Now this is Hubris

(Via The Big Picture)

GMO, an investment group managing over $100 billion in assets, released its official forecasts for returns on different asset classes:


In other words, the future will look exactly like the past!

I have no idea where asset prices will be in 7 years, but I can predict this chart will be horribly, hilariously wrong.

Efficient markets what?

Sometimes the markets are dumb, sometimes they're just slow.

Yesterday Apple unveiled its terribly named IPad, to nearly universally negative reviews. Twitter was filled with IPad Fail posts. The highest-rated post on Digg was titled "8 Things That Suck About the IPad." Anybody paying attention knew last night this thing was going to bomb. The market, though? Took till about 10:30 AM to figure it out.



Very easy 2-3% in a day if you shorted at the open and covered in the afternoon. I've missed out on a lot of money assuming that the market is smarter than it really is.

Obama hires McCain's campaign manager

Really? A spending freeze?

(Alternate title: Obama Gives the Finger to Everyone who Still Liked Him)

They are panicking in the White House. I mean, Obama gave his speech on bank re-regulation basically on the spur of the moment. Barney Frank came out a few hours later to say it wasn't going to happen in the next 4 years. These decisions just seem to be coming impulsively.

And now this? Obama wants to freeze spending and pass a second stimulus bill? It just doesn't work, and it comes off as a transparent pander. Not only that, but it's a pander to the economically illiterate Tea Partiers who will never like him anyway. It's bad economics, it'll never get through Congress, and it demonstrates to a lot of people that Obama is just not serious about governing.

Jon Stewart has been asking for the last year whether Obama was getting his ass handed to him, or whether he was a Jedi master, 5 steps ahead of his opponents. I guess now we know which it is...

Test your Intrade IQ

Fed Chair Ben Bernanke will almost certainly be re-confirmed. The value of his re-confirmation contract on Intrade has gone from a low of 75 on Friday to 94.9 this morning. Which of the following news items tells us most about what will happen with Bernanke?

A. Harry Reid announces he will support Bernanke.
B. Mitch McConnell says he expects Bernanke to be confirmed.
C. Judd Gregg and Chris Dodd say they expect Bernanke will be confirmed.
D. John McCain announces he is leaning against voting to confirm Bernanke.

Fallout from Brown

The Democrats have had a few days to change into a fresh set of underpants. What's going to happen differently now that Scott Brown is the Senator from Massachusetts?

-Health care gets scaled down to a tenth its former size. Some of the Democrats have realized that it was terrible strategy to put together a bill that was a 40/60 mix of "stuff that helps people get health care"/"backroom deals to pay off interest groups." Other than talkingpointsmemo.com and similar lefties, I don't see a lot of appetite for ambitious reform anymore. TPM has a piece out this morning arguing that piecemeal reform won't work -- you can't ban insurance companies from considering pre-existing conditions without adding a requirement that every individual buy insurance, which you can't do without subsidies, etc. This is all true. Which means the only avenue left is to attack only the worst excesses of the insurance industry -- things like the practice of rescission. That's something that could get 80 votes in the Senate.

-Other stuff: off the table. Cap-and-trade? Shaky before the election, dead after. EFCA? Dead. Immigration reform? Dead.

-A shift to populism. The only thing left that's popular is to rein in the banks. We'll see whether the Democrats are able to make that unpopular as well.

-Bernanke and Geithner in trouble? I've been saying for some time that Bernanke's confirmation was in trouble. Today Russ Feingold and Barbara Boxer came out in opposition. Reid has postponed the confirmation vote because he doesn't have enough support. Honestly I think Bernanke's only chance is, if it looks like he's about to get rejected, the Dow will drop 500+ points in a day and possibly scare enough senators on board.

My positions:
Short Obamacare -674 at 30.7
Short Cap&Trade 2010 -175 at 31.4
Short EFCA -32 at 46.7
Short Bernanke -41 at 81.7

I should have seen this coming

Goldman Sachs and JP Morgan down 5% today. On the heels of the Massachusetts Senate debacle, Obama quickly shifts to economic matters. The gist of it is that he'll be moving to stop banks from taking reckless risks.



