On Mandelson, money, and oil

I apologize for the light blogging as of late. I’m starting a new job next week and moving very soon thereafter, so I’m trying to get about a million things done before then.

Three thoughts. First, you’ve no doubt seen that Gordon Brown, in an attempt to shore up his eroding political position, has asked Peter Mandelson (his once arch-enemy) to join his cabinet. Mr. Mandelson was formerly the EU Commissioner for Trade (rough equivalent to the United States Trade Representative.) His departure is a serious blow to multilateral trade negotiations, and it makes it that much less likely that we’ll see a Doha deal in 2009. In my opinion, he understood how far he could successfully push the EU position to the inch, and he had no problems standing up to some of the more recalcitrant members. His departure also seriously diminishes the institutional memory of the major negotiators, which means quite a bit in trade talks.

Second, after tonight’s debate, we can probably start talking about the McCain campaign in the past tense. He looked worse than usual tonight: old, irritated and tired. Mr. Obama didn’t have a great night either, but you don’t need to shake things up when you’re in a commanding lead. Tonight was one of Mr. McCain’s last chances to do something, anything, to reverse that. Aside from proposing that the Treasury buy everyone’s mortgage (I’m pretty sure that was new) and simultaneously proposing a government-wide spending freeze, he didn’t do much. I think he’s toast, and I will argue, as I have done repeatedly in the past, that contracts for Mr. Obama winning the presidency are still undervalued on Intrade. Fivethirtyeight’s electoral projections give Mr. Obama a nearly 90% chance of victory, which strikes me as closer to the reality. His Intrade contract is trading for $7.20ish. Do the math. If you buy right now, and he wins on Nov 4th, you’re making a 39% return in less than a month. Did I mention that Intrade trades contracts worth Real Money?!? Now who said there weren’t good investment opportunities in today’s markets? It just depends on which markets you look in.

Finally, great post by my illustrious coauthor yesterday about the “black lining” (catchy!) of the current economic turmoil: oil prices closed below $90/barrel, although I think they went back above that mark today. Either way, they’re down nearly $60/barrel since July. The point is, commodities correlate well with economic growth: you need more oil, copper, and aluminum to make stuff when the economy is good and demand for ‘stuff’ is strong, so the prices of inputs (commodities) rise as well. Problem is, now that everyone thinks the economy is going to hell in a handbasket, commodities prices are tanking. Great if you want to buy into the market, not so great if you like strong economic growth. So while Nick is right that less oil revenue frustrates the plans of nasty petro-crats, I’d qualify this slightly by saying oil prices are low for the wrong reasons. We want prices to be low because a diversified energy portfolio means we’re demanding less oil, not because we simply can’t afford it. The foreign policy implications may actually be more, not less, dire than we imagined.

On politics, pundits, and prediction markets

I don’t often like to delve into the day-to-day horserace politics of the presidential campaign, although I follow it just about as closely as anybody (one reason it is great being back in Washington.) However, I do feel compelled to make one observation, given the upheaval on all sides after Ms. Palin’s barnstorming speech at last night’s RNC.

Back in July, I wrote a tongue-in-cheek post about how buying Obama Presidency contracts in the prediction markets would be a ‘lock’. My observation was based on a number of presidential race forecasting models which, given our nation’s current perceived economic malaise and the unpopularity of the sitting Republican president, predicted a cakewalk for Mr. Obama. I don’t consider myself a particularly partisan individual, and I won’t explicitly endorse one candidate or the other until much closer to Election Day (though if you read regularly, you can probably tell which one I lean towards). But if you asked me right now from a financial standpoint, I’d still tell you that buying Obama contracts is a smart investment.

As in commodities markets, stock markets, or bond markets, prediction markets are driven by both long term fundamentals and day-to-day news. When it comes to Election 2008, unless you’re trading professionally, you probably don’t need to worry about shorting either candidate. What this means effectively is that you can ignore 95% of what the punditocracy says. Their livelihood depends on keeping their ratings up, which in turn depends on you watching their television shows and reading their articles. You’re much less likely to do this enthusiastically every day if it looks like one candidate is going to win handsomely. In other words, pundits have a personal incentive to make you think the race is closer than it is. Pundits’ careers also extend beyond this race, and they have a reputation to preserve. Even election managers are looking for employment in the next campaign: if for some reason Mr. Obama did lose, and they had been saying the race wasn’t even close, how does that bode for their future job prospects?

But that doesn’t mean you have to listen to them. By nearly any metric you care to use, the long term fundamentals of the election strongly favor Mr. Obama. Most strikingly: voters think the economy isn’t doing well, and the sitting Republican president has been in office for 8 years and is deeply unpopular. This election is Mr. Obama’s to lose. Don’t believe me? Check out the election map at Pollster, which depicts, in my opinion, a nearly impossible scenario for Mr. McCain.

My advice if this election is stressing you out? Take a birds-eye view of the campaign. Check in once every two weeks for a (weighted) national poll and polls in the swing states, check the monthly fundraising numbers, stay tuned for the big announcements, and watch the debates. Most of the rest is filler.

Oh, and maybe think about buying that Obama contract…

(Photo by jmtimage)

Voting with your wallet. Literally.

If you read one article about Election 2008, make sure it's this piece that Clive Crook wrote for the FT. Truth be told, I'm fascinated by the so-called "horse race" aspect of American Presidential politics, which is a show quite unlike anything else. But I try not to get too obsessed with it: I think we all realize that the endless day-to-day minute campaign analysis is largely meaningless.

This is the essence of Mr. Crook's column: tune out what the pundits say every day and focus on the big picture. Economic growth is low, and GWB has very low approval ratings and has been in office for 8 years. As Mr. Crook writes, political scientist Alan Abramowitz has a very simple formula which accounts only for these three variables, and he's used it to correctly predict the outcome of 14 of the last 15 presidential elections. (I might add that he got the 1968 election wrong by a tiny margin.)

His model is predicting not just a win but an absolute cakewalk for Barack Obama, similar to the trouncing that Ronald Reagan gave Jimmy Carter in 1980. Leaving your own politics out of it and keeping this article in mind, now might be a good time to head over to intrade and buy some "Obama Wins Presidency" contracts. I've copied the price chart for you below: as of July 23rd, they're trading at $6.53 and will pay out $10.00 if Obama wins.

Full Disclosure: I do not personally hold any financial positions pertaining to the 2008 Presidential Election and am not connected in any way to either presidential campaign.

Disclaimer: All investments involve a degree of risk and there are no guaranteed returns.