life. money. probability.
L ADY LIBERT Y
2020 L ibe Presid rtarian en Candid tial Jo Jor ate gense n
NOVEMBER 2020
THE MAIN EVENT Big issues abound as America prepares to elect its oldest president ever
the control freak's guide to life, money & probability
12 DECISION 2020 DEMOCRACY, DECISIONS & DILEMMAS 14 Third-Party Challenge to the Two-Party Schism
The Libertarian Party’s national chairman Joe Bishop-Henchman sits down with Luckbox to describe the party’s path forward.
17 Lady Liberty: Jo Jorgensen
An exclusive interview with Libertarian presidential hopeful Jo Jorgensen, the party’s first female nominee for the top spot.
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20 Thinking Inside the Luckbox
The magazine surveys readers to get their thoughts on the upcoming presidential election.
22 The Electoral College: A Relic of our Republic
Some condemn the old-school institution as an undemocratic fossil, while others embrace it for the safeguards they believe it provides to lesspopulous states.
25 An Election Up for Grabs?
Two well-regarded methods of foretelling the outcome of presidential elections are coming up with different predictions this cycle.
28 Uncertain Indicators
With so much at stake, investors and traders are seeking insight into the potential fallout from the presidential election. But hisorically reliable methods of predicting the outcome disagree.
PHOTOGRAPH: OLIVIER DOULIERY/ABACA PRESS
november 2020
luckbox | november 2020
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editor-in-chief ed mckinley managing editor yesenia duran associate editor mike reddy technical editor mike rechenthin contributing editors vonetta logan, tom preston creative director jacqueline cantu contributing photographer garrett roodbergen How to recover from politics 40
trends
tactics
trades
editorial director jeff joseph comments, tips & story ideas feedback@luckboxmagazine.com
life, luxury & the pursuit of happiness
essential trading strategies
actionable trading ideas
contributor’s guidelines, press releases & editorial inquiries editor@luckboxmagazine.com
STOCKS
advertising inquiries advertise@luckboxmagazine.com
THE POLITICAL TRADE
31 The Pros Are Betting on Blue
CHEAT SHEET
Calculating INSERT Tradability
NORMAL DEVIATE
BASIC
BOOK VALUE
INTERMEDIATE
36 Bulls, Bears & Agnostics
38 The Luckbox Bookshelf WELLNESS
40 The Antidote to Politics
47 Just Another Trading Day 49 Three ElectionDay Hedges ADVANCED
51 Exploiting Election-Week Volatility
ROLLING THE DICE
42 Trump & Biden’s Bones
53 Restaurant Shocks FUTURES
57 Bond Basics
THE TECHNICIAN
CHERRY PICKS
58 The Stock Market is Apolitical 61 All Your Options
62 Bump Stocks & Biden
CALENDAR
45 America Votes
DO DILIGENCE
On the cover: Illustration by Paul Lachine
Luckbox magazine, a tastytrade publication, is published at 19 n. Sangamon, Chicago, IL 60607
ISSN: 2689-5692 Printed at Lane Press in Vermont luckboxmagazine.com
Luckbox magazine
FAKE FINANCIAL NEWS
10 Ballot Measure Mania
44 Meet Ryan Grace
media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com
Editorial offices: 312.761.4218
TRADER
subscriptions & service service@luckboxmagazine.com
CLOSING TICK
64 America Needs More Parties
@luckboxmag
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luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!
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GET SMART Trying to make some sense of it all, But I can see that it makes no sense at all, Is it cool to go to sleep on the floor, ‘Cause I don’t think that I can take anymore Clowns to the left of me, jokers to the right, Here I am, stuck in the middle with you — Stuck in the Middle With You, Stealers Wheel (1973) Does a “middle” even exist today? The political polarization that began in the 1980s has become firmly entrenched. As a result, popular vote differentials have been in the single digits since 1988. The ranks of independent and undecided voters shriveled to fewer than 10 million by 2016—just a third of the “swing” presidential electorate from a few decades ago, according to FiveThrtyEight’s Nate Silver. So, how do the presidential campaigns respond to the shrinking middle? They raise more money to target them with advertising. This election season, the Democratic and Republican campaigns are spending a combined $2 billion to motivate their bases to vote and to capture the elusive swing voter. The resulting ads perpetuate tribalism and thus promote even more polarization. But here’s an idea: Instead of trying to buy votes, how about governing to the middle? Identify a problem that stirs Americans’ passions, and offer a solution that appeals to the majority of voters. To find out what problem to address with that approach, let’s turn to the findings of The Decision 2020 Luckbox Reader Survey, which drew a huge response. In the survey, the magazine asked readers to identify themselves as left, left-leaning, center, rightleaning or right. They were then asked to
rank 15 issues in order of importance. (See “A Consensus on Education,” opposite page.) Only one issue, education, ranked high among left, right and centrist respondents. Perhaps that should come as no surprise because today’s families and future generations depend upon the accessibility, affordability and quality of education. It seems like a safe but exciting and important subject to raise with voters. But just the same, George H.W. Bush was the last presidential candidate who hammered at the issue. “I want to be the education president,” he announced to voters. A potentially popular approach to the vital issue of education seems to be awaiting any candidate who chooses to rise to the consensus. Surveys show that a majority of American families want more choice when it comes to their children’s education. It’s not just parents who want to send their children to religious schools or seek to avoid integrated classrooms. Significant numbers of parents whose youngsters attend underfunded, underperforming schools in poor neighborhoods would prefer an alternative. Democrats in general and members of minority groups in particular now favor establishing and maintaining school choice, according to a host of polls, surveys and studies. Likewise, when Luckbox asked readers about their preferences, a large number said they backed school choice, no matter what their political persuasions were. As noted in survey after survey, bipartisan public support for school choice is growing, notably among families with the biggest stake in the education system—including proposals to provide vouchers for privateschool tuition.
Thinking Inside the Luckbox
Luckbox is dedicated to helping active investors achieve skill-derived, outlier results. 1 Probability is the key to improving outcomes in the markets and in life.
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2 Greater market volatility brings greater opportunity.
3 Options are the best vehicle to manage risk and exploit market volatility.
4 Don’t rely on chance. Know your options because luck smiles upon the prepared.
A shift in sentiment Vouchers, which enable families to use taxpayer dollars toward a private school education, were the subject of The EdChoice 2019 Schooling in America Survey. Researchers found 68% of Republicans in favor, followed by 62% of independents and 59% of Democrats. Parents with children in school favored vouchers at a 72% clip, as did African Americans. Hispanics were at 73%. Findings from the 2020 Education Next Survey, noted for its oversampling of teachers, Blacks and Hispanics, were that “(universal) vouchers to help pay privateschool tuition continue to command strong support among Black (60%) and Hispanic (62%) respondents.” It seems that politicians would take note of this opportunity to provide solutions that their constituents favor, particularly in marginalized minority communities. It’s a chance to take action for the common good and become more popular at the same time. But don’t expect the political class to rush into the embrace of school choice. As Thomas Jefferson warned, “The government you elect is the government you deserve.” Jeff Joseph editorial director
two ways to send comments, criticism and suggestions to Luckbox Email feedback@luckboxmagazine.com Visit luckboxmagazine.com/survey A new survey every issue.
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LUCKBOX DECISION 2020 READER SURVEY A Consensus on Education Luckbox reader responses according to partisan leanings. Rank the following issues by its importance to you: Weighted average, ranked 1-5 (5 most important)
LEFT 1. Healthcare 4.69 2. Climate Change 4.62 3. Education 4.40 CENTER 1. Healthcare 4.31 2. Education 4.27 3. Government Deficits / 3.90 (tie) SCOTUS appointments RIGHT 1. SCOTUS appointments 4.32 2. The 2nd Amendment / 4.31 (tie) Size of Government 3. Education 4.19
Do you support expanding access and choices within the public school system, including magnet schools, career academies and public charter schools? No Yes Not certain/No opinion
LEFT CENTER 26% 11% 47% 69% 27% 20%
RIGHT 7% 82% 11%
More Choices
81% of Democratic primary voters and 89% of Black Democratic primary voters support a proposal to “expand access to more choices and options within the public-school system, including magnet schools, career academies and public charter schools.” Source: Democrats for Education Reform (October, 2019)
WHAT IS THIS THYNG? Take the reader survey. Luckbox may publish your comments!
THYNG, an augmented reality app, links Luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage on a digital device.
Open Outcry Education in this country has become a babysitting service rather than a preparation of students for a productive future. Jobs have gone off shore, not just because it is cheaper but also because we do not have the number of skilled workers needed. No Child Left Behind is a failed policy. We are losing talented individuals because of our immigration policies that force foreign students educated in this country to return to their country of origin rather than join our workforce. —Katherine Wildey, Bradenton, FL Americans need more choices for parents in our education system … evolving us forward from our failed public education system. —Tommy Albright, Fort Wayne, IN The American people are being misled by our politicians. Both political parties are willing to bring the entire U.S. government to a virtual shutdown in order to get “their way.” The economy falters and the American people suffer. Yet the senators
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and congressmen all get paid, even when no one else does. We deserve better. Instead of attending to the wishes and needs of the citizens who voted for them, our congressmen and senators are obligated to abide by the wishes and demands mandated by the special interest groups who paid for their election campaigns—the needs of the nation and its people are last to be considered, if at all. —Dave R. Mason, Ph.D., Phoenix Our nation is so divided and angry that growth in any direction isn’t currently possible. We need to learn to make peace with each other’s ideological differences and move forward with common ground. For far too long the counterparty will disagree and obstruct just based on sitting on the other side of the isle. We need to vote in those who will put forth the effort to move us forward based on the best interests of our country as a whole. —Jon Greene, Port Orange, FL
Download the free THYNG app
2 Select the “Targets” mode, scan any Luckbox page that contains the THYNG icon
3 Take our latest reader survey. We may publish your comments!
Watch the page come to life with enhanced content!
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SHORT INTEREST
DECISION 2020 “The brilliance of the Electoral College is that you must go to many states to win. The cities would end up running the country. Smaller states and the Midwest would end up losing all power, and we can’t let that happen.”
SEE PAGE 22
—Tweet by President Donald J. Trump
LUCKBOX DECISION 2020 READER SURVEY
58¢ 44¢
Have you ever voted for a third-party (neither Democratic nor Republican) candidate for President?
As more states legalize cannabis for recreational use, generally speaking, in your opinion, this is a…
Joe Biden
Not sure/No opinion 12.3%
Yes 37% No 63%
Donald Trump
Source: PredictIt prices as of Sept. 17 for its “Who will win the 2020 U.S. presidential election?” market
Bad idea 25.9%
Don’t Know 7.1%
Good idea 54.8%
SEE PAGE 31 Source: Luckbox Political Survey
SEE PAGE 42
Worldwide, around 50 million people have dementia. The estimated proportion of the general population aged 60 and over with dementia at a given time is between 5%-8%. —World Health Organization
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“We’ve got two groups pretending to be on opposite sides, two people who pretend to be at war with each other, when they both want the same thing. They both want bigger government. They want to spend more of your money.” —Jo Jorgensen
SEE PAGE 17
“Companies continue to squeeze every last penny out of workers, making it harder and harder for Americans to make ends meet. It’s way past time we make a $15 minimum wage the law of the land.” —Tweet by former Vice President Joe Biden SEE PAGE 55
How restaurants would react to an increased minimum wage:
64%
would reduce employee hours
43% would cut jobs
32%
would make no changes
2%
would eliminate tipping
Source: Harri’s 2019 Hospitality and Food Service Wage Inflation Survey
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FAKE FINANCIAL NEWS
Ballot-Measure Mania Believe it or not, you actually care about some of the referenda up for a vote on state ballots during the general election—like legalized weed and higher taxes
By Vonetta Logan
L
uckbox wanted a column on some of the nation’s most exciting ballot measures. Seriously, ballot measures? Well, here goes. Whether they’re voting by mail, taking advantage of early voting or just tossing a ballot from a MAGA yacht into the mouth of a lib-owning great white shark, the nation’s voters will weigh in on more than 100 ballot measures come election day. In a “Schoolhouse Rock” moment of education, the teacher says that measures can appear on the ballot in one of two ways. One, Birkenstock-wearing do-gooders cajole citizens into signing a clipboard in front of Trader Joe’s. Two, the state legislature hands down a referral. According to the National Conference of State Legislatures, “Thirty of the Election Day measures are citizen initiatives. That number represents a significant decrease from 60 citizen initiatives in 2018 and 72 in 2016—due in large part to COVID-19 and public safety measures that made in-person signature-gathering nearly impossible.” This is the first election since 1928 when voters won’t see any referenda on the ballot in Washington state, and that’s happening even
“Show up at the polls in Alabama, Colorado or Florida with an American eagle on your shoulder and a Glock on your hip.” 10
though everyone there loves Trader Joe’s, Birkenstocks and ballot measures. But why care about ballot measures anyway? Because it’s like taking the pulse of the electorate and seeing what’s trending statewide and could potentially become a federal issue. Plus, with more people picking up roots and fleeing expensive cities for smaller, more rural locales during the era of COVID-19, it’s always good to know how a state gets down before you settle down. You mean I can’t set off fireworks when I marry my cousin and then set free a bunch of cats to celebrate our forbidden love? Weed Let’s start with the fun stuff. Federal legalization will definitely become an issue for whomever leads America in 2021 and beyond, as the possession of cannabis is still illegal at the federal level. Recreational marijuana is now legal in 11 states and the District of Columbia. Medical marijuana is now legal in 22 states. It’s no surprise because recent polls have shown that a majority of voters on both sides of the aisle now support legalizing marijuana—a change in sentiment clearly reflected by the conservative states taking up the cause in 2020. Medical marijuana legalization measures are appearing on the ballot in Nebraska, Mississippi and South Dakota—solid red states that want to go green. Arizona and New Jersey are also taking votes on measures to legalize marijuana for non-medical use. For fun, we’re also including an initiative by Oregon (where cannabis has been legal since 2014 through state legislature Measure 91), where they are seeking through Measure 109 to legalize ‘shrooms, man! Technically, it’s called the Psilocybin Program Initiative.
