Electioneve,modelpredictionsandrainsinLA

We have introduced Nate Silver in the past as the author of the book The Signal and the Noise, a book which basically tries to identify how to extract actionable information from a deluge of conflicting data points and how to make intelligent forecasts. Intelligent is the operative word here. But today, on the eve of US elections, we will try to make use of Silver’s faculties on poll predictions. Since 2008 he has run a site by the name of FivethirtyEight.com where he tries to predict the outcome of US elections whether for the imperial seat of the president or the mundane elections to Senate or HOR.

In the latest predictions, Silver’s model is giving a 90% chance of a Biden win. The model methodology, though not very explicit, takes into account heavily the opinion polls conducted in various states and constituencies. He writes that the model algorithm is also not static and gives different weights to different phenomenon as D day approaches. He compares the 10% chance of Trump winning to raining in arid Los Angeles on any given day. Downtown LA has about 36 rainy days every year. We are certainly queasy about such a comparison. Comparing a long term observable weather pattern to a once in four year binary bespoke event belies both a lack of appreciation of uncertainty and a false belief in models.

Though the topic today is to focus on the near certain possibility of a Biden win as predicted by Silver’s model, we should try to identify what it means for various asset classes. Any Democrat win in presidential elections, and in case they take the control of senate as well, will be followed up  a massive risk on rally. The stock markets are already assured of a long haul low interest rate regime and massive stimulus plans will be an additional kicker. We wrote yesterday that the world will not revert back to a free trade utopia scenario as the US looks to abdicate its role but a Biden win will be closer to that glorious non-confrontational past more than the Trump regime.  Gold will be in a tricky position as it will vacillate between sell on account of risk off and buy on account of free money. Last but not the least it is well nigh possible that all these effects might have already been priced by the markets. Markets believe in acting on expectations and selling the fact.

Apart from elections, the week’s line-up includes FOMC, BOE meeting and Jobs report on Friday, each one being a market moving phenomenon in its own right. The possible spoke in the above scenario could be a legal challenge to the results. It will be a temporary setback even if it happens. The Dow Jones closed up by 423 points last night which is a 1.6% rise. The Hang Seng is up by 2% in the morning trade today.

Domestically, the rupee has opened stronger by 15 paise from the yesterday’s close. The 10 year benchmark bond is trading at 5.90 after having a very range bound day yesterday. India’s manufacturing PMI rose to 58.9 in October, better than the 56.8 number in the month of September. The PMI data indicates that the unlocking of the economy is well under way. The Fx reserves stand at all time high of 560 Bn USD as per the WSS.