Thursday, October 24, 2024

Election-betting markets face their biggest test: the election

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Oct 24, 2024 View in browser
 
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By Declan Harty

Presented by Structured Finance Association

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QUICK FIX

Wagering on U.S. elections has long existed in American politics — but never before like this.

A recent federal court decision has opened the floodgates for gamblers, day traders and political junkies to legally bet on the contest between Kamala Harris and Donald Trump . Tens of millions of dollars worth of wagers have been placed in the last three weeks alone — and that’s not including on offshore markets, where the betting has been going on for months. The markets’ odds are now seemingly everywhere, from Bloomberg Terminals across Wall Street to the Las Vegas Strip.

Political betting markets like Polymarket and Kalshi are supposed to be a better alternative to traditional polling for forecasting election outcomes because participants are putting real money on the line. Or at least that’s what the executives behind them, academics and other boosters, including Elon Musk, will tell you . However, the soothsaying skill of political gamblers is still open to question. And now, with much of Washington watching, the markets face their biggest challenge to date: Can they actually get the election right?

The so-called prediction markets currently show Trump’s odds of victory close to or even better than 60 percent, a point the former president has already noted on the campaign trail. Their rise to the political main stage comes after years of growing doubt about the accuracy of traditional polls, which were historically bad four years ago. (Several national polling averages indicate that Harris holds a slight lead over Trump today.)

Harry Crane , a statistics professor at Rutgers University, said the betting markets “are the best source of information” given that they are constantly “synthesizing” polls, voter turnout data, mail-in ballot counts and other variables. Kalshi CEO Tarek Mansour calls them a “new source of truth” that can break through the sea of headlines, misinformation and punditry swirling around American politics.

“When you have markets where you incentivize to be right and disincentivize to be wrong, you have a better guarantee for truth,” Mansour, whose exchange is federally regulated and allows for wagers of up to $100 million, told MM. “You just do.”

Not everyone is sold. Berwood Yost, director of the Center for Opinion Research at Franklin & Marshall College, said “markets aren’t always rational.” Better Markets CEO Dennis Kelleher, a leading critic of legal election betting in part because of concerns they can be manipulated, doubts how well gamblers can predict the outcome considering they’re “a very small, unrepresentative subsection of Americans.” And billionaire hedge fund manager Paul Tudor Jones said Tuesday on CNBC that he doesn’t “necessarily believe the betting markets.”

Traders have proven their forecasting chops in election seasons past and on other types of wagers. However, like most other political forecasting tools and pundits, they’ve also had several notable misses. That includes failing to foresee Trump’s victory eight years ago and predicting a “red wave” in the 2022 midterms that never materialized.

“The markets are going to get a lot of things wrong,” one active political trader told MM.

Fueling the latest round of skepticism about their accuracy is the markets’ recent swing in favor of Trump.

Trump’s and Harris’s odds of winning were largely equal until earlier this month when the markets suddenly shifted toward the former president. Behind the bump — at least on Polymarket, a cryptocurrency-powered prediction market that is supposed to be shut off to U.S. traders — is a handful of mysterious accounts that have reportedly dumped more than $40 million into Trump wagers.

Of course, the buying has spurred concerns about potential manipulation of the markets. Rajiv Sethi, an economics professor at Barnard College, said he worries the markets are being taken “too seriously.” His fear? People will look at the trading as “some evidence that suggests the race has changed in a fundamental way" even though “the models are not reflecting that," he said.

But political betting markets aren’t polls, backers are quick to note. A 60 percent chance of a Trump win, they say, is really still just a coin toss. And the markets will usually tend to correct over time when someone starts to move them because of faulty information or personal biases.

Whether that’s the case this time could be critical. Regulators and lawmakers are still circling , and, if they’re wrong, another trader said the markets could take a “reputational hit.”

“There’s a long time between now and Election Day,” said Aristotle CEO John Phillips, whose company runs the decade-old political prediction market PredictIt. “So I’d expect more twists and turns before this thing’s over and even after Election Day — because this is not necessarily going to be over on the 5th.”

IT’S THURSDAY — T-minus 11 days until Election Day. Want to talk about betting markets? Give me a shout: dharty@politico.com. And, as always, if you’ve got tips or pitches, send them Sam’s way at ssutton@politico.com.

 

A message from Structured Finance Association:

BASEL III CAPITAL REQUIREMENTS: The BASEL III Endgame proposal touches nearly all aspects of banking in America. The Structured Finance Association opposes a provision in B3E that would arbitrarily and excessively punish institutions simply for turning illiquid loans into liquid securities. Existing capital standards already incorporate post-crisis reforms and add a surcharge for securitization. Under the Basel III proposal, millions of people and businesses could lose access to low-cost credit because the cost of securitization would rise. Learn more at www.structuredfinance.org.

 
Driving the day

IMF Managing Director Kristalina Georgieva holds a press conference at 8 a.m. … The Association of Certified Sanctions Specialists holds its sixth annual conference at 8:40 a.m. with remarks from David Hanke, the staff director of the House Select Committee on China … White House National Economic Adviser Lael Brainard and Assistant Commerce Secretary Alan Davidson are among the speakers at Semafor’s World Economy Summit which starts at 2:30 p.m. … Semafor’s World Economy Summit kicks off of at 2:30 p.m., with sessions running through Friday. Speakers include UBS Group CEO Sergio Ermotti and White House National Economic Council Director Lael Brainard. … Bank of England Governor Andrew Bailey and CFTC Chair Rostin Behnam will speak at the inaugural Michael D. Gill Lecture on International Financial Regulatory Understanding and Cooperation at 3:30 p.m.