This is great news, and it's something that should have been done about a year ago. People are pissed that banking has been business and bonus as usual after requiring massive bailouts from the Treasury and the Fed. Taming the banks is one thing that's both good policy and good politics.

I would have thought Obama would wait until the dust had settled on Brown/Coakley before launching this next project, but I guess he decided this was the least embarrassing way to shift focus from the collapse of health reform.

By the way, I love the picture of Paul Volcker in the WSJ's article:


Do not play poker with this man.

Same old song

So it appears that we're going back to the same political pattern we've seen over the last 40 years: the Republicans are actively evil, while the Democrats are pathetically ineffective.

These are ALWAYS funny

(Via GeekPress)

And... Intrade is down

Frowny face :(

One more word before the results come in

I just shorted 220 lots of Brown at 83.9. This is a hedge against my stock positions, at what I believe is a cheap price.

One of the reasons I got into this market early (betting on Brown) is because of the inherent unpredictability of special elections. Just look at the NY-23 election we just had -- the polls were wildly off. When a poll came in suggesting Brown was within striking distance, it was a no-brainer to buy him at 15.

Chris Bowers has an interesting table at OpenLeft. He compiled the mean and median polling error in "late-trending campaigns" such as this one. Both the pollster.com trend-following technique and a simple average of polls are off by an average of about 8 points.

Pollster.com has Brown up by 6.9%. Given no other information about the race, a candidate in a fast-trending special election who is leading by 6.9 points on pollster will win about 75% of the time.

Or, take a look at the simple average, which has Brown up by 0.9%, and has very similar accuracy to pollster's technique. All else being equal, a candidate ahead by 0.9% will win 53% of the time.

All else is not equal, of course. Enthusiasm, momentum, and even weather favor Brown. And Chris Bowers' analysis is a textbook example of motivated reasoning. Still, I think the dominant theme right now is uncertainty. I would not be surprised if Coakley won this, and I would not be surprised if Brown wins in a blowout.

Election Day in MA

Mixed anecdotal reports on turnout. Apparently very high some places, not so high other places. These reports come out every election day, and they're rarely very informative. Initially the consensus was high turnout, which is supposed to be good for the Democrats, and Brown's intrade price fell from 75-78 last night to 70. Now the feeling is that turnout is high for Republican areas and low for Democratic areas, so Brown touched 87 recently.

I hedged a bit last night and this afternoon, so this is basically a freeroll for me. I've locked in about $2k profit, and stand to make about another $2k if Brown wins.

Even better, my health insurance stocks, UNH and AET, have begun to pop. After rising more than 5% this morning, they're up 3% right now. I think tomorrow will be similar if Brown wins. Right now, I'm planning to sell Wednesday morning, but that will depend on pricing, and what signals the Democratic leadership gives about their plans for health reform.

____________________
UPDATE 3:15 ET -- I'm out entirely. I'd rather take profits than squeeze out the last 15% on Brown.

What happens to health care?

Let's assume Brown does beat Coakley in the special election. What happens to the health-care reform bill?

Right now, Plan B is for the House to pass the Senate bill untouched, and then for the Senate to implement certain changes through reconciliation, which only requires 50 votes. I've heard other options, such as rushing the Senate bill through, or delaying Brown's certification so that there is time for the Democrats to complete the Senate-House negotiations. I suppose Plan C is failure.

If Brown wins and the Democrats do push a bill through, the optics will be terrible no matter how they do it. Whatever happens, it'll look like they're using parliamentary tricks to get around the will of the people (even though it would technically be a trick to get around the Republicans' trick of the filibuster). The question is, are those terrible optics worse for the Democrats than passing nothing at all?

It's a hard question to answer, because many groups within the Democratic caucus have to agree in order to pass anything. The swing voters here are moderates in the House and Senate, and the lefty House Dems who voted against the health bill the first time around because it didn't go far enough.