Uh, so put that on your list if you’re looking to move and get weird. Elections Three states—Alabama, Colorado and Florida—want to make it double super bold, extra underlined clear that ONLY CITIZENS CAN VOTE. Not sure who was voting before, but gotcha. Show up to the polls with an American eagle perched on your shoulder and a Glock strapped to your hip. The most intriguing election-related citizen initiatives are appearing on ballots in Alaska, North Dakota and Massachusetts, where supporters seek to adopt rankedchoice voting, or RCV. Ranked-choice voting addresses the common complaint that “it’s a choice between the lesser of two evils!” Ranked-choice voting means voters rank candidates in order of preference. In local elections, such as mayoral races, it reflects a more accurate view of the will of the people. RCV is used in local elections in 11 states and was used for the presidential primaries in three states. It is a wholly fascinating study in democracy, and hopefully it’s a trend that catches on in more municipal elections. Taxes Only two things in life are certain: death and that a Khardashian will mess up your day. Oops, wait, that’s taxes. If you’re looking to liquidate, buy an RV and head to greener pastures, you’re gonna wanna brush up on your new state’s tax laws. Here’s what’s at stake on the ballot. Colorado is looking to repeal the Gallagher Amendment (no, it doesn’t get rid of watermelon-smashing comics, but it should) which sets property taxes in the state’s constitution. If passed, the state would have more freedom to set property taxes as
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PHOTOGRAPHS: (SANDAL) BIRKENSTOCK.COM; (ALL OTHERS) SHUTTERSTOCK.COM
legislators see fit. California wants to tax commercial and industrial properties based on their market value, not the purchase price, with all proceeds going to local governments and schools. And Illinois, home state of Luckbox, wants to repeal the state’s flat-rate personal income tax of 4.95% and replace it with a graduated income tax that would have residents who make over $250,000 a year paying more. The battle in Illinois is getting so heated that the state’s richest person, Ken Griffith, who we lovingly refer to as Kenny G., has kicked in $20 million dollars of his own money to defeat the measure. The state’s billionaire-inchief, Gov. J.B. Pritzker has donated an eyepopping $56 million dollars of his own money to promote a graduated fair-tax measure. The iceberg metaphor This is just the tip of the iceberg for measures that might affect voters across the country.
Here are some resources so you can educate yourself and your friends about what to do before you check all of the boxes on the ballot. vote.org Confirm you’re registered to vote.
Make sure your address is correct, and that you haven’t been purged from the polls. Check for those who may not be as computer savvy as you are.
Followthemoney.org Great site for perusing all of the money that flows into elections. See who’s been bought and paid for, as well as what measures are up for vote in your state. Fairvote.org Learn more about ranked-
choice voting and the broken two-party way we’re doing things now.
Ballotready.org Great non-partisan site to
get yourself ready for every candidate and every referendum headed your way. Fill it out
Ranked choice-voting: Overturn the two-party system in Alaska, North Dakota and Massachusetts at home, then transfer your answer to your ballot or take it with you if you’re voting in person. It’s our civic responsibilityas Americans not only to vote but also to be informed voters. So take a few minutes—or even longer—to educate yourself—then maybe do some ‘shrooms. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan
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DECISION 2020
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14 Third-Party Challenge to the TwoParty System
17 Exclusive Interview: Jo Jorgensen
20 Luckbox Reader Survey Results
22 The Electoral College: A Relic of Our Republic
25 An Election Up for Grabs?
28 Uncertain Indicators & Split Decisions
Democracy, Decisions & Dilemmas S
o, who pulls the strings in American politics? Democrats would have voters believe Russia manipulates Donald Trump by pouring barely laundered cash into the coffers of his businesses. Republicans insist Joe Biden is weak on China and that his son Hunter Biden accepted payola from Ukraine. Or maybe the voters control the presidential candidates. Perhaps Trump says the virus will disappear and the overheated climate will cool down simply because that’s what his base wants to hear. It could be that Biden is abandoning his moderate positions to fall in line with the vocal left wing of the Democratic Party. The answers to such questions don’t come easily. But one thing that seems certain is that the noise surrounding the two major-party nominees, and the system itself, makes it tough for third-party candidates to break through and deliver an alternative message. That’s where Luckbox can help. This special section allots plenty of space to the Libertarian Party, the folks who say they support civil liberties, non-intervention, free market capitalism and limited government. 2020 Libertarian presidential candidate Jo Jorgensen is featured. Meanwhile, the section visits two professors who bucked conventional wisdom to predict Trump would win the 2016 presidential election. This cycle, they’ve parted ways, with one betting on Biden and the other forecasting a victory for Trump. Political coverage from a Luckbox point of view continues with an Electoral College lament, a survey of readers’ political sentiments and reports on how the economy and the financial markets will parse the coming election results. Additional articles cover how the political betting markets are reacting to the election, what Biden’s $15 an hour minimum wage would mean to restaurants, the health of the two frontrunners and how yoga can relieve the stress of the political season.
Big issues roil the markets and the nation.
Don’t forget to vote!
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DECISION 2020
Third-Party Challenge to the Two-Party Schism In the 2020 election, the Libertarian Party will once again appear on the ballot in all 50 states. With that in mind, Joe Bishop-Henchman, the party’s national chairman, sat down with Luckbox to describe the party’s path forward. By Jeff Joseph
How would you summarize libertarian principals? Joe Bishop-Henchman: One single
sentence: “Don’t hurt people and don’t take their stuff.” That really summarizes our platform. I would also recommend the writings of Frederick Hayek and Ludvig von Mises, and books by Harry Brown, David Boaz and Ayn Rand. (See “Read Free or Die,” opposite page.)
In 2016, the libertarian party’s presidential candidate, Gary Johnson, received 4.4 million votes or about 3.28% of the popular vote and more than the difference between Donald Trump and Hillary Clinton. Recently, Trump declared that he would have won the popular vote in 2016 had it not been for the Libertarian candidate. What can you tell us about Libertarian voter demographics in 2016?
I have two responses to that. We’re sometimes described as socially liberal and economically conservative. Some people think that’s a little overly simplistic or misleading, but generally that’s how we’re described. It stands to reason that we have a lot of liberals, those who really care about social issues and aren’t necessarily driven by economic issues. Similarly, we have a lot of conservatives who are primarily motivated by economic issues and
Joe Bishop-Henchman • Newly elected chair of the Libertarian Party • Vice president of tax policy and litigation at the National Taxpayers Union Foundation • Scholar with a law degree from George Washington University and bachelor’s in political science and public policy from the University of California, Berkeley
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Presidential elections have been designed to make people think they have only two choices.
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aren’t really driven by the culture war issues. From the survey data that I’ve seen, Gary Johnson pulled equally from both candidates. When asked whom they would vote for if the only choices were Clinton and Trump, Libertarians scattered three ways: some to Democrats, some to the Republicans and some who said they wouldn’t vote. So, I don’t think President Trump’s assumption is correct. My second response is to Trump’s comments that he’s somewhat libertarian. He may need to check out our platform (at lp.org) because on his trade policies, and his immigration policies—and I can go on and on— he’s not very libertarian. He’s got some homework to do. Why is it so difficult to put Libertarian presidential candidates on the ballot in all 50 states? Why must Libertarian candidates start over each election cycle while Democrats and Republicans are automatically placed on the ballot?
Our ballot access is not automatic. It varies by state because every state has different rules on what it takes to appear on the ballot. Some states are very lenient, and some states are very tough. In Tennessee, for example, if you want to be on the ballot as an independent presidential candidate you have to gather 275 valid signatures. If you want to be on the ballot in Tennessee as a party member, as a Libertarian presidential candidate, for example, you need 50,000 signatures. That’s just blatant discrimination against independent political parties. We see that so often in a lot of different states. We’re going to be on the ballot in Wisconsin. We have a very strong party in Wisconsin—they were able to get the signatures very easily. Kanye West, who’s
also running for president, will likely not be on the ballot in Wisconsin, despite universal name recognition and millions of dollars that he is spending to get on the ballot. There are actual barriers to getting on various state ballots. The Libertarian Party has been around long enough and we’re strong enough to overcome these obstacles. But, at a cost. It takes a lot of our money, time and energy that we’d rather spend communicating our message and campaigning and talking about the solutions we want to offer to the American people. I’m excited that we’re going to be on the ballot in all 50 states. Only three presidential candidates will appear on every American’s ballot on Nov. 3: Jo Jorgensen and those other two people. The 2016 Gary Johnson/William Weld ticket was arguably the most formidable presidential ballot for the Libertarian party in years. Johnson served as Republican governor of New Mexico for a couple of terms, and Weld was the former Republican governor of Massachusetts. On the other hand, this year’s Libertarian candidate, Jo Jorgensen, has nearly zero name recognition. How does this happen to a party that had four years to plan and that did so well four years ago?
Name recognition comes from the media coverage surrounding it. I’ve known who Jo Jorgensen was for 25 years. It’s incumbent upon us to talk about her experience as a psychology professor, teacher, therapist and somebody who’s been following national issues for years. Most Americans don’t think prior government experience is essential to be president. And I think polls constantly bear that out. Even in the Democratic primary you saw several candidates who didn’t have traditional
Read Free or Die Why Government Doesn’t Work by Harry Browne (1995) The Libertarian Party’s presidential nominee in 1996 and 2000 argues that big government is ineffective and proposes a redefinition of government.
Atlas Shrugged by Ayn Rand (1957) Larger-than-life heroes and villains grapple with towering questions of good and evil in Atlas Shrugged, Ayn Rand’s magnum opus. It’s an action thriller that explains the philosophical revolution of Objectivism.
The Libertarian Reader by David Boaz (1997) An advocate of libertarian principles presents the ultimate collection of seminal writings by thinkers ranging from Lao-Tzu to Milton Friedman on freedom, selfdetermination and opposition to intrusive government.
government experience. So when you ask people why they vote for a candidate for president, a lot of it comes down to character and personality. I want to vote for the person I can see myself having a beer with. Vermin Supreme—what’s his role in the party?
He is a very interesting guy. He’s a sane person who pretends to be crazy to get attention. That’s the opposite of most politicians
2020 marks the fifth time the Libertarian Party has succeeded in placing its presidential nominee on the ballot in all 50 states. In over 20 years, no other alternative party has achieved universal ballot access.
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DECISION 2020
Vermin Love Supreme, 59, an American performance artist, politician and activist, serves on the Libertarian Party’s Judicial Committee. Supreme has campaigned for political office on a platform of zombie apocalypse awareness and time-travel research. If elected, he’s promised to provide a free pony to every American. The 2014 documentary Who Is Vermin Supreme? An Outsider Odyssey follows his quixotic 2012 campaign for the Democratic presidential nomination and explores his life as an activist and political prankster. This election cycle, Supreme ran in the primaries for the Libertarian Party’s predidential nomination. He then placed third in the race for the nomination by winning the votes of 206 delegates to the party’s national convention in Orlando, Fla.
“Don’t hurt people and don’t take their stuff. That really summarizes our platform.” 16
The Commission is a bipartisan group of Democrats and Republicans. It was founded by the chair of the Democratic National Committee and the chair of the Republican National Committee. They set it at a level that is designed to ensure that it’s only those two parties on the stage. I’m sure if we ever exceeded the threshold, they’d find a reason to raise it. There’s actually an obligation that if you agree to appear in the debates the commission puts on, you cannot participate in any other debates. It’s basically a little bit of a monopoly that they’ve created for themselves. Short of winning the presidency, what milestone would you hope the party will achieve in 2020?
