Nobody knew that a poll in Iowa would be decisive, but that’s what we got in FX yesterday

Outlook

Nobody knew that a poll in Iowa would be decisive in financial markets, but that’s what we got in FX yesterday. It’s not fully cooked yet and there was plenty of squaring up at the US close, but yowza, the dollar tanked on the prospect of a Trump loss.

Late Sunday and early yesterday was chock-full of press stories about the failure of the Trump trade, but Bloomberg, for one, still prefers to consider it “paring positions” mode.

And it’s not wrong. As we see in the peso chart above, the dollar has recovered half of the loss attributed to the Trump trade ending.

It’s not all Trump, either, although we should accept that the Fed’s rate cut this week is already priced in. Not fully priced in just yet may well be the credit ratings agency effects to come, depending on the election outcome. See the dandy chart from Reuters. 

Forecast

We think the groundswell of support for Harris and revulsion of Trump as shown in the Selzer Iowa poll is the real deal.  Some of it is demographic change, to be sure, but most of it is Trump ideas and positions contrary to the wishes of the majority, especially sexism and racism. We also think Trump has shown himself to be incompetent and unhinged on too many occasions, and just too old. We think Harris will win and that means a big, fat drop in risk and therefore a drop in yields and the dollar. This could well be wishful thinking and needs to be taken with a cup of salt.

Political Tidbit: A lot of people will be glued to the news today and far into the night. We know we won’t get a definitive answer until Thursday or Friday at the earliest (mostly because of the stupid counting process in Pennsylvania) but we are all itching to get a result. In the 2020 election, it was Saturday before we got PA.

And it’s down to the swing states, probably. The analysts tell us that it could well be a north-south divide among the swing state. The blue count of givens is 226 (NY, CA, et al.) . The red count of givens is 219 (Texas, Wyoming, et al.). This is based in part on voting since 2020 and conditions may have changed dramatically, as we just saw with Iowa. We find it hilarious that one of the sites doing a decent job is the Hindustan Times.

CNN’s weekend survey has Harris with 226 givens and needing 44 to win. Trump is shown as having 219 and needing 51 to win.

On top of the given red-blue count, it looks like Harris will win Michigan (15), Wisconsin (10) and Pennsylvania (19), and if so, she wins with 270 electoral votes (226 fairly solid plus 44). 

Trump is expected to win N. Carolina (16), Georgia (16), and Arizona (11), plus maybe Nevada (6), but would need one of those northern states to win. That’s 219 fairly solid givens plus these three = 262, or 268 with Nevada. He falls short by 2 points and absolutely, positively needs PA or some other northern (”rust belt”) state. 

We are not so sure about Arizona, which is heavily populated with older women who tend to vote in high numbers and are pro-Roe, having started out without Roe, got it, then lost it to Trump. Arizona went to Biden in 2020, as did Georgia. Polling shows Trump ahead in these two states, but not by anything above the margin of error.

Of the 60 presidential elections, four have had the electoral college go against the popular vote. They were in 1876, 1888, 2000, and 2016, meaning two of them are in living memory—Gore/Bush and Clinton/Trump. One, shame on you. Two, shame on us. Bills to fix the electoral college include one by Marylan’s Jamie Raskin, a constitutional lawyer, but there’s almost no hope of it getting passed because of the Senate filibuster.

One critical issue is the business fate of Elon Musk if Trump loses the election. Musk has multi-billion contracts with the US government that may be replaced, a difficult task. The latest outrage is Musk halting Starlink capability over Taiwan at the direct request of Putin, acting on behalf of Xi.

And something the WSJ names “ridiculous”—Silver thinks the probabilities favor the vote going to the House, where each state gets a vote. In that outcome, Trump wins. Here’s the quote from midnight last night:

“At exactly midnight on Tuesday, we ran our simulation model for the final time in this election cycle. Out of 80,000 simulations, Kamala Harris won in 40,012 (50.015%) cases. She did not win in 39,988 simulations (49.985%). Of those, 39,718 were outright wins for Donald Trump and the remainder (270 simulations) were exact 269-269 Electoral College ties: these ties are likely to eventually result in Trump wins in the U.S. House of Representatives.”

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