The biggest issue of contention between the House and Senate bills is that the Senate bill really whacks the unions by adding an extra tax to "cadillac" health insurance plans. Pelosi and the House caucus will probably oppose the Senate bill unless they can be assured that the Senate will come back and implement a compromise through reconciliation.

The question then goes back to the Senate, where support is iffy. There is certainly a group of moderates who will oppose reconcilation, as a way of blocking reform altogether -- Lieberman, Landrieu, Bayh, Prior, Lincoln, and Nelson come to mind. If those 6 oppose reconcilation, the Dems can only lose 3 more senators before reform is dead. That's not too hard to imagine. McCaskill? Baucus? Hagan? Byrd? Specter? Conrad? Dorgan? None of these are shoo-ins. Meanwhile

This all comes against a backdrop where the health reform bill is opposed by the public something like 60-40. And if Brown wins by a substantial margin (more than 2 points) it will be a very public repudiation of the Democratic agenda. If voters in Massachusetts give Ted Kennedy's seat to a Republican, I think a lot of Democrats will lose political courage, hunker down, and focus on their own re-election. Not passing health reform didn't help the Dems much in 1994, but passing it in such an ugly way might be even worse. If Brown wins, the odds of any health care bill being signed into law would be about 25%.

Even Obama thinks Coakley will lose

Ouch.

And why in the world would "multiple advisers to President Obama" leak this news to CNN? It's probably the faction in his camp who didn't want him to go to Massachusetts, trying to lower expectations. It's horribly undisciplined.

More Massachusetts Polls

This PPP poll is hot off the presses. It has Brown up 51-46.

The weight of the polling evidence is now that Brown is in the lead. Polls for special elections tend to be quite error-prone. In particular, it's very difficult to judge how motivated each candidate's voters will be. Pollsters ask questions like, "On a scale from 1 to 10, how likely do you think you are to vote," and exclude anyone who answers less than 9. Or they'll ask voters what day the election is and where their local polling stations are, and exclude anyone who gets the answer wrong. These are good techniques, but I think it's quite difficult to get a really accurate estimate of how likely someone is to vote.

In this case especially, the motivation is clearly all on one side. Brown's supporters are fired up, and Coakley's are generally apathetic. You can just sense in the national mood -- people who proudly call themselves liberals are disappointed with Obama and with the system generally. They worked hard to elect a shiny new President full of hope and change, and even gave him a supermajority in both houses of Congress. And what have they gotten for it? A health-care bill that's a compromise of a compromise of a compromise, which will achieve universal coverage largely by requiring everyone to buy insurance. I have no doubt the health bill will provide real, important benefits to people who can't afford coverage right now. But it takes a ton of cognitive dissonance for liberals to convince themselves that this bill is what they fought for.

I think the liberals stay home, and Brown wins it. Fair value on Brown is around 70%.

Bad Sign

Looks like Obama's going to Massachusetts to campaign for Coakley. It's a pretty straightforward calculation on Obama's part: if Coakley loses, health reform takes a HUGE hit, and Obama gets blamed whether he campaigned for her or not. He may as well do as much as he can to help her out.

Intrade is edging toward Coakley on this news. It may help a little bit, but I don't think Obama's campaigning is going to be decisive in the campaign. It didn't work so well in NJ or VA. Also included in that Ambinder link is a mention that Coakley's internals have her down by 4 points now. I'd put Coakley's true odds at 40-50%.

Health Insurers Stock

Loaded the boat with Unitedhealthcare (UNH) and Aetna (AET) this morning on the basis of the new Suffolk poll showing Brown ahead of Coakley by 4 in the MA Senate race. Both companies have P/E ratios around 11, and growth rates around 10%. Their financial risk is quite low, in that they are also part of the oligopoly of health insurance companies who essentially print money. They're trading so low largely on the basis of political risk -- investors still don't know what health reform will do to the insurers.

If Brown wins the election, that risk is dramatically lowered. Even if the election is a close call, I think it helps the insurers, damaging the prospects for health reform by scaring other moderates. If the Dems lose or nearly lose an election in Massachusetts, people like Nelson, Bayh, Landrieu, Lincoln, and Pryor all get cold feet.