We’re going to elect quite a few people this year to local offices— city councils, mayor’s offices, school and county commissions— where they’re working to help pass criminal justice reform, reform pension programs, keep a lid on taxes and be a good watchdog of our government agencies. I think there’s a lot of attention on the presidential race, but we are building up a deep bench of elected officials that voters can see in action. Is there a state where you’re most optimistic about the outcome for Jorgensen?
nowadays, so that’s a little bit refreshing. He didn’t really come close to winning the nomination. I think it’s a testament to our party that he was welcomed and had an opportunity to run.
We’re paying quite a bit of attention to Wyoming. We have targeted the state because they’ve got smaller media markets and smaller districts and it is more libertarian in disposition. So, stay tuned.
The Commission for Presidential Debates stipulates a 15% popular vote threshold to qualify for
Nearly 80% of our readers say they’re dissatisfied with the way things are going in the United
States. How does the Libertarian Party respond?
What’s the approval rating of Congress? They’re lucky when they’re in the teens. Would you support having a third or fourth voice on the presidential debate stage? That answer usually gets an 80% “Yes” response. People want choices. Unfortunately, the debate commission only wants two choices. The presidential elections have been designed to make people think they have only two choices. The main thing we have to do is introduce ourselves to the American people and demonstrate that we’re serious that we can get elected and that we can do good things in office—and that’s what we’re out to do. What’s the most common misconception about libertarians?
Probably that we’re not serious despite Libertarian-elected officials passing important reforms. We are the party that stood for criminal justice reform, legalization of marijuana, legalization of same-sex relationships—way before they became mainstream ideas. We’ve long been ahead of the curve.
Who are the most likely new Libertarian voters, and what’s your pitch to them?
I’d say young people. Your parents and grandparents have been engaged in this tribal political conflict between the D team and the R team, while the national debt has been run up, and we have American troops in over 100 countries all over the world. Now we have an economic crisis on top of a health crisis. There just doesn’t seem to be any serious leadership in this country to tackle fundamental long-term problems. We’re the party that can do that, and we’ve got a track record of 50 years of being serious about wanting to do that.
PHOTOGRAPH: WIKIPEDIA
Supreme Irony
representation in presidential debates. How do you view that requirement?
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LUCKBOX LEANS IN WITH JO JORGENSEN
Lady Liberty In the 2016 presidential election, the Libertarian ticket of former New Mexico Gov. Gary Johnson for president and former Massachusetts Gov. William Weld for vice president pulled off the party’s best performance in its half-century history, tallying nearly 4.5 million popular votes. This November, Libertarians hope Jo Jorgensen, their first female presidential candidate, will build on that success. By Jeff Joseph
Jo Jorgensen, the Libertarian candidate for president, is no stranger to politics. In 1980, she supported Ed Clark, the first Libertarian presidential candidate to garner more than 1% of the popular vote. She ran for Congress unsuccessfully in 1992 as the Libertarian candidate in South Carolina. In 1996, she became the Libertarian Party’s nominee for vice president. Meanwhile, she’s worked for IBM, served as president of Digitech and now teaches psychology at Clemson University.
PHOTOGRAPHS: COURTESY OF JO JORGENSEN CAMPAIGN
In a YouGov survey conducted late last year, 64% of Gen Z and 70% of millennials said they were somewhat or extremely likely to vote for a socialist. That directly opposes the free-market principles libertarians embrace. How will libertarians make headway with younger voters? Jo Jorgensen: In spite of the
media’s love of socialist-style solutions, libertarianism is quite popular among many young people. It is a testament to the soundness of libertarian ideas that they have grown in popularity despite a virtual blackout of our solutions by the mainstream media. What’s the best-run country in the world?
Well, that’s kind of like asking a vegetarian what’s the best steakhouse out there. By definition, governments cannot be run well. People in government have no accountability. If they make a mistake, they don’t pay for it. If they do something wrong, they don’t go out of business. Private
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DECISION 2020
How can the U.S. combat climate change without regulating industry?
enterprise in the free market, on the other hand, has to work to acquire and keep customers—they have to do a good job or they go out of business. So, I think that government should be limited to police, courts and military because other than that, individuals can do a much better job.
I will pardon and free all nonviolent drug offenders and any federal prisoner serving time where there was no victim. 18
It’s often suggested that Libertarians represent a middle choice between socially progressive Democrats and fiscally conservative Republicans. Do you agree?
You could say that Libertarians are in the middle or the mainstream because we believe what most Americans believe: Keep taxes low and government lean. Be personally responsible and don’t harm others. Be free to make your own choices. Stay out of war, except to defend our own soil and shores. In contrast, Democratic and Republican politicians hold the disturbing view that it’s OK for the United States to have troops stationed in 150 countries around the world and entangled in multiple endless wars, which makes us less safe and puts us at risk of a terrorist attack. What do Libertarians propose to ensure equal or at least baseline
I was in a third-party debate in March in Chicago, and one of the people running for the Socialist ticket said that the Department of Defense—run by the federal government, of course—was the largest polluter on Earth. Then she went on to talk about how horrible companies are to the environment. Well, then why would we rely upon the very people who are causing the problems to fix the problems? If you look around the globe, wherever there’s bigger government, there’s more pollution. Wherever there’s less government, there’s less pollution.
It’s been said that a president can take on only a handful of major issues in a single term. What would that handful look like in a Jorgensen administration?
Free-market healthcare is a top priority. We must drive down healthcare costs to make it affordable and to ensure people have access to the care they need. We must end our interventions in foreign wars. As commander in chief, I will make America like one giant Switzerland: armed and neutral. I will immediately begin an orderly process of bringing our troops home from the Middle East and Afghanistan. I will give notice to our NATO allies that we will be
bringing our troops home and are preparing to close foreign bases. This will keep our servicemen and women out of harm’s way and allow military spending to be cut, which is critical to balancing the budget, ending deficit spending and keeping taxes low. We must get runaway spending under control. I will veto every bill that adds debt or that contains a tax increase. My veto pen will get a real workout. I’ll set spending-cut targets for each of my cabinet members and hold them to account for results. Then we’ll cut spending more so we can move toward eventually ending the federal income tax. This will create millions of jobs and put over $12,000 back in the budget of the average family. On Day 1 of my administration, I will pardon and free all nonviolent drug offenders and any federal prisoner serving time where there was no victim. This will end our obscene and unjust overincarceration, allowing peaceful Americans to go home to their families. This will signal the end of the failed War on Drugs, which will dramatically reduce street crime and allow drugs to be labeled and far safer. Your thoughts on America’s increasing partisanship and tribalism?
Democratic and Republican politicians want to divide and conquer voters so that we fight among ourselves—rather than attack their failed policies. This must end. We must resist engaging in disagreements that are relatively superficial, and focus instead on policy changes that make a real difference by getting government out of the way. What actions of the Trump administration have been most egregious to Libertarian principles?
Keeping our troops at war, failing
PHOTOGRAPH: COURTESY OF JO JORGENSEN CAMPAIGN
educational opportunities for all?
One-size-fits-all education fits no one. What is “baseline” for people living in Appalachia is different from what is “baseline” for people living in Manhattan. This is why we need to get the federal government out of education—so we return control of education to parents, teachers and students. This will drive down the cost of education, lower property taxes and enable a rich variety of educational choices that serve the real needs of students.
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to repeal Obamacare when there was a Republican majority in both houses and adding as much as $5 trillion to our nation’s debt this year would be among Trump’s most egregious failures as president. What policies of a Biden administration would be most contrary to Libertarian ideals?
Biden’s plan to spend even more than Trump would cripple our economy. His disdain for our right to self-defense will put innocent Americans at risk and drive up crime. His love of just about everything big-government would harm many areas of the economy and of our lives. What’s your pitch to likely Trump voters and to likely Biden voters? To the Trump voters, I say that I understand why you voted for him. You were looking for an outsider, and he claimed to be a businessman who knows how to balance a budget and cut spending. Unfortunately, he has not done any of that. If you’re looking for a real outsider, I’m what you’re looking for. As a lifelong Libertarian, I am committed to turning Washington, D.C., on its head, and to not only repealing Obamacare, but opening up a truly free market in healthcare to bring costs down. I will veto every spending bill that adds a dollar to the debt, with the ultimate goal of ending the federal income tax. To the Biden voters, I point out that the Democratic Party has traditionally been the party of peace, the antiwar party. Unfortunately, they have strayed from these routes by muzzling Tulsi Gabbard and nominating a war hawk. If you want to bring the troops home and have our country be at peace, I am your only option.
Jorgensen on Healthcare What do Libertarians prescribe as a safety net for at-risk and disadvantaged citizens who cannot afford basic healthcare? We cannot simply end Medicare and Medicaid, which millions depend upon today. But we can eventually make them unnecessary by unleashing a free market in healthcare. Singapore’s healthcare system is much closer to a free market than ours is, and their costs are 75% less than ours. A free market in healthcare will make medical services and insurance affordable and will allow free clinics to open up to serve the poor. How would Libertarians help people who still can’t afford to see a doctor, even if creating free markets for healthcare brings prices down? We cannot move to a free market overnight because the government has caused prices to become too high. So rather than having the Medicaid and Medicare programs we have now, I would actually put dollars directly into their pockets and let them shop around for the best prices and get the ball rolling, similar to the [Healthy Indiana Plan] in the state of Indiana. The Indiana plan not only provides insurance but also buys medical services. As a result, generic drug use went from 10% to 90% in the state because people were motivated to use their money efficiently. So, a Jorgensen administration would provide a safety net that would allow people to use the free markets to get the best healthcare they can afford? Right, initially. In the long run, of course, I’d like to go to a completely free market, but we can’t do that right now. Also, a lot of people don’t realize that we’ve got federal laws that prevent local charities from opening clinics. We don’t have the free clinics that we used to have because of the federal government.
We cannot move to a free market overnight.
Should the federal government intervene if pharmaceutical companies price life-saving prescription drugs out of the reach of some patients? Well, they wouldn’t be priced out of reach if we had a truly free market. The problem with our insurance system is it’s not really insurance at all. You know, people shop around for the lowest gas price at gas stations. If our car insurance paid for gas, oil and car washes, we would have no incentive to shop around for the best or the lowest-priced gasoline because we would just whip out a little $5 co-pay, and maybe even go to the nicest place that gives us free coffee while we wait. And of course, gas stations wouldn’t have any reason to lower their prices because they would simply pass the prices along to the car insurance companies—because they’re going to get paid anyway. And then, in turn, they would simply raise our insurance rates. But, if we had a free market in healthcare, then drug companies—just like gas stations, grocery stores, computer stores and car dealerships—would have to offer lower prices to get our business. If the government comes in and just tells them to cut prices, they’re just going to pay off their congressmen.
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DECISION 2020
LUCKBOX DECISION 2020 READER SURVEY
Thinking Inside the Luckbox The Luckbox editorial team recognizes the magazine’s readership as savvy, wellinformed and self-directed. And a good portion of those readers take advantage of the magazine’s monthly surveys to express their perspectives on the theme of each issue. But The Luckbox Decision 2020 Reader Survey, the magazine’s most extensive ever, has attracted more responses than any of its predecessors. Of course, we did the math—the results of the poll represent the pulse of Luckbox subscribers within a 2% margin of error.
Key All Luckbox
Which of the following best defines you politically?
Left or Leans Left
23.6%
Right or Leans Right
49.3%
Center
27.1%
What party will receive your vote for President in 2020?
47.6%
Republican
24.6%
37.7%
Democratic
49.8%
5.4%
Undecided
9.4%
3.6%
Libertarian
5.2%
3.0%
I do not plan on voting
6.1%
1.3%
Independent
2.6%
1.0%
Other
1.7%
0.4%
Green
0.5%
Left and left-leaning subscribers Right and rightleaning subscribers Center-sitting subscribers 20
Luckbox centrists are heavily tilted toward Biden.
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Responses to the survey reflect the Biden enthusiasm gap and anti-Trump fervor.
Which of the following is the strongest motivation behind your Presidential vote?
Not sure 6.4%
Not sure 3.8%
Vote for my candidate 46.5%
Vote against opposing candidate 47%
Who do you believe will win the popular vote for president?
Not sure 5.6%
Vote for my candidate 29.1%
Vote against opposing candidate 67.1%
Vote against opposing candidate 33.1%
Vote for my candidate 61.3%
In general, are you satisfied or dissatisfied with the way things are going in the U.S. at this time? GALLUP POLL (8.12.20)
55.7%
74.3%
84%
42.1%
19.8%
13%
Joe Biden
Donald Trump
2.2% Other
Generally speaking, if Trump loses his re-election bid, it’s mainly because of …
Dissatisfied
Satisfied
5.9%
No sure/No opinion
Dissatisfied
Satisfied
3%
No sure/No opinion
Are you concerned or not concerned about vote tampering issues if voting by mail is made available to everyone for the 2020 presidential elections? THE HILL-HARRISX POLL (6.30.2020)
23.7%
His administration’s policies
62.2% His personality
14.1%
Not sure/ No opinion
Not concerned 34.9%
Not concerned 32% Concerned 65.1%
Concerned 68%
Please take our latest survey
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DECISION 2020
The Electoral College: A Relic of Our Republic Some condemn the old-school institution as an undemocratic fossil, while others embrace it for the safeguards it provides By Ed McKinley
T
The Founding Fathers weren’t about to entrust control of the presidency to the voters. The signing of the Constitution is portrayed here by artist Howard Chandler Christy.
