Election Results More Accurate from Online Betting

There are another couple of markets which intrade is making which seems inconsistent with current market levels. Specifically, there are odds of less than 4:1 that the US or Israelconducts an air-strike on Iran in the next year, and if that is the case, then the risk (and equity) markets are way over priced. In the second half of today’s blog, I have reprinted the results of CRT’s investor survey as to what they are expecting from the 2 day Fed meeting, which concludes tomorrow: $862 billion of total QE to be conducted over the next year.


*    Election Day: I was recently reading Barton Bigg’s book, Wealth, War and Wisdom, in which he mentioned examples where the betting community was a better gauge at determining what election results will be, rather than what the pollsters say. His logic is that when people put their own money at risk, is when they (collectively) make a more informed decision. With that in mind, I am going to share with what the on-line betting website, www.intrade.com says about today’s election:


1.    Likelihood the Republicans take control (over 50%) of the House of Representative:  you have to bet $95 to make $5; in other words, very likely.


2.    Likelihood the Democrats control the Senate: You can bet $45 to win $55. In other words, the markets think there is a better than even chance the Democrats come away with less than 50 seats.


3.    Sharon Engel, Republican candidate for Harry Reids Nevada Senate seat: You have to bet $70 to win $30, in other words, pack your bags Harry.


The point of all this is to note that the markets are already expecting the Democrats to lose control of Congress, and will no longer be able to bully the process, as our Pres-Bo has so happily done the last 18 months. In turn, this will bring forward a greater sense of fiscal discipline amongst our government, which will in turn be shared on the state level, helping to hasten the day when phase 2 of the depression takes hold. Despite that, the risk markets are enamored by the Fed’s expected contribution to the holiday punchbowl, with an expected addition of almost a trillion more, freshly printed dollars. And for this market observer, the stock market reminds me of Wylie E Coyote, who has run off the cliff, but has yet to realize he has no ground beneath him. It doesn’t mean he (or the stock market) cannot run some more before falling, but a fall is coming.


While I was on Intrade’s website, I browsed other topics which folks can make bets on. Of note is the following:


a>    It costs $22 to win only $78 that the US or Israel executes an air-strike on Iran by the end of 2011.


b>    You can bet $17 to win $83, that at least one country using the Euro drops out of the EMU (European Monetary Union) by the end of 2012;


I find it interesting that there is a decent bid on some form of air-strike against Iran between now and the end of 2011. It seems to me that the world, while aware of such a possibility, seems to be acting as if the likelihood of an attack against Iran is next to zero, while the betting markets suggests otherwise. No matter what you say, if such an event were to happen, I would think that the resulting disruption to oil supplies and global commerce/production would be so great, as to be a catalyst for part two of the Great Depression 2.


I also find it interesting that you can get decent odds that at least one country chooses to exit the EMU. In my opinion, this will happen, as the EU’s recent message to the questionable credits, is that investors will have to share in the losses if there is a default. In turn, this will force greater austerity on the defaulting countries, along with much higher interest costs. Given this arrangement, it will be unfeasible for a defaulting countries to embrace the Euro, when they can create their own devalued currency as a means to take its economy out of the dumps. I would definitely bet that one country drops out of the EMU over the next two years.


*    The Fed and tomorrow’s QE2 announcement- Former Greenwich Capital colleague and now head of government bond market research and strategy at CRT, as well as having received 5 Institutional Investor #1 rankings, David Ader, has published the following survey taken from his institutional bond market clients, earlier this morning:


“To the question of how much do you expect the Fed would ultimately buy, we got a nice round figure of $862 bn.  Understand, however, that includes a lot of calls for $500-600 bn over the next six months or so, so closer to $1.2 trillion annualized…we went with the lower figure.  


The takeaway there is that people expect the immediate announcement to be somewhat limited in terms of size and longevity, but before you rush to the disappointment window many, perhaps most, of the respondent added the caution that the accompanying language could make up for the lack of shock and awe that $100 billion/month might would provide.  That is, there are thoughts the Fed might concentrate on a longer duration sector more explicitly, take the term “extended” period into the realm of indefinite, emphasize the downside risks to the economy, or simply state unequivocally that the goal  of the Fed is to take rates LOWER and they stand ready to combat efforts to do otherwise.


In terms of the overall length of the program, the consensus fell on 10 months, but that was flexible depending on economic conditions. 


And the impact of $500 bn or $1 trillion on 10s?  In both cases people left room for a rally, considerably so.  For $500 bn the target was 2.35%, i.e. recent lows.  For $1 trillion it came to 2.10%, near the cycle lows.


When asked how people planned to ‘play’ the bulk are going in long and/or with a flattener (54%), with 35% flat, and 11% saying they’re short.  As for the move away from the FOMC, 39% planned to buy or buy a dip, 31% wanted to wait and see how things played out, and 26% wanted to sell, generally, strength.” (End of David Ader’s survey)


There you have it folks, $862 billion of additional money printing by the Fed over the next year. That is what is in the market. What is not in the market is what will happen if the Fed decides instead to impose aninterest rate cap, which is what they did for a decade from the early 1940s until 1951. Despite that, it will be interesting to see if the Fed decides to emphasis buying the long end, or will they let the market continue to impose its inflation expectations of 2.75% inflation, as I showed in yesterday’s blog; which means that long rates will can only fall so far.


* Trading Points – The Yen is within 1% of its all-time high of 79.75 yen per dollar, most recently at 80.70, with a high print of 80.22 on Sunday evening. The attached graph shows that the last time the Yen was down here, in 1995, the Yen managed to decline to 147. I am not suggesting that the Yen will be in for that sort of correction, but it is likely that the Yen should at least correct from current levels. Accordingly, I am taking off my long Yen trade, which accounted for 13% of my total savings account, 50% at current levels, and the other 50% if the Yen pierces lower to 79 or goes the other way above 82. I do expect the Yen will ultimately rally to such levels below 79, and possibly as much as 55 yen/dollar, but it occurs to me that such an event will occur with a dollar collapse, and this does not seem to be in the cards this time around.