The Schrodinger Election Futures Market And Fiscal Gridlock
As the US Presidential and Congressional election campaigns move into their frenetic final stages ahead of the November 6th polling date, we thought it would be good to see what the futures markets think about the outcome. As UBS notes, the Iowa Electronic Markets (IEM) are futures markets allow traders to take positions, with real money, on a variety of economic and political events, the best known of which are US elections. Since inception, the IEM has had an impressive track record of forecasting elections, consistently better than conventional polls months in advance. The current data, however, highly contradictory - or Schrodinger-like - as the gap in the popular vote has narrowed significantly, yet the gap in the winner-take-all election result market has widened dramatically in favor of Obama. Furthermore, there is a 70% chance the Republicans wrest control of the Senate and the probability of the democrats gaining a House of Representatives majority is a mere 10%. It would seem gridlock will persist with a divided government - not good news for the fiscal cliff.
The popular vote is close and getting closer...
In the vote-share market, the payoff is determined by the final percentage of the popular vote received by the Democratic and Republican nominees on election day
but the winner-take-all election (where the payoff is binary on the outcome), Obama is a heavily favored...
It should be noted that the payoff in the IEM Presidential winner-takes-all futures market is based on the popular vote, not the Electoral College outcome.
What about the races for the US Senate and House?
Without belaboring the reader with the details (which are available on the IEM website), the futures markets are giving the following indications about the races for Capitol Hill:
- US Senate: Futures markets suggest there is only a one-in-ten chance that the Democrats will build on their small majority (51 seats) in the Senate. Their chances of holding the Senate, albeit with a smaller majority, are tipped at about 20% (a ‘majority’ of 50 is possible in the 100-seat Senate if an independent holds a seat or as a result of the tie-breaking vote of the Vice President—assuming in this case that President Obama is re-elected). Conversely, the chances that the Republicans wrest control of the Senate have risen to about 70% (from closer to 55% in the spring of this year).
- House of Representatives: The futures markets assign long odds to the probability of the Democrats taking control of the House of Representatives. According to the latest figures, the probability that the Democratic Party will lift its members from 193 today to a majority of 218 is about 10%.
The outcome for the Presidential election remains too close to call. To be sure, Governor Romney has ground to make up. It seems that if he is going to do so, the economy, markets, or the geo-political environment will have to deal President Obama a blow. Alternatively, President Obama will have to commit a significant political blunder.