If Brown does win, I expect a pop of 5% or more Wednesday morning. Based on past experience, I expect there to be a peak around 10 AM ET, and I plan to sell around then.

What can Brown do for you?

I've taken a fairly large position on Scott Brown in the MA-Senate race. Regular readers know I tend towards a center-left position, but I'm not surprised the Democrats are going to have a tougher time than they expected holding onto this seat.

Midterm elections are always hard on the party in power, and more so when the economy is in the tank. What's more, special elections depend very heavily on supporters' enthusiasm. Liberals on the whole are apathetic, while conservatives are enraged.

It's tricky to estimate turnout in special elections, and the polling reflects this:
Boston Globe: Coakley +15
PPP: Brown +1
Rasmussen (Jan 5th): Coakley +9
Rasmussen (Jan 11th): Coakley +2
Leaked Democratic internal poll: Coakley +2
Blue Massachusetts Group (Democratic pollster I've never heard of before): Coakley +8

The numbers are breaking quickly for Brown.

Massachusetts is not *that* blue of a state. Republicans have held the governorship continuously from 1991 to 2007. They have not held a Senate seat, but that's largely because the state's two seats had been held by Ted Kennedy since 1962 and John Kerry since 1985. This is the first open-seat Senate election in 25 years. Given their relative success in the governors' races, I'd say the GOP certainly has a ground establishment to rival the Democrats'.

Coakley is still the favorite, but I think she's more of a 60% favorite than the 77% she's trading on Intrade. I've bet Brown for a net of 475 lots.

Another way to play this is in the stock market: if Brown wins, there's a very good chance health care reform gets derailed completely. Buying stock in a big health insurer like UNH offers good risk/reward -- if Brown wins, all the insurers will jump 5% or more Wednesday morning. If Coakley wins, they'll be basically flat.

Hack job on Monsanto

Huffington Post has a breathless report of a new study purporting to show that GMO foods produced by Monsanto cause organ damage. I read the study, and man, does it suck.

First, the journal. The International Journal of Biological Sciences. Scientists can gauge the general importance of a journal through a number called Impact Factor -- on average, how often does a paper published in that journal get cited by other papers? Top journals like Science and Nature have impact factors near 30. The best journals in a field (Journal of Neuroscience, Neuron, etc.) are around 10-15. Then there are the low-quality specialty journals (Acta Neurobiologiae Experimentalis, Canadian Journal of Neurological Sciences) which are around 1. The International Journal of Biological Sciences isn't even in the database.

Second, the authors. The lead author is Gilles-Eric Séralini, a French researcher who has built his entire career attacking GMO foods. If their experiments didn't show effects of GMOs, do you think he would have published?

Finally, the statistics. This is not a difficult question to analyze. When rats are fed GMO food, do they show signs of organ damage? You get your treatment group, your control group, your outcome measures, and you do an unpaired t-test between the two. These guys use "nonparametric methods," "Principle Component Analysis," and a bunch of other unnecessarily advanced statistics. Basically, they tried doing it the right way, failed to find what they were looking for, and pulled out the fancy (wrong) techniques to get the result they wanted.

New Year Update

I've been gone for a while. There just hasn't been that much happening on Intrade, and I've been focusing on neuroscience.

Intrade has definitely gotten tougher over the past year. I think the 2008 election drew in a lot of people who weren't very good at politics or gambling. By now those people have either lost their money or gotten better. Hopefully the 2010 elections will draw in a new crop.

In the mean time, Intrade's management has not done a great job in developing the brand. My impression is that volume is off by more than 50% compared to last year. Chief difficulties:
-Absolutely no advertising whatsoever.
-Diminished interest in politics in an off-year.
-Getting money onto the site requires a lot of determination and a visit to a gas station to buy a Netspend card.

Future updates on this blog will be less-than-daily, basically when I have an opinion about politics that I feel like sharing.