A sideways look at economics

Joe Biden will be the next US president. The Democrats keep the House and flip the Senate. Things have turned out how most analysts and commentators, including Fathom, predicted. Officer Barbrady from Southpark would say, ‘Nothing to see here, move along.’ But Officer Barbrady is not a man known to care about the details. The journey from election night to Congress’ certification of Joe Biden as president-elect has been a rollercoaster, to put it mildly. Does that matter? Do we care more about the destination or the journey?

I draw on my election night experience to answer this question. We are in a strict lockdown in London now, but back on election night in November, when such things were allowed, five of us gathered at a bar near the US embassy to get into the election spirit, before returning home to follow the developments on TV. Three of us were rooting for Biden, one was rooting for Trump (interestingly, he would have preferred Bernie Sanders) and another didn’t care.

Having covered the US economy professionally for years, I have an extra interest in things on that side of the pond. But there are many other reasons that the world likes to follow the US election, like John King, from CNN, who explained everything we needed to know with the poise and authority of a firm but likeable schoolteacher.

I’m not a huge fan of CNN’s news coverage more generally, but that guy is quality and their election coverage, with comparisons between 2016 and 2020, using county-level detail was excellent. That said, to get a more balanced sense of things and some alternative views I flicked between CNN, BBC, RT, Fox and Infowars. The latter was interesting, although I was closer to buying a protein shake through one their banner ads than sharing the ‘non-consensus’ views voiced by their presenters.

Going into election night we all had opinions on who would win, who we wanted to win, and what might happen. And the US election gives every man, women, boy, girl and their dog the opportunity to show their forecasting skills and reveal their forecasting personality type — unlike, say, elections in China. In the days before the election, my colleague Kevin Loane gave us a handy framework to sort ourselves into groups : the consensus-follower (i.e. those who are talented at offering explanations when their predictions turn out wrong); the contrarian (who loudly dislikes Kanye West); and the unconstrained contrarian, who dreams of Nassim Taleb liking one of their Twitter posts. I would add a fourth category: the super-consensus-forecaster, one so firmly in the consensus camp that they condemn anyone who disagrees as a loser.

Ahead of the vote, consensus standard-bearer Nate Silver placed little more than a 10% chance of a Trump win. One super-consensus-forecaster gave Trump a less than 5% chance. Implied odds in betting markets were closer to one in three. Unconstrained contrarians were predicting a Trump landslide. I hate to be in the consensus camp, but that is where I came out for this particular event – because surely pollsters had learnt their lessons, adjusted their models, etc, and Biden was going to win this? The crew and I were all several beers down and back at home (at our separate houses – no mixing after 10pm) when the first results started coming in. The usual suspects came and went. Kentucky Trump. Vermont Biden. New York Biden. South Carolina Trump. But the early figures in Florida, with its 29 electoral college seats, worried the Democrats. They were expecting to flip the state (polls suggested they would by a few per cent), but early results were showing that Biden was doing worse in the key populous districts around Miami than Clinton did four years ago.

Bad news for those of a Democrat persuasion, although they could still console themselves with: a) another beer; b) a whisky; c) some good early numbers in Ohio; d) that the Miami figures could be explained by the city’s Cuban and Venezuelan Latino population who were scared of ‘the radical left’, unlike Latinos in Nevada, Arizona and Texas; e) the ‘red mirage’, meaning that postal votes were more likely to favour Democrats and likely to be counted last.

As the night wore on, the results were getting no better for Biden in Florida, Ohio was turning red, the Democrats’ slim hopes of winning Texas were proving to be nothing more than a pipedream and at one point it looked like even Virginia might go red. Betting markets were turning and Trump was now the favourite. It felt like 2016 all over again. Options a) and b) were still viable for the Democrats, at least. It was around 3am and I had to work the next day. Time for me to go to bed.

Things still seemed to be favouring Trump at around 7.30am when I woke. Ohio had gone Trump. Virginia was blue. The rust belt states were close – favouring Trump slightly, but Biden was catching up. There was still a chance that the red mirage was a thing. But was the blue comeback going to be strong enough? How many votes were still to be counted? From what counties? What about overseas ballots? How would they vote? Still so many questions.