LUCKBOX DECISION 2020 READER SURVEY
Picking the President Thousands responded to the Luckbox Decision 2020 survey of political sentiment. They were starkly divided along political lines on the best way to elect a president. Source: Luckbox Decision 2020 Reader Survey
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Which vote should determine the presidency?
Who will win the Electoral College vote for president?
The Popular Vote
Joe Biden
According to 87.8% of left and left-leaning respondents
According to 80.8% of left and left-leaning respondents
The Electoral College
Donald Trunp
According to 85.4% of right and right-leaning respondents
According to 87.8% of right and right-leaning respondents
PAINTING: PUBLIC DOMAIN VIA WIKIPEDIA
wo of the last three presidents took office after losing the popular vote but winning in the Electoral College, a phenomenon that enraged Democrats but failed to pierce the complacency of Republicans. Members of both parties learned in eighth-grade civics class that America doesn’t elect the president by direct popular vote. The Constitution provides for an Electoral College that makes the call on who occupies the highest office in the land. When voters go to the polls, they’re actually choosing an elector to vote for Candidate A, not casting a direct vote for Candidate A. That system’s been turning the results of the popular vote upside down lately. Democrat Al Gore
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outpolled Republican George W. Bush by 43,895 votes in the 2000 election, yet Bush wound up in the White House. In 2016, Democrat Hillary Clinton received 2.87 million more votes than Republican Donald Trump, but look who’s living at 1600 Pennsylvania Ave. And don’t think the importance of the Electoral College is fading into the past. These days, fear is spreading among jittery Democrats that Trump could lose the popular vote again and still prevail in the Electoral College. A clash of philosophies Opponents of the Electoral College call it undemocratic because they believe it violates the cherished ideal of “one person, one vote.” But proponents say it serves the higher purpose of ensuring voters throughout the nation—not just coastal urbanites—have a say in who lands the most powerful job in the world. A survey of Luckbox readers prompted thousands of responses and shows a majority favor keeping the Electoral College in place to determine who wins the election. However, readers who lean left indicated in the survey that they’d prefer voting directly for the president. (See Picking the President, lower left.) But wherever voters reside on the political spectrum, they can’t plausibly deny that the Electoral College favors Republicans over Democrats. Republican operatives have admitted that it’s almost a given these days that the Democratic candidate will win the popular vote. In a bitterly divided nation, more voters lean left than right and not many remain undecided. To complicate matters, where voters live can make more difference than which way they lean. Take a glance at a map of how counties voted in any recent national election. College towns and big cities— the places where Democrats tend to carry elections—generally look like little blue islands dotting a vast red
sea of Republican countryside and suburbs. That geographic distribution counts because of the way the Constitution apportions electoral votes. Each state gets one elector for each U.S. senator and one for each U.S. representative. Because every state has two senators—while representatives are assigned based on population—more populous states are underrepresented in the Electoral College and states with fewer residents are overrepresented. Let’s look at some examples of what can happen as a result. The consequences In 2016, election officials tallied 255,849 votes in Wyoming, the least populous state, while the vote count came to 14,181,595 in California, the most populous. That means each of Wyoming’s three electoral votes represented the wishes of 85,283 voters, while each of California’s 55 electoral votes embodied the intentions of roughly 166,842 voters. In other words, a vote in Wyoming counted for nearly twice as much as a vote in California. Moreover, some votes don’t really count at all, according to Electoral College detractors. Every state except Maine and Nebraska uses a “winner-takes-all” approach to electoral votes. That means they award all of the state’s electoral votes to the candidate who earns the most popular votes in the state, regardless of whether the margin of victory was five votes or five million. In 2016, for example, Clinton won Illinois by a margin of 944,714 votes, while Trump took Pennsylvania by 44,292 votes. Yet each state awarded its winning candidate 20 electoral votes. Consequently, it’s rational to argue that the votes of more than 900,000 Illinois residents simply didn’t count. In the beginning Seemingly disenfranchising huge blocks of voters probably wouldn’t
Electoral College End Run The National Popular Vote Interstate Compact, an agreement among states and the District of Columbia to cast all of their electoral votes for the winner of the national popular vote, could circumvent the Electoral College. It would go into effect when it signs up enough states to control a majority of electoral votes, which is at least 270. By July, 15 states and the district, representing 36% of all electoral votes, had joined the movement. Legal questions abound.
have upset the framers of the Constitution. When they convened their convention in Philadelphia in 1787, debate centered on whether to have Congress or slates of electors choose the president and vice president. They didn’t give much thought to doing it by direct vote. In the end, they decided upon electors because they didn’t want Congress mucking about in presidential politics. So the Constitution stipulates in Article II, Section 1 that states may choose electors any way they please. Some used to have state legislators choose the electors, but all have switched to giving voters the choice. The Constitution doesn’t require electors to vote in line with the popular vote of their state but
The Electoral College has remained largely intact over the last two centuries despite more than 800 attempts by members of Congress to change it. november 2020 | luckbox
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DECISION 2020
Winning the presidency without winning the popular vote is nothing new. In fact, it happened three times in the 19th century. In 1824, Andrew Jackson received 152,901 popular votes, yet the Electoral College picked John Quincy Adams, who captured just 114,023. Samuel J. Tilden outpolled Rutherford B. Hayes 4,228,546 to 4,034,311 in the 1876 race, but disputes arose in the Electoral College. The Democrats agreed to recognize Hayes as president after he promised to withdraw occupying troops from the South and vowed not to run for re-election. In 1888, Grover Cleveland received 90,596 more votes than Benjamin Harrison but lost in the Electoral College 233 to 168. More than a century would pass before anyone else won the popular vote and lost the election.
7 million The popular vote margin of victory that pundits say Joe Biden would need to lock in an Electoral College win in 2020 2.87 million The margin of Hillary Clinton’s 2016 popular vote win 301 to 191 Richard Nixon’s Electoral College triumph over Hubert H. Humphrey despite a difference in the popular vote of less than 1%
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some states do. From the outset, the Electoral College has inspired criticism. James Madison, who helped concoct the Electoral College during the Constitutional Convention, conceded that the delegates came up with the compromise at a moment when they were fighting off exhaustion and wanted to get out of Philadelphia and go home. He said, she said Delegates’ misgivings notwithstanding, the Electoral College breeds plenty of enthusiastic defenders and a lot of bitter attackers. Electoral College backers say the system gives residents of every part of the nation an opportunity to participate meaningfully in the political process. Without it, the
quo as cultural elitists who consider one way of life better than another when all are created equal. It’s an affront to the nation’s pluralistic ideal and a sad commentary on the state of democracy, opponents maintain. Meanwhile, some fans of the Electoral College favor the institution simply because it’s entrenched. It’s the way it’s always been done, they insist, and the Constitution is sacred to them. Opponents counter that America should seek continual improvement instead of becoming mired in the past. They see the Constitution as a living document that can change and grow to suit the times. But over that gulf of disagreement, proponents and opponents of the Electoral College can at least agree that changing the system isn’t easy. Two amendments to the Constitution have modified the system, but it’s remained largely intact for more than two centuries despite an estimated 800 attempts by members of Congress to reorder it. Don’t look for it to change anytime soon.
Advocates of preserving the Electoral College say it provides a voice in national government for every geographic area.
PHOTOGRAPHS: WIKIPEDIA
A History of Winning and Losing
heavily populated coastal areas and the big cities of the Upper Midwest would dominate, they say. Opponents don’t view it that way. They contend that the Electoral College makes it vital for candidates to win hotly contested “battleground states” and encourages them to ignore the states they feel they’re certain to win or certain to lose. Consequently, only a handful of voters count and most don’t, detractors say. What’s more, opponents note that the all-important swing states that determine the outcome in the Electoral College don’t represent the nation as a whole because their residents tend to be older and whiter than the national average and dependent upon 19th century jobs in agriculture and mining. Still, advocates of the Electoral College maintain that the system wards off “mob rule.” They warn that without the institution, 51% of voters could wield tyrannical power over 49%. Without the Electoral College, a president who’s beholden only to the popular vote for re-election would have no incentive to care about the needs of a handful of Iowa farmers when masses of city folks are demonstrating for something else, advocates believe. But the opposite has been happening, detractors argue. A conservative minority of the population has been prevailing over the progressive majority, denying the nation the single-payer healthcare, higher minimum wage and free education most Americans favor, they say. Electoral College boosters also say that de-emphasizing the culture of the Heartland by muting its voice in the political system would cause America to lose its identity and become unmoored from its origins. Many of them view smaller communities and farmlands as the “real America.” Their opponents would characterize those defenders of the status
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An Election Up for Grabs? Two methods of foretelling the outcome of presidential elections—both of them long-established and well-regarded—are coming up with different predictions this cycle. One favors Trump and the other picks Biden. By Ed McKinley
T
Allan Lichtman
Helmut Norpoth
wo scholars noted for their prowess at predicting the winners of presidential elections—including Donald Trump’s generally unanticipated Electoral College victory in 2016—are parting ways this year. One’s betting on a win by former Vice President Joe Biden, and the other’s picking President Donald Trump for another term. Let’s parse the details. Allan Lichtman, a professor of history at The American University in Washington, D.C., says he’s accurately foretold the outcome of every presidential contest since 1984, even though some dispute the veracity of a couple of his prognostications. This time, he’s counting on a win for Biden but hasn’t estimated the margin of victory. Helmut Norpoth, a professor of political science at Stony Brook University on New York’s Long Island, contends that he’s been right about the results of five of the last six presidential contests. He’s calling this one for Trump, giving him a 91% chance of winning with 362 Electoral College votes to Biden’s 176. Neither soothsayer waits around to see how the candidates will fare in the debates or in polls. Lichtman declared on Aug. 5 that Biden would prevail, and Norpoth announced March 2 that Trump would win re-election. Despite the split decision, both scholars seemed adamant about the reliability of their predictions when
they discussed the upcoming election in interviews with Luckbox. “In late 2019, Trump was looking pretty good,” Lichtman maintains. “Then we got hit with the pandemic, the recession and the cries for social and racial justice. It’s a strong prediction for Biden.” “It looks like a landslide,” for Trump in the Electoral College vote, even if he loses the popular vote again, according to Norpoth. “These predictions are written in stone,” he asserted. “I’m stuck. I can’t get out of it.” Method to their madness Both academicians have developed models for predicting the outcome of presidential contests. Lichtman worked with Russian seismologist Vladimir Keilis-Bork, an expert on earthquake prediction, to develop the Keys to the White House Model in 1981. Norpoth came up with the
“Biden’s a good guy who can make a great speech, but he’s still not a JFK or Barack Obama.” november 2020 | luckbox
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DECISION 2020
The Keys to the White House The Keys: To predict the winner of the presidential election, Allan Lichtman judges each of the following statements “true” or “false.” Each “key” is worded to favor the re-election of the party holding the White House. The Scoring: When five or fewer keys are judged false, the incumbent party wins, but if six or more are considered false, the challenging party wins. Party mandate: After the midterm elections, the incumbent party holds more House seats than after the previous midterm elections. FALSE
Contest: There’s no serious challenge for the incumbent party’s nomination. TRUE
Incumbency: The incumbent party candidate is the sitting president. TRUE
Third party: No third party mounts a significant campaign. TRUE
Short-term economy: The economy is not in recession during the campaign. FALSE
Long-term economy: Real per capita economic growth during the term equals or exceeds mean growth during the previous two terms. FALSE
Policy change: TRUE The incumbent administration makes major changes in national policy. Social unrest: No sustained social unrest occurs during the term. FALSE
Scandal: The incumbent administration is untainted by major scandal. FALSE
Foreign or military failure: The incumbent administration suffers no major failure in foreign or military affairs. TRUE
Foreign or military success: The incumbent administration achieves a major success in foreign or military affairs. FALSE
Incumbent charisma: The incumbent-party candidate is charismatic or a national hero. FALSE
Challenger charisma: The challenging-party candidate is not charismatic or a national hero. TRUE
The Tally: For 2020, seven keys are false, indicating President Trump will lose his re-election bid.
