Financial markets and their comparisons to betting on the US election.

Oct 30, 2020

Welcome to Finance and Fury, the Furious Friday edition.

In this episode we will not be looking at the great reset further, that will be next week, but instead we will be having a look at how financial markets compare to the betting markets – in relation to the upcoming US election

1. Decided to cover this topic pretty last minute – bit we will be finishing up the great reset next week – it is just that this topic is very topical at the moment -with the US election in just a few days –
2. I find this to be an interesting topic – covers so many elements – from behavioural science to supply and demand – especially in the context of how the US population will vote versus how individuals - both inside and outside of the country are betting
   1. To clear one thing up - I don’t gamble – some of my friends love it – personally I don’t – don’t like the odds normally gambled twice in my life – one year when I was at the Melbourne Cup and another time in Macau – beyond that I don’t gamble
   2. However – have been intrigued by the US election due to the discrepancy between the betting markets and the predicted odds of the election results
3. There is a lot going on with this topic – which we will break down in this episode -

 

Quickly – have to do a PSA – in not endorsing gambling in this episode- there is a difference between investing and gambling

1. Gambling has absolute loss levels that I don’t like – if you put a bet on one person to win and they don’t – well you lose everything
2. Investing – when done well this isn’t gambling – it is taking calculated risks but isn’t the same as taking an absolute risk
   1. Example – If I put $1k onto team A to win and they don’t – I lose my money – if I put that $1k into an investment fund – if it loses it may lose by a market decline – but it isn’t an absolute loss unless the companies that are invested in lose everything – i.e. go bankrupt
   2. The probability between the scenarios is vastly different – not only does investing in one company carry a small absolute loss risk – depending on the type of company invested in
      1. For example – the Absolute loss of investing into a start up with a bad track record is higher than investing into a blue-chip company like WOW
      2. But if you are investing your $1k between 40-50 companies through a managed fund – which screens for these forms of absolute loss scenarios – your probability of losing your $1k are very close to 0%

• Sure, you can lose in volatility risks through investing in managed funds – but this can then rebound as you still have money in the game – unlike in gambling

1. This is due to that the returns in Financial markets is due to the combination of the income returns plus the price movements of assets (volatility) – and this second factor works off demand and supply
   1. If a share is highly in demand – above its supply – the price will rise – has little to do with the fare value
2. However – the payoff for investing versus gambling is different due to the larger absolute loss potential for gambling
   1. Think about the following scenario – if you put $100 down on a scenario that gives you a 50% chance to win $200 – but a 50% chance to walk away with $0 – your expected return or payoff is $100 – or no real return
   2. If now – if you be $100 and you have a 34% chance to win $300 and a 64% chance to walk away with $0 – your payoff is $102 – or about 2% return
3. The payoff – it is the expected return that you will receive from a scenario – between winning and losing
4. For investing – your payoff is the expected return over a longer-term forecast – i.e. a 8% return p.a. -gambling is different as it is based around a single event that has the event based payoff – it is not a long term strategy

3. When looking at the Betting markets – work off similar dynamics in one way – but they are based around the probability of an outcome – in conjunction with the level of betting on the market
   1. Explaining this further- the payouts are based around the amount of money on one side versus the other – and then discounted to the market probability of an outcome - this is a market force in one way
   2. But the market is heavily influenced by the odds given – which changes the behaviour of the individual when betting –
   3. If you can bet $100 and only stand to make $105 – what is the point? As the saying goes – most people like to have a punt – hence the long odds still setting bets on them even though the probability may seem low
4. You can have one person put a bet on team A to win with $1m and then 1m people all put a $1 on team b –
   1. In this case it is likely that the odds point towards team B to win
5. well either way the bookies lose – they have to pay a certain amount depending on the odds – if it is $4 for team A or $1.50 for team B – they are still losing money – either $3m or $500k – bad outcome –
   1. So the bookies have an incentive to offer odds that are attractive but will hopefully make them money –
   2. But What does this have to do with the US election
6. That is where I think the bookies have it wrong in this upcoming election – and have the potential to lose a decent chunk of money due to the odds – which are based around the forecasted results based on polls
   1. Could also offer an opportunity for punters out there – now this isn’t financial advice – or a recommendation to bet on anyone – but is an analysis from the odds versus the probability of a candidate winning
7. The Odds of the winning don’t really line up with what the polls are predicting –
   1. This being said – in the Polls – has Biden to win by a substantial margin, then also in the Betting odds – has Biden to win by a decent margin – Changes across sites – but on average Biden is around the $1.45 mark payout and trump is sitting at $2.80 for a payout
   2. Both of these things are in tandem – but where they diverge is to the degree to which they predict the win – which may show a flaw in the methodology
   3. Hence – this could be an arbitrage opportunity – for those punters out there

