Citi Is Getting A “Brexity Feeling”: Asks “What If We Are All Wrong About The Election”

While Citi remains confident that there is a 60% probability of a Clinton win…

… in the latest report by Citi’s chief global political analyst, Tina Fordham, she flags the heightened risk of disruptions to the campaign and outcome in this unusual election, also known as “October Surprises.”

As she notes, an “October Surprise” refers to an event created or timed to influence the outcome of a presidential election. Events that take place in October have greater potential to influence the election outcome, and given the low trust, high polarization and anti-establishment sentiment, plus influence of social media, this could be higher than usual.

Among the biggest potential surprises listed by Citi are further health scare, major scandal, terrorist attack, game-changing gaffe, or information warfare incident that affects the outcome. Another possible scenario: due to fragmentation in the race, no candidate gains the 270 Electoral College votes needed to win, taking the choice to the House of Representatives.

“Alternatively, disruptions cast doubt on the legitimacy of the final result. Could low levels of trust and high levels of polarization lead to EM-style political outcomes in a world where political risk is shifting to Advanced Economies?”

Fordham also notes the Key Risk as “Information warfare”, asking if WikiLeaks and/or foreign interference may play a role?

“Wikileaks has indicated that they plan to release up to a million documents before US election. Allegations of Russian interference in the electoral process are also on the rise. Congressional Democrats have called on FBI to investigate Russian government interference with election. “The government… face[s] and unprecedented dilemma. [We] have seen mounting evidence of an active Russian influence operation targeting the election… [Russians] can sow disruption and instability up to, and on Election Day, undermining faith in the result and in democracy itself.”

Citi says that there are a number of other possible black swan events such as health scare, scandal, terrorist attack, game changing gaffe or the election resulting in an electoral college tie or dispute.

Stepping away from the hypothetical, in terms of next practical steps, the biggest upcoming catalyst is of course this Sunday’s second debate, seen by many as a “must win” for Trump.

But what if the debate doesn’t really matter, as Bloomberg asks?

What if it turns out, as many analysts suggest, that support for Trump’s candidacy can’t be measured by developments in traditional election events? Failure to grasp that, they warn, could lead markets into the kind of misstep and turmoil that the U.K.’s vote to leave the European Union did.

As Fordham says, “this is an unusual juncture but we keep looking at it through the same kinds of lenses. What if it’s all wrong because society, technology, opinion polling methods, and everything else don’t capture marginalized voters in the way they might once have?”

“What if” indeed.

The reason for the rhetorical question is that according to Fordham, this presidential race feels more like an election in a developing nation where public distrust in government is high and conspiracy theories are rife. Markets seem unaware how much that low trust raises the risk of an anti-establishment vote. Fordham has focused on the Gallup World Poll on public health, which analyzes two decades’ worth of health records of Trump supporters. The numbers show a correlation between the increase in the number of people going through difficult times – as measured by suicide rates, depression, mental illness and drug addiction – and the rise in Trump’s popularity, Fordham said.

“This is the kind of thing that investors just don’t normally run into, but it provides another useful way to think about things because income inequality is necessary but not sufficient,” she said. “There is something more subtle going on about public expectations and exhaustion and a sense of corruption, elite abuse of power, and lack of control.”

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Both Fordham and other analysts point out how off polling data has been in many recent contests, including Brexit and the Greek and Israeli elections, which is why they are looking for other measures of public sentiment. Some, such as analysts at Wells Fargo say they are paying closer attention to state poll numbers for Senate elections to determine whether they are moving in line with the presidential candidates’ gains or losses.

Alternatively, Fordham has focused on the Gallup World Poll on public health, which analyzes two decades’ worth of health records of Trump supporters. The numbers show a correlation between the increase in the number of people going through difficult times – as measured by suicide rates, depression, mental illness and drug addiction – and the rise in Trump’s popularity, Fordham said.

“This is the kind of thing that investors just don’t normally run into, but it provides another useful way to think about things because income inequality is necessary but not sufficient,” she said. “There is something more subtle going on about public expectations and exhaustion and a sense of corruption, elite abuse of power, and lack of control.”

While some, such as David Rothschild at Microsoft Research are not convinced that the surprise of Brexit is a model for what may happen in the U.S. election because Brexit was such an unusual vote whereas the U.S. election is a regularly scheduled event with a plethora of dense polling data that will prove to be more reliable, other disagree. David Woo at BofA disagrees, saying the markets are in for a rude awakening. And Fordham says some investors seem to agree.

“I’m getting this Brexit-y feeling and I know other investors are as well,” she said. “The thinking is: I didn’t expect Brexit, so I better assume Trump is going to win. That element of investor psychology is at play here.”