There was lots going on – people were tired and betting markets were all over the place. By mid-morning it was still not clear what would happen. This can be seen from a screenshot of my phone at 10:30am (London time) the day after the vote: Biden’s chances of winning over the last 24 hours had gone from 1.5 to 5.5 and back below 2. Or, for the non-betters, that basically meant that Biden’s chances of winning went from around 65% to less than 20% and back to more than 50% within 12 hours. With such extreme swings there was money to be made (and lost) for punters sitting at home on the Betfair app, and professional investors that were awake, executing trades.

The result would not be settled the next night, or the night after that; and while the results were shifting Joe Biden’s way, swing states like Pennyslvania, Arizona, Nevada and Georgia would not be cleared up for a few days yet. This was one scenario that we (the consensus) had prepared ourselves to expect: that the mail-in ballots would be counted last and they would favour the Democrats; that Trump and his supporters would question these results as they came through; that Anthony Scaramucci would appear on as many British news interviews as humanly possible; and that Rick Santorum’s forehead would sum up the mood of bewilderment. Ultimately, though, if you believed the polls, the most probable scenario was an early Biden win in Florida and a decisive Biden win in Pennsylvania, meaning that the red mirage wouldn’t matter.

Wrong again. As it happened, the drama, uncertainty and acrimony would continue for weeks. It was weeks before the Betfair app would pay out on a Biden win, and things that the consensus-follower might have never imagined have actually happened: things like the suggestion that state electors might not cast their votes the same way that the state electorate had voted, or that a large number of members of Congress would not certify the election results, or that a group of protestors dressed like they had come from a Jamiroquai gig would storm the US Capitol building causing five deaths.

So the final outcome may have been what the consensus predicted, but if we had just patted ourselves on the back and moved along, Officer Barbrady-style, without noticing the journey, there is a ton we would have missed. And this only goes to underline the importance — for traders and risk managers at least — of having an idea ahead of time about what the journey might be like, or what the consensus is missing.

The margin of victory is something important itself (at least for punters on the Betfair app). But if you had known, for example, that the polls would be wrong by several percentage points in Biden’s favour, you might have foreseen that Florida would go red, and that the result in Pennsylvania wouldn’t be known for days, and that the betting odds (and financial markets) would be all over the place on election night. Such volatility presents traders with opportunities, although it also makes risk managers sharply raise their eyebrows in ways that only they and Carlo Ancelotti know how to do. Just because we think something will happen, doesn’t mean we should bet the house on that happening. Good investing is about considering the risks and rewards, as well as tolerance for risk.

This makes me think of a recent trip that my wife and I made in a Zipcar. We had 30 minutes to return the car and two choices: a) drop the car in its bay in good time, unload it and take a £6 taxi ride home; or b) go home, unload it, and drop the car back with 10 minutes to spare, according to the GPS calculations. (Keep in mind that the fine for returning Zipcar late is £40.) I voted for option a), my wife for option b), so naturally we did b). As it turns out we made it, but with one minute to spare, not the estimated ten. This is because the GPS sent us down a street that had been blocked, which then required a nine-minute detour, turning a ten-minute journey into a 19-minute journey. At the end of this event the facts looked something like this: my wife was ultimately ‘right’; I am a ‘chicken’; and we were seconds away from a £40 fine because we didn’t want to pay £6 for a taxi.

In the case of the US election, the consensus-follower got the outcome right. The unconstrained contrarian had some interesting insights but was ultimately unconstrained. The super-consensus-forecaster was a waste of time. The contrarian was ‘wrong’, but in hindsight the reasons they gave for their predictions may have been the most useful ahead of the event. Something to think about and reflect on.

Finally, and to end on a more philosophical note, my own personal view is that in life it is not so much about where we end up, as how we get there and what we experience along the way. Enjoy the journey – not just the final destination. Happy Friday.