A new chapter for the CFPB — Just a few months ago, the Consumer Financial Protection Bureau was facing an existential fight at the Supreme Court. Now, as evidenced by its latest rule, the Rohit Chopra-led watchdog is embarking on a new path “to more durable rulemaking,” our Victoria Guida writes in her latest Capital Letter column.

The rule — intended to give consumers more of a say over their financial data — “could end up being the most consequential piece of Chopra’s legacy,” Victoria writes. And while the banking lobby quickly challenged the rule, the CFPB has some potentially critical allies supporting it, including House Financial Services Chair Patrick McHenry, a Republican.

Can’t get enough Chopra content? — Good, because Victoria has you covered. In a Q&A, the CFPB director went deep on the ins and outs of the newly adopted landmark rule, banks’ concerns and the legitimacy of his agency.

Watch this space Americans’ frustrations over housing costs are coming to a head at two Kansas City apartment buildings, where tenants are refusing to pay rent and pressing federal regulators to fix up the properties and cap rent growth. But the strikes could soon spread across the country, our Katy O’Donnell reports.

ICYMI from Benjamin Guggenheim‘Trying to curry favor’: Lobbyists on tax matters hired Richard Neal’s son

2024 ELECTION

Trump is rich — Donald Trump’s fortunes are on the rise — and not just in the betting markets. The former president rejoined the ranks of the world’s wealthiest 500 people Tuesday, with a net worth of $6.5 billion, Bloomberg reports.

As for what’s next for the Trump businesses, Eric Trump is forging “ an expansionary path,” The Wall Street Journal’s Alex Leary and Peter Grant report. His plans “could cement his own place in the business world,” they add, but the efforts to grow the business also risk feeding into already stirring concerns about potential conflicts of interest.

On the Hill

Musical chairs, GOP lawmakers edition — POLITICO has a fresh breakdown of the various fights between Republicans who are vying to lead congressional committees next year. That includes the House Financial Services Committee, where, our Eleanor Mueller reports, there’s a “four-way race” to replace McHenry that is “highlighting tensions between pro-business Republicans and the party’s populists.” Reps. Andy Barr, French Hill, Bill Huizenga and Frank Lucas are all in the mix to replace McHenry.

Key Senate Republican targets NFIP – Louisiana Republican Sen. Bill Cassidy is urging FEMA to roll back a recent administrative revamp of the National Flood Insurance Program, citing concerns in a new report from his office about rising costs for homeowners, our Zach Warmbrodt reports. The overhaul at issue , known as Risk Rating 2.0, is intended to ensure that flood insurance premiums better match the real risks for individual properties – a process that entails higher costs for some policyholders and lower costs for others.

Sanctions pay, for some — From The Washington Post’s Jeff Stein, Federica Cocco and Peter Whoriskey: “A sharp increase in U.S. sanctions has spawned a new lobbying industry in Washington, as businesses and governments around the world attempt to shape these economic penalties by hiring former U.S. officials to leverage their connections, a Washington Post investigation has found.”

WORLD VIEW

Done deal — “The U.S. and Western allies on Wednesday finalized plans to provide Ukraine with a $50 billion loan that will be repaid using frozen Russian state assets, locking in a stream of funding for the war-torn country just ahead of the American presidential election,” our Michael Stratford reports.

The U.K. agenda in D.C. – U.K. Chancellor Rachel Reeves is in Washington for her first IMF annual meetings. Her message to the world, per the British embassy, is that Britain is open for business and the U.K.’s upcoming budget is about investing in future growth, Zach reports. Her schedule includes G7, G20 and IMF discussions on the global economy, international financial systemand support for Ukraine.

 

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At the regulators

You didn’t think we were done with CFPB news, right? — The CFPB took a bite out of Apple and Goldman Sachs on Wednesday, ratcheting up its fight against Big Tech in the process, Katy reports.

The CFPB fined Apple and Goldman Sachs a combined $89 million over their Apple Card product. Per Katy, Chopra told reporters that the case is the latest sign “that even the most powerful technology and financial firms can fail to meet their legal obligations to American consumers, causing real financial pain to individuals and families.”

Trouble in New York — New York Attorney General Letitia James is investigating the merger of Capital One and Discover on antitrust grounds, adding another potential hurdle for the $35 billion deal. In a legal filing, James contended that the effects of the “deal will be particularly felt by the often vulnerable New Yorkers with subprime credit scores.”

Capital One said in a statement that it’s “well-positioned to obtain approval from our federal banking regulators under the appropriate federal banking laws, and believe we have made a strong case on the pro-competitive and pro-consumer benefits of this transaction. We will, of course, be responding to the NY AG’s action through appropriate legal channels.”

Crypto

Binance executive to return to US soon — Nigeria has dropped charges against cryptocurrency executive Tigran Gambaryan, releasing him from prison Wednesday, citing his need for immediate medical attention, The New York Times’ Ismail Auwal, Emily Flitter and David Yaffe-Bellany report.

Jobs report

The Mortgage Bankers Association has hired Astrid Vermeer as its senior vice president and chief financial officer. Vermeer was previously CFO for the International Foundation for Electoral Systems and the International Services for the American Red Cross and also held finance roles at the World Wildlife Fund.

 

A message from Structured Finance Association:

New proposed capital rules under Basel III Endgame could raise costs on everything from personal mortgages to business credit. These changes would arbitrarily double the capital that banks must reserve for securitized loans, making it harder for banks and others to offer low-cost credit to consumers and businesses. These proposed rules on securitization capital requirements would be significantly more restrictive than even the stringent European Union regulations. Learn how these changes could affect your access to credit at www.structuredfinance.org.

 
 

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