It’s difficult to overstate how much financial markets -- primed by promises of unlimited monetary stimulus from the world’s central bankers -- are currently in a state of unhinged ebullience.
Since the Federal Reserve announced last Thursday that it would pursue a course of open-ended bond buying to jump-start the U.S. economy, assets that had ostensible already “priced in” the Fed action beforehand have gone on a dramatic rise. The benchmark S&P 500 Index of U.S. equities is up 1.53 percent. Gold was up over 2.25 percent and poised to rise more on Wednesday, while silver futures have gone on a nosebleed-inducing 5.3 percent ascent.
Simply put, it’s rally time.
Nowhere has the market euphoria been more prevalent, however, than in the tiny corner of finance where political futures are bought and sold. On extremely high volume, traders in those markets -- which let people bet on the possibility that the named political candidates will prevail in the upcoming U.S. presidential election –- are piling into an Obama rally.
And while cable TV pundits and newspaper columnists might be continuing the self-interested game of framing the election as a photo finish-worthy horse race, the people putting their money where their mouths are signal that it’s more than 70 percent likely the U.S. will get four more years of Obama.
On Tuesday, the contract for an Obama victory traded in the Iowa Electronic Markets, a presidential futures pit run by the University of Iowa, reached 75 cents on the dollar, the highest level it’s seen all year. The contract closed at a slightly lower price of 72.8 cents. Meanwhile, over at InTrade, which bills itself “the world’s leading prediction market” and allows people to bet not just on presidential elections but other events, the contract for “Barack Obama to be re-elected President in 2012” reached a 52-week high of $6.84, meaning traders thought there was a 68.4 percent probability such an event would happen.
Those numbers far exceed the probabilities of an Obama victory being assigned by pollsters and political scientists.
On Wednesday, the RealClearPolitics average of major national polls had Obama up in the total popular vote by just 2.6 percent over his Republican rival Mitt Romney. Meanwhile, a forthcoming article in the academic journal Political Science and Politics noted only two out of 10 widely followed models for forecasting presidential races based on polling data had the certainty of an Obama plurality at over 67 percent.
People in the futures political markets have been piling into the Obama side of the wager for weeks now. A Sept. 10 press release posted in the Iowa Electronic Markets website noted traders had given Obama contracts an significant bounce at the beginning of the month and that “most of it came during the Republican convention, not his own.” A run of bad press on the Republican candidate, including the release of a covertly taped speech that took up most of the 24-hour news cycle Tuesday, also helped the incumbent President.
But the biggest single factor boosting the traders’ appetite for Obama futures, however, appears to have been the Fed’s actions last Thursday.
The conventional view, as Bob Janjuah, a fixed-income strategist for Japanese financial behemoth Nomura, wrote in a note to clients Tuesday, is that the Fed’s actions “are likely to impact voters in the US elections in November” and could be “perceived by Republicans to secure Obama a new four-year term.”
Indeed, the spike in expectations of an Obama victory as measured by the political futures markets is substantially more dramatic than the spike around the same time in 2008 when, in a period most political strategists agreed sealed the election for the Democrats, then-candidate Obama was seen as more measured than his opponent in dealing with the political fallout from the Lehman Brothers bankruptcy.
Of course, supporters of the Republican candidate's chances are likely to point out the old Yogi Berra saying that "it ain't over 'til it's over." For the time being, at least, a different Yogiism might be more appropriate, the one that notes "the future ain't what it used to be."