It’s a strong prediction for Biden’s victory. —Allan Lichtman
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Primary Model in the early-to-mid ‘90s, in time to forecast the winner of the 1996 election. Lichtman’s model hinges on true-false answers to 13 “keys” that measure the power of factors that include incumbency, policy, scandal, charisma, social unrest, foreign affairs and the economy in the near and short terms. The incumbent party is expected to win re-election if five or fewer keys are false. Lichtman believes seven are false this cycle,
meaning that Biden will ascend to the highest office in the land. There’s a good reason why Trump will fall short, according to Lichtman. “He didn’t recognize the fundamental insight behind the keys, which is that governing, not campaigning, counts,” the professor says. “And instead of dealing substantively with the challenges, he reverted to his challenger playbook of 2016 and tried to talk his way out of them. It didn’t work.”
Norpoth says most prognosticators base models on the performance of the economy or the approval ratings of candidates based on polling. He wanted to find another niche and thus predicates his model on two factors—whether the party in power seems primed to lose control and which candidate did better in the primaries. So Norpoth used time-series analysis to analyze election results and discovered that the numbers back up the conventional wisdom that the political pendulum swings back and forth between left and right. That research showed Bill Clinton would be re-elected despite the fact that many considered him “toast” after the beating the Democrats sustained in the ’94 midterm elections. That prediction came true, but the methodology provided only a 60% level of certainty. Norpoth wanted to strengthen his model and came up with the idea of tracking primaries, an approach none of his colleagues seemed to use. He began by using all of the primaries to establish patterns but found that beginning in 1952 the New Hampshire primary has been a nearly perfect predictor. For example, sitting presidents Harry S. Truman, Lyndon Johnson and Jimmy Carter turned in weak performances in New Hampshire and didn’t go on to second terms. So Norpoth uses the New Hampshire results to shape his predictions but has also added the South Carolina primary for better racial balance. Historical reach Lichtman’s Keys Model applies pattern-recognition methodology used in geophysics to data for American presidential elections as far back as 1860, the first contest with a fouryear record of competition between Republicans and Democrats. Defining the keys narrowly prevents undue subjectivity from creeping into the process of judging a key true or false. For example, Lichtman defines an incumbent party
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nominating process as contested if the losing candidates secure a combined total of at least one-third of the delegates. History also guides judgments in the Keys Model. To qualify as charismatic, for instance, a candidate has to measure up to Ronald Reagan, John F. Kennedy and Theodore Roosevelt, Lichtman says. Norpoth likewise relies on history to make his projections. When he studied the 1912 election he saw that former President Teddy Roosevelt had badly beaten sitting president William Howard Taft in the primaries. Imagine, Northpoth thought to himself, a sitting president losing in the primaries! But the delegates to the Republican convention decided to run Taft anyway. Meanwhile, Democrat Woodrow Wilson won the primaries on the other side and captured the nomination. So a primary loser
It looks like a landslide for Trump. —Helmut Norpoth
and a primary winner faced off with Wilson emerging victorious. Roosevelt cast a shadow on the model by running as a third-party candidate, but in Norpoth’s view, the election verified the Primary Model. The Primary Model generates numbers that coincide with the actual results of 25 of the 27 elections conducted since 1912. The first exception occurred in 1960, an election some believe Chicago Mayor Richard J. Daley stole for Democratic Sen. John F. Kennedy by stuffing the city’s ballot boxes. The second was in 2000, an election some insist Republican operatives stole for George W. Bush by tainting the Florida recount and contesting the outcome all the way to the predominantly conservative U.S. Supreme Court. Where models fall short Some would dispute Lichtman’s claim that he’s compiled a perfect string of predictions because he erroneously projected that Trump would win the popular vote in 2016. The professor says he now disregards the popular vote because the Democrats will win it anytime the totals are close and neither party can carry off a landslide.
Donald Trump’s White House sent Allan Lichtman this signed clipping from The Washington Post after the professor correctly predicted the president-elect’s comefrom-behind Electoral College victory in the 2016 presidential election.
The Primary Model Helmut Norpoth foretells the winner of presidential elections based on the power of incumbency and the results of the New Hampshire and South Carolina primaries. But he adjusts the weight of those variables to fit each election.
NH
SC
Norpoth’s Projected 2020 Electoral College Vote: Trump 362, Biden 176
In 2000, Lichtman and Norpoth both bet on Gore, who won the popular vote but lost the Electoral College vote. Although the professors made the same predictions, Lichtman counts his as correct while Norpoth concedes his was wrong. The question of subjectivity arises with the keys, too. The key that critics find most subjective has been the charisma key, but Lichtman has awarded it to neither Trump nor Biden. “Joe Biden’s a good guy who can make a great speech, but he’s still not a John F. Kennedy or Barack Obama,” he opines. “Trump is not one of those once-in-a-generation, broadly appealing candidates like Ronald Reagan. Trump’s a great showman, but he appeals only to a narrow slice of the electorate.” Although the 13 Keys Model isn’t perfect, it’s very good, Lichtman maintains. It’s produced consistent results when applied to elections dating back to “the horse and buggy days,” he contends. What’s more, professional forecasters have concluded that the best predictions result from combining judgments with quantifiable factors, he notes.
“Trump is a great showman, but he’s not one of those once-in-ageneration, broadly appealing candidates like Ronald Reagan.”
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DECISION 2020
Uncertain Indicators A close look as some historically reliable predictors— some are picking Trump, while others favor Biden By Andrew Prochnow
A
In 2008, when a presidential election occurred during a deep recession, market volatility went parabolic. 28
n abyss of uncertainty— that’s what the upcoming presidential election represents for the country and the financial markets. To see why the election results are shrouded in mystery, let’s examine the results of three different predictive approaches. First, an economics-based model indicates a Joe Biden win, while a markets-based approach predicts a Donald Trump victory. Second, a history professor famous for choosing the winners of presidential races has called the contest for Biden, while a well-known political scientist says his model favors a Trump landslide in the Electoral College. Third, traders in the prediction markets are betting on Biden. The issues If Biden wins, as most polls predict, the “wall of worry” on Wall Street will turn upside down. For example, the “Green New Deal” championed by former Vice President Biden would reverse the current administration’s policy objective of “energy independence.” President Trump touted the revival of the coal industry during his 2016 campaign and has maintained the nation’s dependence on fossil fuels. But change wouldn’t be limited to the energy sector—not by a long shot.
If the Democrats win a majority in the Senate, hold onto their majority in the House and Biden captures the White House, they would likely overturn the comprehensive tax reform package the Trump administration pushed through in 2017. Another huge unknown relates to China and the trade war—a conflict that has arguably morphed into something much broader during the last six months. With so much at stake, investors are seeking insight into the potential fallout of the election. While nothing is known with 100% certainty, history teaches that the formation of certain patterns leading up to a presidential election has successfully predicted the outcome. The market and the economy Two indicators that have foretold the results of presidential elections include: • T he performance of the stock market during the three months immediately preceding the vote. • The performance of the economy leading up to the election. Specifically, is the country currently in a recession—yes or no? The history of the stock market is significantly shorter than the history of presidential elections, with reliable trading data extending back only as far as roughly 1928. In
comparison, the first U.S. presidential election was held in 1788. Limiting the analysis to data from 1928 forward, historical patterns reveal that if the stock market rises during the three months immediately preceding a presidential election, the incumbent party wins 87% of the time. Since 1928, there were only three exceptions to that trend: 1956, 1968 and 1980. That means over the course of the last nine elections (going back to 1984), that predictive trend has been accurate 100% of the time. But the stock market isn’t the only indicator that’s successfully predicted the outcome of many presidential elections. The performance of the U.S. economy has also foretold the outcome. With the economy, it’s pass or fail. Presidents aren’t likely to win re-election if a recession occurs during their first term. Since 1900, four of the five presidents who ran for re-election during an economic downturn lost—which is 80%. The unlikely winner was William McKinley in the year 1900. Unfortunately, McKinley’s luck soon changed when he was assassinated at the start of his second term in 1901. The four presidents who ran unsuccessfully for re-election amid a recession were William Taft in 1912, Herbert Hoover in 1932, Jimmy Carter in 1980 and George H.W. Bush in 1992. The United States officially entered a recession in February of 2020, according to the National Bureau of Economic Research’s Business Cycle Dating Committee. That means Donald Trump will be the sixth president since 1900 to attempt a re-election bid while at the helm of an underperforming economy. If the election were held today, these trends and data suggest two different winners—President Trump, according to the stock market, and
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former Vice President Biden, according to the economy. But the discrepencies don’t end there. Experts disagree A couple of well-known experts with a knack for predicting presidential elections have also announced conflicting prognostications. In late August, historian Allan Lichtman indicated Joe Biden would win come November. By some measures, his presidential predictions have been accurate 100% of the time going back to the 1984 election—including in 2016. The model does not rely on polls, but instead uses the country’s economic status, social unrest, military success and scandals. Long before Lichtman’s prediction went public, political scientist Helmut Norpoth announced the results of his prediction model, which also disregards polling data and instead focuses on the results of presidential primaries. He’s successfully predicted five of the last six presidential elections. But when it was applied to the last 27 presidential elections (after the fact), it was correct 25 times. In 2020, Norpoth’s model indicates that President Trump will win re-election. (See p. 23.) The betting markets The betting markets—websites such as PredictIt and Smarkets—also gauge political sentiment. At press time, the PredictIt market showed Biden with a sizable lead over the incumbent. Biden’s candidacy gained momentum back in June when the former vice president surged past President Trump for the first time. Currently, the betting market favors Biden to a greater degree than historical trends (the stock market, the economy) and the opinions of experts (Lichtman and Norpoth)— with the latter two split more evenly down the middle. Those contradictory findings
Getting it (mostly) right Upward movement in the markets usually indicates the incumbent party will retain the presidency. Source: LPL Financial
Election year
Winner
Performance of S&P 500 (%)
Incumbent Party
Predictive Trend Holds
1928
Herbert Hoover (R)
13.6
Won
Yes
1932
Franklin Roosevelt (D)
-2.6
Lost
Yes
1936
Franklin Roosevelt (D)
7.9
Won
Yes
1940
Franklin Roosevelt (D)
9.7
Won
Yes
1944
Franklin Roosevelt (D)
2.3
Won
Yes
1948
Harry Truman (D)
5.4
Won
Yes
1952
Dwight D. Eisenhower (R) -3.3
Lost
Yes
1956
Dwight D. Eisenhower (R)
-3.2
Won
No
1960
John F. Kennedy (D)
-1.3
Lost
Yes
1964
Lyndon Johnson (D)
3.9
Won
Yes
1968
Richard Nixon (R)
6.0
Lost
No
1972
Richard Nixon (R)
3.0
Won
Yes
1976
Jimmy Carter (D)
-1.0
Lost
Yes
1980
Ronald Reagan (R)
6.9
Lost
No
1984
Ronald Reagan (R)
3.6
Won
Yes
1988
George H.W. Bush (R)
2.8
Won
Yes
1992
Bill Clinton (D)
-0.4
Lost
Yes
1996
Bill Clinton (D)
6.7
Won
Yes
2000
George W. Bush (R)
-3.4
Lost
Yes
2004
George W. Bush (R)
2.8
Won
Yes
2008
Barack Obama (D)
-24.8
Lost
Yes
2012
Barack Obama (D)
1.9
Won
Yes
2016
Donald Trump (R)
-2.3
Lost
Yes
could mean the country is in for a highly competitive race for votes from a passionate electorate. And that passion will more than likely spill over into the financial markets. Market volatility tends to rise during presidential election years. And in 2008, when a presidential election occurred during a deep
recession, market volatility went parabolic. This year, the election seems even more uncertain than usual as chaos reigns among the usually reliable predictors. Andrew Prochnow, an avid, longtime options trader, has written extensively on professional tennis and contributed articles to Bleacher Report and Yahoo! Sports.
Stock volatility in election years The financial crisis of 2008 slightly skewed average electionyear volatility. 2004: 15.50% 2008: 32.70% 2012: 17.80% 2016: 15.80% All Years: 18.30%
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trends life, luxury & the pursuit of happiness
THE POLITICAL TRADE
The Pros are Betting on Blue Prediction market traders forecast a strong Democratic showing in November Despite Joe Biden’s lead in national polling, the fate of the 2020 election is closely tied to the results of a few key battleground states. Two months ahead of election day, Luckbox asked five accomplished prediction market traders how they would wager in some of the most heavily contested races. (See p. 35 for introductions to the traders—Scott Supak, Jason Pipkin, Pratik Chougule, Derek Phillips and Paul Krishnamurty.)
FLORIDA Which party will win FL in 2020? Democratic
52¢
1¢
Republican
51¢
1¢
1.7M Shares Traded
Not at all confident
Very confident Paul, Jason, Derek
Scott
Pratik
RCP average*:
2016 results:
Biden +1.0
Donald Trump: 48.6% Hillary Clinton: 47.4% Gary Johnson: 2.2%
Scott: Biden’s polling well with old people.
Registration numbers are very good for the Democrats.