Looking deeper at the numbers behind the betting payouts –

1. The amount of money that has been bet on this US election is huge – it is about $260m - As a result, more money has now been placed on this election than last year’s Super Bowl, the Mayweather vs McGregor fight, the Kentucky Derby and the NBA Finals all combined – there is a massive amount of money that has been placed on this
   1. set to be the biggest-ever betting event with wagers worth close to $400m expected by November 3rd
2. Due to the polling and predictions - Trump trails in the odds market - with his odds at time of writing listed at -188, or 15/8, which carries an implied chance of 34.78% - Biden has odds of -190, or 10/19, which puts him in the driving seat with a 65.53% chance to win – that is where I think these odds are off
3. Looking at the Leading U.K. bookmaker Betfair – have to look outside of the US – as it is technically illegal for US companies to hold bets on the US election – so punters go to non-US sites – well Betfair are reporting that the odds on both candidates give Biden a 66% implied probability of winning and Trump a 34% chance of winning
4. But regardless of the odds – the money is on Trump = the more the odds predict that Biden will win – the money is flowing into trump –
   1. in fact more money has been bet on Trump in this race – With Betfair alone there is a split between £91m compared to £84m on Biden – being a UK company things are in pounds – but this means the money is 52% to trump and 48% to Biden
   2. So are people betting on Trump just going for the better payout odds?
   3. Biden pays out around the $1.45 mark payout and trump is sitting at $2.80 for a payout
5. To break this down – important to remember the previous US election predictions – both in 2016 and the 2018 US state elections – all of which went into the Republicans favour over what the pollsters predicted
   1. This was a massive turn around compared to what the odds market saw on election night in 2016 – remember that Hillary Clinton went in the big odds-on favorite. And we all know how that turned out."
   2. In 2018 – there was a blue wave predicted -but the Republicans picked up seats in the senate – not the blue wave that was predicted
6. Interestingly – other bookmakers – have seen an observation that the amount of money being bet on Biden has increased significantly over the past few days – but overall Trump is still more popular
   1. in terms of the number of bets placed in the last seven days, 80% have been on Trump compared to 20% for Biden – this is the number of bets being made – not the amount of money bet – aggregates betting data from dozens of bookmakers, said that over the past weekend, twice as many bets were placed on Trump to win than Biden, in an intriguing trend that has gathered momentum over the past month
   2. This is an important distinction – could mean that people are chasing the better payout figure –
7. Looking at the payouts – if there is a 34% chance that trump wins at $2.90 – that is a payout of $98.6 – but with Biden at 66% chance to win at a payout of $1.44 – that is a payout probability of $95.04
   1. Remember - Like Biden, Hillary Clinton was the bookmakers' favourite heading into the 2016 election.
   2. Even though the odds were stacked against him back in 2016 – 61% of wagers on the 2016 election were placed on Donald Trump – even at worse odds
   3. Back in 2016 - Trump's election odds implied he had only a 16.7% chance of winning in late October but 47.6% of wagers were placed on Trump in the same month
8. The betting favourite is still Biden – even since the markets opened in May 2020 – back then he had a 13% chance due to the Democratic Primaries – however thanks to Bernie and a few others tapping out due to some favourable deals as well as the inner party SuperPAC corruption – Biden emerged as the candidate – he is the big money doner
9. Speculation is rife – the odds predict that biden has double the chance over trump –
   1. But these may be based off the popular vote – which means nothing in the US – they are a republic system – where the electoral college matters –
   2. The same runs with gambling – whilst more money has been bet on Donald Trump – a telling factor is that the ten biggest stakes made are all on Joe Biden – and these were made early on – which affected the original voting offs
      1. Multiple bets worth more than $100,000 have been placed on Biden winning the presidency, with the largest single bet of the campaign being more than $350,000 on the 27th of September

