome matters. But it matters less than the economic backdrop: October layoffs hit a 20-year high. Challenger reported 153,000 job cuts. The Fed is divided and signaling it may hold in December despite persistent wage growth. Bitcoin is oscillating around $102,000 and finding support only on institution-building (JPMorgan targets $170K within 12 months). XRP is consolidating near $2.28 with neutral momentum. Ethereum whale behavior suggests accumulation, but equities are pricing all of this as "risk-on" without actually knowing what the risk is.

VI. The Tactical Point

If the Supreme Court strikes down the tariffs (most likely outcome), prediction markets will have called it three weeks before the actual ruling drops. That's a market making real-time decisions about structural outcomes while equities are still pricing intermediate flows.

For our positioning:

• Maintain short duration on duration uncertainty
• The prediction market signal on tariffs is worth treating as information
• If tariffs fall, prepare for a USD weakness window and energy/commodity strength
• Gold and Bitcoin benefit either way (policy uncertainty trade), but Bitcoin's recent consolidation suggests institutional calm, not panic

VII. Closing Thought

We live in an era where prediction markets—direct-mechanism truth-seeking—are sometimes more accurate than asset markets that bundle 50 different narratives into a single price. This shouldn't be controversial. Binary markets purify information. Continuous markets diffuse it.

When they diverge this sharply, it's worth asking why.

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