Jason: There’s plenty of time left for things to happen,
What is PredictIt? Billed as the “stock market for politics,” PredictIt is a political prediction market website where traders legally wager real money on the outcome of political events. Traders buy “Yes” or “No” shares in the markets, and the share prices are in decimal increments of $1.00, which also represent the forecasted probability of a specific outcome occurring. For example, a 45¢ “Yes” share means the market’s traders forecast a 45% probability of the outcome occurring and a 55% probability of it not occurring. Twenty-seven million shares were traded among PredictIt traders on election night in 2016, a record since surpassed on Iowa caucus night and Super Tuesday of the current election cycle.
but as of this prediction, Biden’s surprising lead among senior voters should be enough despite Trump doing better among Venezuelans and Cubans than Hillary.
Pratik: Traders are overcompensating for the fact that
the GOP outperformed expectations in 2018 and 2016.
*Real Clear Politics state-specific polling averages as of 9.15.20, realclearpolitics.com
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trends
NORTH CAROLINA Want insight into wagering on political prediction markets? Check out The Political Trade wherever you listen to podcasts. Weekly episodes feature top prediction market traders and wellknown political insiders.
ARIZONA
Which party will win NC in 2020?
Which party will win AZ in 2020?
Republican
Democratic
52¢
64¢ 2¢
1¢
Democratic
Republican
883K Shares Traded
1.1M Shares Traded
49¢ 2¢
39¢ 2¢
Not at all confident Jason
Very confident Paul
Scott
Derek
Pratik
Very confident Jason
Paul, Scott, Derek, Pratik
RCP average*:
2016 results:
RCP average*:
2016 results:
Biden +0.3
Donald Trump: 49.8% Hillary Clinton: 46.2% Gary Johnson: 2.7%
Biden +4.7
Donald Trump: 48.1% Hillary Clinton: 44.6% Gary Johnson: 4.1%
Jason: North Carolina is a turnout dogfight. So far,
Democrats are putting up very strong numbers in vote-by-mail requests, particularly in highly educated counties. They will need to pray that their lead holds on election day—though it’s notable that the Senate race and gubernatorial race seem to favor Democrats.
Scott: The Senate race looks bad for Republican
incumbent Thom Tillis, and Democratic Gov. Roy Cooper is going to cruise to re-election easily, perhaps with some reverse coattails.
Derek: Cooper is going to win by 10 points, and I don’t see a whole lot of Cooper/Trump voters here. Paul: My prediction is a Biden landslide, which
would include North Carolina. A big increase in African American turnout might be just enough, but this state will be close.
32
Not at all confident
Derek: This one is slipping off the map. Another state where losing older voters hurts Trump, with the added bonus of having a literal astronaut on the ballot. Pratik: With the Senate race slipping out of reach,
Republicans are not going to invest enough in Arizona to put Trump over the top.
Paul: Democrat Kyrsten Sinema won the Senate
seat in 2018, and Mark Kelly’s vast poll lead for 2020 demonstrates how Arizona is moving left. Biden’s support from the McCain family offers an extra edge.
Scott: Polling, polling, polling. Polls notoriously
underestimate the Latino vote. Captain Mark “Future President” Kelly is going to have reverse coattails big time.
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trends
WISCONSIN
PENNSYLVANIA
Which party will win WI in 2020?
Which party will win PA in 2020?
Democratic
Democratic
68¢ 2¢
65¢
Republican
2¢
Republican
36¢ 1¢
37¢
1.2M Shares Traded
1.2M Shares Traded
Not at all confident
Very confident Jason
2¢
Paul
Scott , Derek
Not at all confident
Pratik
Very confident Jason, Derek
Paul
Pratik, Scott
RCP average*:
2016 results:
RCP average*:
2016 results:
Biden +6.3
Donald Trump: 47.2% Hillary Clinton: 46.5% Gary Johnson: 3.6%
Biden +4.3
Donald Trump: 48.2% Hillary Clinton: 47.5% Gary Johnson: 2.4%
Paul: Biden has a tiny deficit to overcome but is
Pratik: The Trump campaign will not be able to
Pratik: Trump’s 2016 victory was mostly a function
of the Clinton campaign’s unforced errors that Biden is unlikely to repeat.
Derek: Of all the major swing states, Pennsylvania gives me the most uneasy feeling. There’s no structural or demographic reason for that, but I am not liking what I see in the polls from the Keystone State lately.
Jason: There are plenty of non-college white voters
Jason: Pennsylvania likely would have been in
well ahead in the polls. However, the violence in Kenosha is a worry, given long-term social divisions in a state with lots of small, rural, Trump-friendly counties.
here who are culturally drifting right and will pull the lever for Trump. Still, a little bit better turnout from Milwaukee and Madison alongside suburban erosion in Trump support should be enough for Biden here.
Scott: Polling is showing Biden with a comfortable
lead, and the third-party vote will be much smaller than in 2016.
maintain the fragile coalition that allowed him to win Pennsylvania in 2016.
Hillary’s column if the state had any form of early voting in 2016. This year, we’ll see if the widespread adoption of vote-by-mail—which Republicans are desperately fighting in court—is enough to push Democrats over the edge, even if rural margins shift more toward Trump.
Paul: The Democratic registration advantage is
three times the size of Trump’s 2016 winning margin, and polls show him consistently trailing. I experienced the lack of organization and enthusiasm for Clinton in Philadelphia last time and expect vast improvement for Scranton boy Biden.
How to Trade Politics Video
*Real Clear Politics state-specific polling averages as of 9.15.20, realclearpolitics.com
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trends
SENATE CONTROL
POLITICAL TRADER TIPS What has trading in the prediction markets during previous elections taught you going into 2020?
Who will control the Senate after 2020?
Paul: Don’t overestimate the number of genuinely
persuadable voters or the effect of set-piece events, such as debates. Don’t overstate the importance of media narrative in such a fragmented environment, and recognize the vested interest in presenting the horse-race as “too close to call.” Never underestimate the scope for skullduggery and voter suppression.
56¢ 1¢ Republican
46¢ 1¢ 1.1M Shares Traded
Jason: If Hillary Clinton goes to Not at all confident
Very confident Jason
Paul, Scott, Derek
Pratik
Paul: I’m confident Democrats will gain Colorado,
Arizona and Maine but lose Alabama, meaning if Biden wins the presidency, as expected, they need Montana, North Carolina, Iowa or one other. I won’t be surprised if they win a couple more off the back of ultra-enthused anti-Trump turnout.
Pratik: Facing elevated Democratic turnout, too
many swing-state Republican senators will not figure out how to maintain support both from their base of Trump loyalists and independents.
Jason: Democrats lose Alabama and win Arizona
and Colorado. Maine and North Carolina are probably closer than thought at the moment but still lean Democrat while other opportunities, like Georgia, Iowa and Montana, are there as well.
Scott: Alabama’s Democratic Sen. Doug Jones will
“Even if you think something is a sure thing, the price will fluctuate.” 34
lose. Polling—and especially fundraising—says Republican Sens. Martha McSally, Susan Collins, Cory Gardner and Thom Tillis are toast. Then you could easily go +4 or more, especially with Steve Bullock in Montana, either Georgia seat or the real sleepers—and great longshots—Alaska and Kansas.
95¢ at 8 p.m. on election night because of heavy early voting margins in Florida, sell. Don’t be greedy unless you really know what you’re doing.
Scott: Hedge, hedge and then
“In the leadup to a big election like this, be willing to take small gains.”
hedge some more. Look for insurance for both a Biden blowout or a long, drawn out count. Pay attention to polling averages and less to “fundamentals,” like the economy or incumbency, because negative partisanship is so strong now— people’s minds are basically made up, and there are very few undecideds. Always think about what your biases could cost you.
Derek: In the leadup to a big election like this, be willing to take small gains. A lot of newer traders get locked into long-term positions because “this one is done” and they want to get every penny out of the contract. But prediction markets are incredibly volatile, and even if you think something is a sure thing, the price will fluctuate, and breaking news will change the outlook. There will always be an opportunity tomorrow, so take your money today. Pratik: Voters are fickle, and even the most seasoned
politicians regularly make missteps. Breaking news can dramatically change the trajectory of a race at the last minute, especially when they test the skills of candidates and campaigns.
PHOTOGRAPH: MARK REINSTEIN / SHUTTERSTOCK.COM
Democratic
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trends
ELECTION DAY TRADING What is the most important piece of advice you have for trading on election day? Paul: Be skeptical of exit polls and the early numbers that emerge during the count. Often the betting overreacts. Keep a keen eye on which counties or cities are yet to declare in the tossup states. Listen to the expert commentators—John King, Larry Sabato—rather than more generalized political pundits. Jason: If you’re planning to trade actively on election night, you should plan to do the job right. Do your homework well in advance. You will need to have a strong estimate of early voting and vote-by-mail turnout and margin and understand what election day margin/turnout needs to be for Trump to win. You will need to know where to find that data on election night and the order in which various states are counting and reporting their ballots. Be prepared, if using PredictIt, for the possibility that the site crashes under heavy traffic, making it impossible to trade for several hours. Scott: Do not assume you’ll be able to trade. Since the polling and tweet markets
were shut down, PredictIt isn’t pulling in the big bucks on fees, so they’ve almost certainly had to stop investing in scalability. When the results start coming in, especially from Florida, you’d better be ready to accept your positions because you most likely won’t be able to change them in time.
Derek: Be prepared for slowdowns. Even smart traders head into election night with a game plan for when prices are going to move, based on Twitter data, exit polls or early returns. But when the servers get overwhelmed, traders end up holding the bag on positions they don’t necessarily believe in. If you aren’t ready to ride or die with your shares, you probably shouldn’t be trading on election day.
the ultimate stock market & election forecasting competition featuring BIG CASH PRIZES! (and no entry fee)
CLOSING TICKS & POLITICS for contest details visit: thepoliticaltrade.com
Pratik: Do not panic at early returns and the inevitable swings in the market.
THE TRADERS
Pratik Chougule, formerly an executive editor at The American Conservative, is a contributor to Star Spangled Gamblers and the author of How to Make Money from Political Predictions: A Guide to Generating High, Steady Returns on PredictIt. @pjchougule
These five pro panelists have a number of things in common: They have all made money betting on political outcomes. Their bets are driven by profit—not by partisanship—and they have each appeared on The Political Trade podcast.
Paul Krishnamurty has been gambling professionally since 2003, specializing in politics, cricket and golf. He has served as an analyst for the online gambling site Betfair since 2007. @paulmotty
Derek Phillips has been a successful prediction market trader for four years, having famously turned his initial $400 investment into $400,000. He contributes prediction market-focused articles to Luckbox. @dmpfrompi
Jason Pipkin, a neuroscientist, has been a semi-professional prediction market trader since 2017, primarily as a way to monetize his political news addiction. @jipkin
Scott Supak went from gambling on horse races, to poker, to sports before discovering the prediction markets on Intrade in 2004. He has hardly bet on anything but politics since, joining PredictIt in late 2014. @ssupak
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trends
THE NORMAL DEVIATE
Which party will control the White House and Congress? The dirty little secret is the markets really couldn’t care less. By Tom Preston
Y
ou know Xi Jinping? General Secretary of the Communist Party of China? Dictator for life? Crusher of protests? Look at his picture. If you didn’t know anything about the guy, tell me he couldn’t be the CEO of a Fortune 500 company. He has that bland, somewhere north of middle-age stolidity of most of America’s corporate leaders. Why do I bring up a Marxist dictator in a magazine about the election of 2020? I’ll get to that. But first, the markets. Think about this: Whoever wins the election, the market doesn’t care—at least longterm. Let’s look at some basic data. Going back to the end of 1964, when Democrat Lyndon Johnson won the election, the S&P 500 was higher than at the end of 1960, when Democrat John F. Kennedy took office. When Johnson was leaving at the end of 1968 and Nixon was taking
office, the S&P 500 was higher than it was in 1964, and was higher still at the end of Nixon’s first term in 1972. The S&P 500 would be lower at the end of Republican Gerald Ford’s term at the end of 1976, but it rallied back and then some at the end of much-maligned Democrat Jimmy Carter’s administration. In all, since 1960, counting two-term presidencies separately, there have been seven Democratic administrations and eight Republican administrations. Of those 15 administrations, the S&P 500 was up over the course of 12 and down over three. Those three were all Republican administrations—Nixon/Ford from 1972 to 1976, and Bush 43 from 2000 to 2004 and 2004 to 2008. Does that mean Republicans are on balance worse for the market than Democrats? Not necessarily. If the crash of 2008
The assumption that Republicans are good for the markets and Democrats are bad is wrong. Take a look at Presidents Donald Trump and Xi Jinping, seen here at the G20 Leaders Summit last year in Osaka, Japan. Which one looks more like a tyical American CEO?
