The betting market for the Democratic nomination in next year’s presidential elections is grossly mispriced. President Biden has negative odds: this means betting markets are pricing zero chance of Biden not being nominated. In reality, the chance of Biden withdrawing from the race could be about 20% based on poor performance in the polls, third party candidacies, and poor primary performance.
Poor Poll Performance
First, Biden is currently two points behind former president Trump in the polls, and this could get much worse. Voters are unhappy with the president’s age, with immigration and with the economy. This dissatisfaction may well reflect that real median wages are still below their end-2019 level, partly due to a surge in foreign workers under the Biden administration. Since end-2020, the number of foreign-born workers has increased by nearly 4mn and, at 31mn, now stands 3mn higher than before the pandemic.
Another issue is housing affordability. It had been worsening since the 2008 financial crisis, but got much worse under the Biden administration. Meanwhile, the Fed 2022 SHED survey showed a sharp fall in households’ financial wellbeing, which was among the lowest since 2016. Furthermore, the Fed Survey of Consumer Finances found a marked increase in wealth and income inequalities during 2019-22.
These trends started before Biden’s presidency, and he can do little to reverse them. He could therefore struggle to rally voters. The Democratic party lost the white blue-collar vote a decade ago, and the polls show that this time Biden is losing the minority blue-collar vote as well.
New Candidates Emerge
Second, new, competitive third-party candidates could yet emerge. For instance, conservative Democratic Senator Joe Manchin has announced that he is considering a run. His ideas align with those of No Labels, a well-funded grouping of centrist Republicans and Democrats. There has been talk of No Labels supporting a Manchin run. If the combination happened, it could eat substantially into the support for the Biden-Harris ticket.
Problems in New Hampshire
Third, to make matters worse, Biden is not on the ballot in New Hampshire, the first primary after the Iowa caucuses. This is because New Hampshire and the Democratic National Committee could not agree on a primary date. There is a good chance therefore that Biden will score poorly in New Hampshire, where Democratic Representative Dean Philips, who has launched a primary challenge to Biden, is already campaigning.
Three Precedents
Biden could fall much further behind in the polls and, faced with increasingly strong prospects of a second Trump presidency, withdraw from the race.
There are precedents. In 1952, President Truman withdrew from the nomination after Senator Kefauver defeated him in the New Hampshire primaries. In 1968, President Johnson withdrew after he won the New Hampshire primary against Senator McCarthy by a margin Johnson thought too small. And President Ford in 1976 came closest to becoming the first sitting president to lose his party’s primaries: he barely made it past Ronald Reagan – and went on to lose to Carter.
If Not Biden, Who?
I think betting odds for alternatives to Biden are equally mispriced. Betting markets price the strongest chance of winning the nomination for California Governor Newsom, followed by former First Lady Michelle Obama, VP Harris, Senator Warren, Secretary Clinton, and Senator Booker. Michigan Governor Whitmer carries the lowest odds.
Representative Phillips, currently the only Democratic challenger to President Biden, does not even have a betting contract. Rightly so in my view: if Biden withdrew from the race, Representative Philips would be unlikely to become the nominee. Instead, the Democratic party apparatchiks would likely step in.
The most attractive contract among the Biden alternatives is Whitmer’s. Ms Obama and Clinton have made it clear they have no intention of running. Governor Newsom, Senator Warren and VP Harris seem either too far on the left relative to the median voter or too unpopular to win the nomination. Booker, a vegan Rhodes Scholar, already ran a lackluster 2020 primary campaign.
Governor Whitmer has the longest odds but could be the more viable candidate. She is a popular Democratic governor in a purple state; her job creation record is middle of the pack compared with other states, but Michigan has risen to 10th place on the CNBC list of top states for business; and most importantly, Michigan born and educated, Whitmer does not carry the political baggage of the educated coastal elites. The highly credentialed elite that called former President Trump voters ‘deplorables’ or urged them to eat their greens could find it difficult to unite the country.
What About Undiscovered Candidates?
Since this is a Grey Swan, I will indulge in some fantasy. Today’s most popular governors include Kentucky’s Andrew Beshear, a democrat who just won re-election in a deeply red state, and Vermont’s Phil Scott, a republican who got elected in a deeply blue state. Beshear, who is 46, campaigned on his strong economic record, as well as universal pre-K, pay raises for teachers and centrist abortion rules. Scott, who is 64, won his fourth term last year with 71% of the vote, based on his COVID record and his public opposition to former President Trump. A Beshear/Scott ticket would have strong odds of winning the election and therefore would be a logical choice for the Democratic party.
In reality, both men likely have too much self-preservation instinct to throw their hats in the circus of a presidential election, not to mention their commitment to their states. Yet they show that America can find winners, if it knows where to look.
What would this mean for markets?
For markets, all that matters is whether Trump gets elected or not. If he does, expect more volatility, attacks on the Fed and even questions around the status of the US dollar. So, the question is whether a candidate other than Biden has a better chance to beat Trump. We think they would, so should this Grey Swan take flight then markets may take a sigh of relief and volatility around the election may ease.
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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)