The election itself – Biden will probably win the popular vote – but the US election is built around the electoral college votes –

10. This is the way the founding fathers set up the election process – to avoid the over populated areas deciding elections
11. That is where I think that the US election race is going to be far closer than many analysts and other respected predictive models – many predict that Biden will get well over the magic number of 270 electoral votes that he needs to win – I personally think that trump may get close to 300 -
12. Looking at the evidence - Biden continues to hold an average lead in national polls of 8-10 points – now this is well ahead of Hillary Clinton’s final average national lead over Trump in the 2016 race, and well more than the 4-5 point lead he needs to overcome Trump’s advantage in the Electoral College
    1. But polls are misleading – they have to do with the way the questions are asked as well as who you are asking – the voter turn out will be the deciding factor
    2. This is the most intriguing aspects of this race to me – that is the disconnect between prediction markets and respected statistical models/forecasts of the outcomes – it is a remarkable distinction not just from a betting perspective, but from an academic and financial perspective as well
    3. Main stream respected sites such as The Economist as well as FiveThirtyEight both show Biden with a projected 92% and 87% chance to win, respectively
    4. If anyone is mathematically challenged out there - it means that Biden is projected to win in a landslide - Yet prediction markets around the world continue to price the race around just 60/40 in favour of Biden
    5. Hence - many bookmakers have priced the race even closer than this probability – otherwise – the race would be McGregor Mayweather odds – with Mayweather $1.20, McGregor $5 – at least in this scenario there is a punchers chance of a win
    6. The debate will always continue over whether markets are more accurate forecasters of election results than polls, but they aren’t usually this disconnected – which is why I think the odds are good in Trumps favour
13. We will find out in under a week – either I am going to be massively wrong and Biden is going to win – or Trump is going to win
    1. Either way – Politics in the US isn’t getting better - There are some pretty crazy optics outside of this – Biden is probably the most corrupt president candidate in US history – and that is saying a lot when compared to Hillary and Bill with their white-water scandal, and many others over the years
14. The optics – which decide a lot when it comes to public perception and political outcomes haven’t been good for Biden over the past few weeks –
    1. You have Biden’s laptop– which shows some pretty revealing photos and videos if Hunter smoking meth/crack whilst engaging in inappropriate acts – not judging him on this – but where this comes back to his Joe biden – his major bill that he past in a 47 year career was the hard on crime act – or the 1994 crime act which would make a situation where his own son would be sent to prison for at least a decade under the mandatory minimum sentences that he set in this bill –
    2. In addition – the pay for play situations with Hunter between Burisma and the Chinese companies where the big guy or the chairman – which has been verified to be Joe Biden
       1. Had Tony Bobulinski who was involved with these deals verify this
    3. The fact that Twitter and FB were blocking this story and banning members who spread it is the very nature of campaign influence
    4. The difference between searching Biden’s laptop between google and duckduckgo – gives two different worlds
15. Another major factor of optics - Who built the cages? With the immigration tactics of trump building cages for illegal immigrants -when this was what was done under Obama – ad It was literally Jim Biden's (Joe's brother) construction company contracted by the Obama Administration
16. There is a lot of propaganda about Trump – but the amount of suppression with Biden is incredible – don’t think that active people in the US could be unaware of this – hence the outcome to the election may be surprising turn of events
17. I personally think that trump will win – may be completely wrong – but there seems to be a disparity between the numbers when it comes to the odds markets and that of what I think the outcome is

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