Tuesday, July 22, 2008

election 2008 - Crunch Time Cometh

As you know, in 2004 I built a presidential election model that had a great deal of success predicting the outcome of the Bush/Kerry race. In passing, I have shown the 2008 version to you in a couple of previous letters, but I thought it might be a good time to delve a bit deeper, given the calendar.

As a reminder, the model is built off state-by-state futures markets (see intrade.com). It has long been demonstrated that political futures markets, which tap the views of thousands of people who put their money at risk, are better predictors than polls. That is not to say, however, that they are sure-fire accurate, especially this far out. Further, they will exhibit a great deal of volatility between now and the election, although not nearly as much as polls. But for now, let’s see which way the wind is blowing.

Things look quite rosy for Barack Obama. The model, which you can view in full in the attachment, has him winning the election, 300 electoral votes to 238. 270 are needed to win. (We ignore the popular vote since it holds no relevance as to who actually gets elected.) As usual, a small number of states are really the only ones that matter, but here again, Obama looks to be in good stead:

Imagine these states to be on a shifting ladder, where they all move up and down in probability together over time. So in other words, if Obama wins Florida, it means he will have already trounced in the other states. Worrisome for McCain is that Ohio is the usual fulcrum point, and right now that looks like a comfortable win for Obama. Ohio was a toss-up in 2004 and Bush’s win there sealed the election. If Missouri remains the toss-up state this time it won’t really matter, McCain is cooked.

The U.S. has not knowingly elected a liberal since 1964. Jimmy Carter turned out to be one, but didn’t run that way. Bill Clinton ran and governed as a centrist, for the most part. Certainly, the country is more conservative now than it was in 1964. But if a liberal is ever to be elected, now would seem to be the time.

The market knows that Obama has several significant historical winds at his back. First, we are coming of the natural fatigue that results when one man holds the White House for eight years. Second, that man is deeply unpopular. Third, the economy is flagging. Fourth, the Iraq situation, which really is more of a police action now than a war, drags on. On top of this, Obama is an excellent campaigner. In contrast, I have no idea what McCain has been doing the last few months. Interestingly, McCain has some excellent ideas on taxes and health care (I was surprised), but he doesn’t seem to have enough conviction to pound the table on them. It is critical that he start soon.

What remains to be seen is if Obama can survive the public’s scrutiny of his own platform, which at this point, is as unknown to the public as underwear to Paris Hilton. What is clear is, in contrast to his mantra about change and post-partisanship, he is, in fact, a conventional leftist. He wants to raise taxes of every kind, including income, capital gains, and social security. He wants some form of socialized medicine. He appears antithetical towards free trade. Et cetera. All these measures seemed designed to move us in the direction of the EU, which troubles me greatly from an economic standpoint. The good news is that he is already tacking (slightly) to the right on some issues now that he has dispatched Clinton Inc. And history shows that most presidents, once installed, must compromise towards the center.

It is worth remembering that prognostication at this point on the election’s outcome is largely meaningless. George Bush Sr. trailed Mike Dukakis by 17 points right around this time. Gerald Ford trailed Carter by a whopping 30 points and almost won. Had the election been one day later, he undoubtedly would have, his momentum was so strong. So, at this point, I show you all the data mostly for fun. We will track it over time together.

Odds Are

While we’re on prediction markets, I offer you the following contract odds for events this year (unless otherwise indicated). There are an ever-increasing number of propositions.

Hurricane to make landfall in New York 7%
Avg. global temp. to be among 5 warmest years 7%
Bird Flu observed in U.S. 14%
Guantanamo to close 30%
Osama caught/killed 12%
U.S. or Israel strikes Iran 31%
Hugo Chavez leaves office 10%
A 9.0 earthquake strikes anywhere 7%
Average gas price over $5 on Dec. 31 7%
Drilling in ANWR approved 9%
John Paul Stevens to be next Justice to depart 68%
Arata’s cold fusion results replicated 22%
Higgs Boson particle observed 47%
Top U.S. tax rate in ’09 greater than 40% 13%