Tags: Martin Hutchinson

Election 2008: Taking a Financial Flyer on the Race for the U.S. Presidency

By , Money Morning •

[“Election 2008" is an ongoing Money Morning series that examines the investor implications of the presidential election campaign.]

By Martin Hutchinson
Contributing Editor
Money Morning

A Portuguese online bank, Banco Best, is offering deposits tied to the results of the U.S. presidential election: If U.S. Sen. Barack Obama, D-Ill., wins the White House, Banco Best will pay 8% for the period between the deposit and Nov. 4; if Sen. John McCain, R-Ariz., wins, the bank will pay 2%. That reflects the general preference for Obama held in Europe; it’s worth noting that the bank’s not offering an equivalent deposit product biased the other way, which by all the rules of hedging it should be (opening branches in Arizona and Wasilla, Alaska, where demand might be expected to be greatest, for example).

You don’t need to go to Portugal to bet on the election. At Iowa Electronic Markets, or IEM, Obama is currently trading at 85 cents asked, so if you bet $85, you stand to be repaid $100 if Obama wins. You can get much better odds on McCain; you only need to bet $16 to win $100 if he wins.

Aside from the amusement value, there’s actually a very real hedging question here. Most of the differences between Obama and McCain come down to questions of policy preference that are difficult to express in a monetary form. Thus, the two candidates’ policies on the Middle East have quite different implications, and though you may have strong views on which candidate you prefer, it is impossible to put a monetary number on those preferences. Even on policies such as healthcare, the details are so complex – and the application to your own circumstances involves such indeterminable unknowns as your future health – that a net monetary number is impossible to calculate.

There is one exception, and that is in the tax field. For those of moderate incomes, there is probably not much to choose from between the two: Obama may bring slightly higher taxes, but the additional government services he promises to institute may provide benefits to offset them.

For high-income people, however, there is a clear difference: Obama promises to repeal the Bush tax cuts (which lowered the top tax rate 4.6%) on incomes over $250,000, and to institute Social Security contributions (at 6.2%, or possibly less) on those top incomes. Therefore, for someone with a steady taxable income of $500,000, an Obama presidency can be expected to cost about 10% of his or her income above $250,000, or $25,000 per annum. Over a four-year presidential term – the time that elapses before we get to choose again – that total cost will reach $100,000.

There are several ways to hedge this:

  • You can bet in the Iowa Electronic Markets. If you bet $85,000 at 85, you will have $100,000 to pay your taxes if Obama wins, and nothing if he loses. On a net basis, you will be $85,000 poorer after the election, so you may regret not having done this earlier, when Obama contracts were trading at around 50.
  • You can place a deposit with Banco Best. As I penned this, there were 21 days remaining before the election; at that point, the difference between the two returns works out to 6% x21/360 or 0.35% on your money. Your deposit would thus have to be $28,571,428.57 to make $100,000 of difference between the two outcomes. Given the wobbliness of most banks currently, you may feel that’s a lot to risk (and Banco Best says its limit is 10 million euros, about $14 million).
  • You can buy Obama-friendly shares like green energy and short McCain-friendly shares like defense. If you assume that an Obama win will increase the return on Obama-friendly shares by 5% annually compared to McCain-friendly shares, then over the four-year term their returns will differ by 20%. That means that an investment of  $500,000 should cover you.

Alternatively you can shrug your shoulders and realize that political events, like the weather, are mostly too difficult to hedge against.

[Editor’s Note: As the Election 2008 campaign season kicked off,
Money Morning Contributing Editor Martin Hutchinson personally interviewed the economic advisors for candidates John McCain, Barack Obama and John Edwards, and very early on concluded that out of the entire field of presidential hopefuls, Obama and McCain would be the best candidates for investors. For a full report on the "presidential profit plays," please click here. That Money Morning Special Investment Research Report is free of charge.]

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