36
Damaging specific stocks? The S&P 500’s indifference to politics might be true in general, but individual stocks in specific sectors are influenced, right? Maybe, but any thought that some sector—from healthcare and banks to energy and entertainment—might benefit doesn’t recognize the power of money. The success of any company, no matter its industry sector, depends on how the CEO and the company’s lobbyists navigate the administration. A company that maintains strong D.C. connections can extract exemptions to regulations and push for favorable legislation. It’s going to succeed whether Democrats or Republicans are in charge. That’s because politicians are predictable. They all want to be re-elected, so they need to raise campaign funds, get their faces on TV and come up with a story they can sell back home. CEOs know how to push the right buttons and pull the right levers to reap benefits and push stock prices higher. Completing the circle Which brings us back to Xi. If he were a CEO in the U.S., the skills and talents he used to reach the peak in a Marxist system would succeed in D.C. The reverse is also true. A guy like Apple CEO Tim Cook would probably wind up on top in China. CEOs know how to play and win any game—whether it’s achieving higher stock prices or becoming dictator for life. They can negotiate any playing field, capitalist or Marxist. They wield strong interpersonal skills and practice empathy. They’re smart, but not too smart. They figure out the system and find their place in it. That goes for the leader of China, the American president and CEOs.
PHOTOGRAPH: REUTERS/KEVIN LAMARQUE/FILE PHOTO
Bulls, Bears & Agnostics
had happened five months after it did, Bush 43’s second term would have been a positive one for the S&P 500, and Obama’s first term would still be positive, too. And the factors that caused the crash existed for years before and after. It was just bad timing for Bush and good timing for Obama. That’s why the assumption that Republicans are good for the market and Democrats are bad is wrong. One can argue that Republicans and Democrats are on the opposite sides of a broad guns versus butter argument. But there’s a lot of wiggle room in between when it comes to tax policy and regulations, which are where a lot of CEOs and their minions throw their weight around in D.C.
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trends
That’s why who wins the presidential race or which party controls the House or the Senate doesn’t matter to the markets. Even if every elected position in Washington were filled by an AOC or a Newt Gingrich, CEOs would find a way for their companies to win. Their stock prices would reflect those victories by going higher. Now, that’s no reason to sour on Washington. As a trader, I’m realistic. I see evidence that the market goes up long-term without much regard for politics. As such, any volatility around the 2020 elections means opportunity. On election night back in 2016, the S&P 500 futures were crashing as a Trump victory took shape, and the VIX futures spiked higher. The next day, the market recovered and volatility sank. What’s important to note is that volatility increases options prices, and that translates into excess risk premium that traders can capture with short option strategies. Let’s compare some SPX options to explore the reasons for that.
Concrete examples On Nov. 4, 2016, four days before the election, when the world was freaking out about the possibility of a Trump victory, the SPX closed at $2,085 with volatility at 23%, and the 1985 put with 49 days to expiration was trading for $28.40. On April 28, 2016, well ahead of the election and with the market not concerned about it yet, the SPX closed to $2,075 with volatility at 14%, and the 1975 put with 49 days to expiration was trading for $17.00. Both SPX puts had the same days to expiration, were both 100 points out-of-the-money, and the SPX was roughly the same price on the two dates. But when the SPX volatility was 23%, that put would generate 67% more premium if a trader shorted it as a bullish strategy than when volatility was 14%. That’s why, as a trader, it’s more important to focus on the opportunities the market and volatility present instead of the politics themselves. As a bullish strategy, shorting that put for a larger credit when volatility is higher increases
Even if every elected position in Washington were filled by an AOC or a Newt Gingrich, CEOs would find a way for their companies to win and push their stock prices higher. the potential profit, gives the trade a lower breakeven point and increases its probability of profit. Those are all good things. So, if you think the S&P 500 will spend the next four years rallying, and volatility spikes ahead of the election, take advantage of that with strategies that can benefit from the elevated options prices. It’s what Xi Jinping might do in one of his more capitalist moments. Tom Preston, Luckbox contributing editor, is the purveyor of all things probability-based and the poster boy for a standard normal deviate.
Since 1960, 7 of 7 Democratic administrations saw the market go higher and 5 of 8 Republican administrations saw the market go higher
BEYOND THE WALL OF WORRY The world will know soon enough how the market responds to a Trump versus a Biden victory, but Luckbox still put the question to readers in the Decision 2020 Reader Survey. Overall, respondents were bullish on the market’s forward prospects under Trump—75% predicted the same or higher stock prices if Trump were re-elected, compared with only 30% if Biden wins. But, to make it more interesting, the editors parsed the readers’ forecasts based upon their selfproclaimed partisan leanings.
LUCKBOX DECISION 2020 READER SURVEY How will the U.S. stock market respond over the short term (less than three months) to … … a Biden victory?
… a Trump victory?
RIGHT AND RIGHT-LEANING RESPONDENTS
LEFT AND LEFT-LEANING RESPONDENTS
Not certain 10.0% Stay the same 9.0% Go up 2.5% Go down 78.5%
Go up 21.2% Not certain 21.4%
Stay the same 33.3% Go down 24.1%
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BOOK VALUE
The Luckbox Bookshelf The new and not-so-new books that captured our attention this month Too Much and Never Enough: How My Family Created the World’s Most Dangerous Man By Mary L. Trump
Anyone seeking a rebuttal to what mainstream media have been saying about Donald Trump for the last few years will not find it in his niece’s tell-all book. From personal experience, she describes the astonishing arc of her famous relative’s life, noting that despite his braggadocio, disregard for the truth and inability to feel the pain of others, “nobody has failed upwards as consistently and spectacularly.” She traces the president’s malice to his father, Fred Trump, who groomed his son Donald to become cruel, unfeeling and devoid of moral character. The book immediately achieved best-seller status and seven-figure sales. And while Trump’s detractors no doubt welcome a new salvo in a spate of well-timed pre-election salaciousness, the spirited memoir is not exactly an “October surprise” to the president’s family. In 2000, Mary Trump and her brother, Fred Trump III, sued over the amount of money left to them by the estate of Donald Trump’s father—the first of other financial lawsuits to follow. On election night in 2016, Mary Trump tweeted, “This is one of the worst nights of my life. What is wrong with this country?” At least the president and his niece have Twitter in common. #5 New York Times Non-Fiction #32 Amazon Best Seller Ranking
Money for Nothing: The Scientists, Fraudsters, and Corrupt Politicians Who Reinvented Money, Panicked a Nation, and Made the World Rich
Calling Bullshit: The Art of Skepticism in a Data-Driven World By Carl T. Bergstrom
By Thomas Levenson
Money for Nothing chronicles the lively story of the South Sea Bubble, the world’s first financial crisis—when war, natural philosophy and investment collided. It’s about how the new math of the Scientific Revolution intertwined with the financial markets to plunge England into economic chaos—before setting the world off in a rich new direction. At the dawn of the 18th century, England was running out of money because of a prolonged war with France. Parliament tried to raise funds by selling debt to the citizenry, taking in money now with the promise of interest later. It was the first permanent national debt. But England still needed more money, so it turned to the stock market—a relatively new invention. Filled with brilliant scientists, noble and corrupt politicians, conniving businessmen, a mad crowd frothing at the mouth for free riches and “stock-jobbers” looking for any opportunity to get in on the action, this new world of government debt finance had the potential to save the nation—but only if it didn’t bankrupt it first. Longlisted for the Financial Times and McKinsey Business Book of the Year award Amazon Best Seller Ranking #42 in Economic History
Misinformation, disinformation and fake news abound, making it increasingly difficult to know what’s true. The media have become hyper partisan, and science is conducted by press release. Startup culture elevates bullshit to high art. People are well-equipped to spot the oldschool bullshit that’s based on fancy rhetoric and weasel words, but most don’t feel qualified to challenge the avalanche of newschool bullshit presented in the language of math, science or statistics. Calling Bullshit provides a set of powerful tools to cut through the most intimidating data. It doesn’t take a lot of technical expertise to call out the problems. Are the numbers or results too good or too dramatic to be true? Is the claim comparing like with like? Bergstrom and West exuberantly unpack examples of selection bias and muddled data visualization, distinguish between correlation and causation, and examine the susceptibility of science to modern bullshit. Society has always needed people who can point out falsehoods, whether it’s in a circle of friends, a community of scholars or running rampant through a nation. As bullshit has evolved, people need to relearn the art of skepticism, and this book can help. Amazon Best Seller Ranking #11 in Applied Psychology
Far too often, book reviews drive away readers. Why devote time to a book the reviewer regards as less than perfect? But reviews present just one stranger’s view, and taking it to heart leaves great books undiscovered. That’s why The Luckbox Bookshelf offers profiles instead of reviews. Don’t look to these pages for opinions. Think of Bookshelf as a place to discover books that educate, entertain and challenge entrenched beliefs. Amazon rankings are accurate at press time and subject to change.
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Have a book suggestion? Email tips@luckboxmagazine.com
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The Biggest Bluff: How I Learned to Pay Attention, Master Myself and Win
Apocalypse Never: Why Environmental Alarmism Hurts Us All
By Maria Konnikova
By Michael Shellenberger
Maria Konnikova had never played poker and didn’t even know the rules when she approached Erik Seidel, Poker Hall of Fame inductee and winner of tens of millions of dollars. But she convinced him to become her mentor. Seidel, a famously thoughtful and broadminded player, was intrigued by her pitch. She wasn’t interested in making money so much as learning about life. But she wound up doing both. Under Seidel’s guidance, Konnikova used poker to learn how to read her opponents and how to read herself, while evolving from a pure novice to a world-class player. The Biggest Bluff is a primer on how to pay attention and make better decisions. It explores the meaning of luck, and it revels in the science, psychology and joy of outsmarting opponents.
Michael Shellenberger has been fighting for a greener planet for decades. He helped save the world’s last unprotected redwoods and led a successful effort by climate scientists and activists to prevent a spike in emissions by keeping nuclear plants operating. He even helped create a predecessor to today’s Green New Deal. But in 2019, Shellenberger decided to speak out against what he considers overreaction to the perils of climate change. Doomsayers were causing rising anxiety with their assertion that “billions of people are going to die.” As the father of a Greta Thunberg-aged daughter, he had become acutely aware of how young people were falling under the spell of such claims.
Apocalypse Never lays out underreported scientific truths. Carbon emissions have peaked and have been declining in most developed nations for more than a decade, Shellenberger says. Deaths from extreme weather, even in poor nations, declined 80% over the last four decades. And the possibility of Earth warming to very high temperatures is increasingly unlikely, thanks to declining population growth and abundant supplies of natural gas. Curiously, the people most alarmed about climate change tend to oppose obvious solutions to the problem, Shellenberger says. So, what’s really behind the rise of apocalyptic environmentalism? He lays the blame on hysteria hustlers, hypocrisy and powerful financial interests. Amazon Best Seller Ranking #1 in Climatology #1 in Environmental Science #1 in Environmental Policy
PHOTOGRAPH: GARRETT ROODBERGEN
Amazon Best Seller Ranking #1 in Poker #13 in Business Decision Making
“People learning about climate change for the first time might understandably believe, upon listening to Lunnon and Thunberg, that climate change is the result of deliberate, malevolent actions. In reality, it is the opposite. Emissions are a by-
product of energy consumption, which has been necessary for people to lift themselves, their families, and their societies out of poverty, and achieve human dignity.”
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WELLNESS
The Antidote to Politics Ease the anxiety of a fraught electoral season by striving to live in the moment and accepting others By Lissette Caballero
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mericans tend to view the presidential elections as Democrats versus Republicans—or my team versus their team. With nearly everyone choosing sides, social and family connections are subject to stress when the inevitable question comes up: “Who are you voting for?” The tension intensifies with fear of changes enacted when a new party comes to power or when a familiar party feels reaffirmed. So, can yoga offer an effective anti-
dote for those woes? Absolutely. Classes in mediation or yoga can bring some relief, but politically induced stress may require the salve of yogic philosophy’s deeper wisdom. Yogic philosophy warns that dichotomies can cause unhappiness. Dichotomies arise when people view two things as opposed or entirely different. Thesse two things may seem separate, but a Yogi—or an economist— might see them as two halves of a
whole. What’s more, good and evil are often just differing perceptions of a single neutral event, particularly in today’s tribal political environment. The inherent dichotomy in the American political system can become a source of great stress. When most people think about politics, they rely on their mental programming. It’s what determines how they perceive the world. Here’s an example: When people encounter someone they dislike, the
Seemingly separate entities could be two halves of a whole.
A BREAK FROM THE CAMPAIGN TRAIL The three well-known yoga poses described below provide a brief but valuable respite from the emotional distress that political conflict can cause.
Begin in child’s pose with the forehead on the floor or the head on a pillow or yoga block if the head does not comfortably touch the mat. Hold for four long, deep breaths. Breathing slowly and deeply helps the body’s baroreceptors give the nervous system the signals to lower blood pressure.
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Transition into downward-facing dog pose. Find long arms, legs and an open distance between the hands and feet. Hold downward dog for four long, slow breaths.
Finally, from downward dog, walk the feet in toward the hands and hang over the legs in a standing forward fold and stay for four breaths. At the end of the breathing, slowly roll up to a tall standing position and breathe naturally until feeling clear-minded and ready for what the day will bring.
