This note was originally published at 8am on August 17, 2012 for Hedgeye subscribers.
“People can forsee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.”
In life generally and life as stock market operators in particular, our biggest enemy is often ourselves. As humans, we have mental biases. As much as we do to train ourselves out of them, they still broadly exist. In global macro analysis, an important area in which we see biases manifest themselves is political analysis. Particularly in the United States, people are tied to a political party, so have a difficult time seeing the world outside of that specific lens.
Stepping back, as many of you perhaps already know, in analyzing the top down prospects for a country and in particular the currency, we focus on three key factors: growth, inflation, and policy. In many instances, the policy and/or perception of future policy is the most critical factor. In the United States, the President, and his or her party if they control Congress, have the power to set the economic agenda, especially related to fiscal outcomes. Moreover, they appoint the Federal Reserve Board which has independent (in theory) control of monetary policy.
Understanding this, makes one realize that having a view of politics is important. The negative thing about analyzing politics, as I noted above, is that most people have their partisan biases. The positive aspect is that there is a lot of data to help us establish an unbiased view. This morning I’m going to spend some time going through the relevant data. That said, I’ll get to the punch line: Obama has the consistent edge. That might not make everyone happy, but that is a fact for now.
- National Polls – There have been six major national polls in August that look at Obama versus Romney in the general election. In aggregate, Obama has won four of these polls and his average edge over Romney is +3.5 points. Since the margin of error for these polls collectively is right around 3.0, this is a statistically significant edge. On the positive side of the spectrum, in the last two major polls, Romney has a slight edge, which may be indicative of some positive momentum from the Ryan announcement.
- Electronic Predictive Markets – The most prominent electronic predictive markets that have a contract that enables people to “bet” on the outcome of the Presidential election are Intrade and the Iowa Electronic Markets. On Intrade, Obama currently has a 56% to 43% edge over Romney. On the Iowa Electronics Market, Obama has a slightly more superior edge at 60% to 39%. Both of these markets measure the probability of either candidate getting elected.
- Economic Projections – Once again the key economic models that we look at, our own Hedgeye Election Indicator and Yale Professor Ray Fair’s model, both show a higher probability that Obama gets re-elected than Romney winning the Presidency. Currently, on the Hedgeye Election Indicator, which uses real time market and economic data to predict an outcome for the election, we have a 59.5% probability of Obama getting re-elected. Currently on Ray Fair’s model, a model that focuses on growth and growth surprises as the primary factors, the Democratic candidate is predicted to win 49.5% of the vote and the Republican candidate to get 46.3% of the vote.
On these broad national indicators, Obama has an edge, even if a slight one. The closeness of the aforementioned indicators suggests that this election will once again come down to the key battleground states and the overall electoral college map.
Based on the most recent polls, Obama has 237 electoral college votes and Romney has 191 electoral college votes. This is based on state level polls that are outside the margin of error. Even as Obama has an edge, 270 votes are needed to obtain the Presidency, so his edge is simply that, an edge. The states that remain in the toss up category combine for 110 votes and include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin. Ultimately, this election will be won or lost in those states.
For those of you who haven’t stopped reading and gotten bored because of my political meanderings this morning, you probably think that I’m painting a negative picture for Romney. And on some level you are correct, although I’m not painting but rather just relaying the facts. In that vein, there are a couple of facts that also auger positively for Romney – Obama’s approval rating and voter engagement.
In terms of approval rating, Obama’s approval rating is low for a President that hopes to get re-elected. According to Gallup, the most long running pollster in this category, Obama’s approval rating is currently 45 and his term average is 49. The only Presidents with lower approval ratings were Truman, Carter, and Nixon. Obviously, this not an enviable bunch and an approval rating that is broadly indicative of dissatisfaction with the Obama administration.
The more interesting wild card in this election will be voter engagement. This is the factor that led to the Republicans doing much better than expected in the midterm elections. As well, this is likely a key reason that Romney selected Paul Ryan, a conservative and Tea Party favorite, to motivate the base. Getting out to your base is from Karl Rove’s electoral strategy 101 and is a fundamental reason why George W. Bush won two elections.
So, not to pour cold water on the positive picture I’ve just painted above for partisan Democrats, but early indicators suggest that Republicans may be much more engaged that Democrats this electoral cycle. The most recent evidence comes from a USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same. This may be a meaningful and relevant edge for the election.
This election is likely to be tight, with Obama having a slight edge currently, but Romney has a number of factors that could swing his way, especially as he begins to outspend Obama this fall. Some suggest he may be able to outspend Obama almost 2:1 in key states. Regardless of your political affiliation, as a stock market operator if you get policy right, you will get a lot of other things right. And policy starts with politics.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research