Market participants are coming to the realization that the US’s fiscal situation won’t be solved by the next administration, whether it’s Trump or Harris. Furthermore, proposals on both sides of the aisle have been labeled as inflationary, at times because they’re too expensive from a budgetary standpoint or highly restrictive of global trade. Investors have responded by purchasing Yes Forecast Contracts regarding the growing national debt as well as scooping up gold bars while they unload duration from their portfolios. Indeed, the Fed’s 50-basis point jumbo rate reduction on September 18 served to send yields north, and not south, which was largely expected. Folks are worried about price pressures down the road, as well as unsustainable revenue and spending dynamics in Washington. Stocks, meanwhile, are beginning to pay attention to these risks, as traders scoop up volatility protection across the curve while they modestly unload shares. On the one hand, equities are priced nominally and serve as a hedge to loftier inflation, but taller long-term yields complicate the valuation conversation.
Forecast Traders Project Fiscal Mismanagement
IBKR Forecast Traders believe there’s no end in sight to fiscal mismanagement, with players anticipating debt loads in excess of $38 trillion and $61 trillion by the end of fiscal years 2025 and 2035. The Yes choices, which closely reflect implied probabilities, are priced at $0.52 and $0.66. And while Democrats generally think that the answer is higher tax burdens, Republicans prefer to grow out of these debt problems via pro-growth policies. But ladies and gentlemen, the longer we continue on this road, the narrower and narrower the path becomes for solutions across party lines.
Source: ForecastEx
Traders Increasingly Point to a Trump Win
Meanwhile, IBKR Forecast Trader contracts are increasingly pointing to Donald Trump securing the Oval Office, while polling results continue to underscore the importance of swing state votes, including the need for his competitor, Kamala Harris, to win Pennsylvania. The Forecast Trader contract with the Yes answer to the question, “Will Donald Trump win the US Presidential Election in 2024?” now shows a 62% likelihood of the Republican defeating Harris, up significantly from 48% on October 9.
Source: ForecastEx
PA, NC and GA are Pivotal
The two candidates are focusing on swing state votes, which will be the deciding factor in the race to secure the 270. According to Real Clear Politics, among non-toss-up states, Harris is likely to win 215 electoral points so she needs to capture 55 among swing states, slightly more than half of the 104 votes up for grabs. Trump has 219 likely secured, requiring him to win only 51 more. The toss-up states and congressional district along with each battleground’s electoral total as identified by Real Clear Politics are as follows:
- Pennsylvania (19)
- North Carolina (16)
- Georgia (16)
- Michigan (15)
- Arizona (11)
- Minnesota (10)
- Wisconsin (10)
- Nevada (6)
- Nebraska CD2 (1)
One likely path to success for Trump would be to sweep Pennsylvania, Georgia and North Carolina, with the three states having a total of the 51 electoral points he needs, allowing Harris to capture only 53. If she wins Pennsylvania and loses both Georgia and North Carolina, then she would need to capture an additional 36 votes of the remaining 51 up for grabs. By sweeping three of the four remaining states with the largest electoral votes, Michigan, Arizona and either Minnesota or Wisconsin, her swing state tally, when including the Keystone state, would then climb to 55. However, if Trump beats her in Georgia, North Carolina and Michigan, she would have to secure Pennsylvania, Arizona, Minnesota, Wisconsin and Nevada to get past 55.
A 23-Year Tradition of Deficit Spending Continues
In conclusion, after 23 years of deficit spending, a continued failure to implement fiscal restraint will persistently weaken the nation’s economic prospects over time. Interest rates, gold, forecast contracts and society are all listening and punishing government officials that have excessively relied on debt and the printing press as their path of least resistance to solving significant problems. The next tempting option would be to further balloon the central bank’s balance sheet in sight of economic volatility to the point that it’s the Treasury’s majority lender, like in Japan. To be fair though, debt issues are not isolated to the US: they’re a consequence of complacent public servants worldwide. America should lead the globe here, folks, and start solving these challenging troubles by making the tough adjustments sooner rather than later. A failure to implement these difficult choices today will lead to inferior options tomorrow.
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