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information they take in about that person reinforces their disdain. If they encounter a person they like, they focus on the characteristics that confirm their positive opinion. Psychologists refer to this as “confirmation bias.” The good news is people can override this biased programming, especially when friends have bad qualities too blatant to ignore or when enemies demonstrate admirable traits. So, overcoming prejudice isn’t a hopeless dream. Happiness hangs in the balance, and certain practices can help develop the greater compassion that brings greater peace. A better way First, make the effort to accept others as they are. Try to remember that everyone tends to behave according
to his or her mental programming. People who learn to accept others earn acceptance for themselves. Second, people should learn to accept themselves. Realize that actions are the direct result of programming. Don’t worry about faults and setbacks. Accept limitations, but do the internal work to clean up mental conflicts and find self-awareness. The inability to accept one’s self causes so much anguish. Third, live in the now. Don’t dwell in the past by worrying about what has already happened. Don’t bother anticipating the future because it’s unknowable. Live each moment fully. Devote full attention to every action, enjoy existence and make action a manifestation of existence. Three stress-reducers With the base of yogic philoso-
Yogic philosophy handed down over the centuries teaches that those who learn to accept others earn acceptance for themselves. phy, move into an asana, or movement, yogic practice. To lower the blood pressure and induce relaxation, employ three simple inversion poses where the head is located below the heart. Keep in mind that yogic philosophy helps relieve the tension of this charged political climate. The short and effective yoga movement series illustrated on the opposite page should ground and center the mind and body in this volatile political season. Namaste. Lissette Caballero teaches pilates, yoga and breathwork in Miami. @yogitraveladdict
Listen Here Truth or Skepticism
Tom Sosnoff, entrepreneur, options trader and co-CEO of tastytrade, joins Dylan Ratigan, businessman, author and former host of MSNBC’s The Dylan Ratigan Show, for a weekly podcast covering everything from sports and investing to politics and monetary policy. One’s an iconoclast, and the other’s a contrarian. Tune in each week find out who is who. It’s unscripted and unpretentious—some like to think of it as rants, but refined.
The Political Trade
The only podcast devoted to political freaks and probability geeks seeking fun and profit in political prediction markets. With each new episode, this Luckbox podcast interviews elite prediction market traders and political insiders who offer actionable insights on the week’s best predictionmarket trading opportunities. Recent memorable episodes feature James Carville, Anthony Scaramucci and the team from Barstool Sports’ Hard Factor.
Truth or Skepticism and The Political Trade are available on your favorite podcast platform.
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ROLLING THE DICE
Trump and Biden’s Bones Let’s calculate the probabilities of the septuagenarian presidential candidates making it through a full term or being diagnosed with dementia. The probabilities are expressed as rolls of the dice.
R
egardless of who wins the 2020 election, America may soon have its oldest president ever. Ronald Reagan currently holds the record at 77 years, 349 days, but Joe Biden will pass that mark two weeks before the election. If Donald Trump wins re-election and serves his full second term, he’ll reach that milestone in 2024, his final year in office. The age of the candidates has raised questions. Will the next president live long enough to finish his term? Will he remain fit enough to see out a full term? After all, it’s a physically and mentally demanding job. Jimmy Carter claimed that by the age of 80, he would have been unable to carry out the duties of the Oval Office. So, what are the chances that the next president will be able to cope for the full four years? To find out, consider two probabilities. First comes the question of whether the next president will survive a full term. Second, assuming he does survive, will he have
the capacity to carry out the duties of the office for four years. Luckbox doesn’t have access to the full medical history of either candidate, so let’s simply consider both candidates representative of other men their age. Term limits? Of the eight presidents who have died in office, four did not die of natural causes. They were assassinated. Security may have tightened in modern times, but some degree of risk inevitably remains. And the president is still disproportionately exposed to several other sources of risk, such as a helicopter accident, as an inevitable consequence of an unusually busy schedule. Nonetheless, let’s assume the main threat to presidential life expectancy comes from a medical condition and not the risks of the office. A 75-year-old American male, as Trump will be in 2021, has a one in 30 risk of dying in a given year. For Biden, who’s slightly older, annual risk
Bones: The Greeks and Romans made dice from sheep anklebones, and the name stuck. 42
PHOTOGRAPHS: (BIDEN) REUTERS/LEAH MILLIS; (TRUMP) NICK OZA/THE REPUBLIC VIA IMAGN CONTENT SERVICES
By Fergus Simpson
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increases to one in 20. The cumulative risk of death during the four-year term works out to be around 15% for Trump and 19% for Biden. These figures (which are both one-die risks ) contrast sharply with that faced by Barack Obama when he took office, which was only around 2% (a two-dice risk ). Mental acuity The greater concern is perhaps not whether the president will survive the full term but whether he will retain his mental faculties—whether he will remain the same person the public saw on the campaign trail and in the televised debates. If the president’s ability to think and act rationally is compromised by aging, it could pose a significant risk to national security. One of the major causes of decline in mental capacity is dementia, a neurological disease that disproportionately affects older people. In the United States, approximately 7% of those over 65, and around 17% of those over the age of 80 are believed to have the condition. What do those figures mean for the next president? Let’s estimate the probability that someone will become symptomatic over a four-year period. That’s calculated by looking at how the incidence of dementia changes with age and tells how many cases emerge as people get older. Men are at a slightly lower risk of dementia than women of the same age, so the projection should take gender imbalance into account. The cumulative risk that the president will develop dementia within a four-year term is approximately 5% for Trump and 7% for Biden. But dementia is not the only neurological risk they face. Mild cognitive impairment (MCI) is a condition with a similar level of prevalence. While MCI does not adversely affect daily life to the extent dementia does, its symptoms of loss of memory or concentration may mean that carrying out presi-
dential duties is too much to ask. The chances of the president becoming unfit to serve because of cognitive decline in the next term are in the region of 10%-15%. Decline and death The probability that the president will die or suffer cognitive decline is a combination of the 15%/19% mortality risk for Trump/Biden, and their 10%/15% cognitive risk. Simply adding the cognitive and mortality numbers together would be an overestimate. Still, it’s reasonable to estimate the chances of an incomplete term in office at around 23% for Trump and 30% for Biden— almost twice the chance of throwing a single six. Because of the significant chance that either candidate will fail to see out a full term in office—10 times higher than with Obama—their running mates may be subject to closer scrutiny than the public usually exercises with vice-presidential candidates. While the vice president has had to step in to take power on nine occasions, it hasn’t happened since Gerald Ford took over for Richard Nixon in 1974. But will there be a President Mike Pence or a President Kamala Harris within the next few years? First woman president? Despite the media focus on Trump and Biden, the chances that America will soon see its first female president have rarely been higher. Given a 60% chance of Biden winning the election, coupled with an estimated 30% chance of stepping down during his first term, suggests the odds of Harris being sworn into office before 2025 are as high as 4-1. Meanwhile, the odds of President Pence taking office before 2025 currently sit at around 10-1. Fergus Simpson, Ph.D., a machine-learning researcher from Scotland, focuses on probabilistic models and information theory at Prowler.io, a business-decision platform. @frgsimpson
THROWING BONES What are the chances they all land on a six? Well, with two dice, the chance of that happening is just one in 36, or 2.8%. Roll more dice at the same time, and the numbers rise quickly. With six dice, the chance of rolling all sixes rises to a little over one in 50,000. For simplicity, let’s refer to levels of risk in terms of “two-dice risk” and “six-dice risk.” Note that the risk of throwing six dice is much lower and hence safer than throwing just two. The more dice, the safer it becomes.
LUCKBOX DECISION 2020 READER SURVEY What is the ideal age for a President?
65-74 14.9% Doesn’t matter 25.6%
45-54 12.9%
35-44 0.9% 75-84 0.2%
55-64 45.4%
Source: Luckbox Political Survey
51% say Trump 52% say Biden ... is “mentally unfit” to be president Source: CNBC/Change Research poll of likely voters in the pivotal states of Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin
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TRADER
RYAN GRACE
1. Koyfin data dashboard to keep track of what’s going on across markets at a macro level 2. Trading Economics, a service I use to stay on top of economic data around the world 3. tastyworks desktop platform 4. dough mobile trading app 5. My market notebook
2 1
3
5 4
Ryan Grace, Chief Market Strategist, dough Office Chicago Age 33 Years trading 15 How did you start trading?
Since childhood, I was fascinated with the concept of investing and this idea that you could make money by simply picking stocks in the market. As I learned more, I became completely enthralled. I then invested a small amount of money with relative success and this encouraged me to continue. Favorite trading strategy for what you trade most
My approach starts with a macro view of the current economic landscape and then I look for entries into trades that tend to perform well in that specific
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environment. It’s a multistep process, but it tends to keep me in positions that are working and away from low-probability trades, given the economic backdrop. Average number of trades per day? 5 What percentage of your outcomes do you attribute to luck?
Luck, both bad and good, is really second to process. I think most investors will attribute a very small percentage of success to good luck, but a defined process positions you well for “lucky” outcomes. Adhering to a process will also help you manage risk whereas you might otherwise stay in a trade that’s moving against you, all the while chalking it up to “bad luck.” Favorite trading moment
In July 2019, my view was that it was a very cheap bet on interest rates moving back toward 0%. I constructed a trade using
Eurodollar futures options. The trade started to move my way in the fall and then really worked when the Federal Reserve made massive interest rate cuts to combat the economic fallout from Covid-19. So, I suppose there was some luck involved with how quickly rates fell, but there were numerous potential catalysts that made the trade enticing prior to that. Worst trading moment
In 2014, I had a short options position in the crude oil market. My thought was that options premiums were tremendously expensive given where the market had traded over the past four years. They were, but expensive for a reason. The price of oil experienced a historic collapse, falling from around $110 per barrel to under $30. So, in hindsight, the right trade was to actually be buying premium even though it was so “expensive.”
FAVORITE TRADING BOOK
THE MISBEHAVIOR OF MARKETS by Benoit Mandelbrot (2006) $19.99 (Amazon) Paperback (368 pages)
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CALENDAR
AMERICA VOTES Gold could rally into an Oct. 9 high as the market’s first-trade sun gets some love from Venus. However, first-trade Venus comes under pressure from the sun, Mars and Pluto the following week that could make a low on Oct. 15. That pressure eases so that prices rally to a high on Oct. 21. The S&P 500 sets up for an important low on Oct. 9 when Mercury and the moon form a big triangle in the sky with the market’s first-trade sun. The rally could be short-lived, though, as the market’s sun and moon are under pressure from transiting planets that could mean a high on Oct. 14. The 10-year T-note gets support at a potential low on Oct. 13 when its first-trade sun is activated by three transiting planets. Two weeks later, on Oct. 28, prices could peak when money planet Venus enters its ruling sign of Libra. Susan Abbott Gidel, author of Trading In Sync With Commodities—Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter. @susangsays
PHOTOGRAPHS: (PRESIDENTS) WIKIPEDIA
Black Friday One of the busiest shopping days of the year, Black Friday is continuing to grow and evolve. Online sales for Black Friday, the day after Thanksgiving, rose more than 19.6% in 2019, reaching $7.4 billion, according to Adobe Analytics. And while Black Friday used to live up to its name as the day retailers began to turn a profit for the year, more stores are beginning their holiday sales before the turkey gets cold on Thanksgiving evening, with shopper traffic on that day increasing 2.3% last year.
OCTOBER 7 Vice Presidential Debate Salt Lake City 12-17 Wealth365 Summit Online conference 15 2nd Presidential Debate Miami 16 NBA Draft Brooklyn, N.Y. 22 3rd Presidential Debate Nashville, Tenn.
NOVEMBER 3 Election Day
8 Gann Day—change of trend
9 Miss USA Pageant Memphis, Tenn. 9-11 Greenwich Economic Forum Digital Event
22 Gann Day—change of trend
23 48th International Emmy Awards New York
27 Black Friday
30 Full Moon/Lunar Eclipse
Presidential Debates President Donald Trump and Democratic challenger former Vice President Joe Biden will spar in three televised debates ahead of the Nov. 3 election. The 90-minute matchups are scheduled for Sept. 29, Oct. 15 and Oct. 22. Vice President Mike Pence will face off against Democratic vice-presidential nominee Sen. Kamala Harris for one debate Oct. 7.
Memorable moments from past debates 1960 Sen. John F. Kennedy and former Vice President Richard Nixon faced each other in the first televised presidential debate, adding a new dimension for praise or criticism of candidates: appearance. Radio listeners called the first debate a draw, or favored Nixon. But Nixon was visually sweating under the studio lights, and television viewers overwhelmingly favored Kennedy. 1984 At 73, President Ronald Reagan was the oldest person nominated by a major party for the presidency. But in a debate with his challenger, Sen. Walter Mondale, Reagan addressed concerns about age. “I will not make age an issue of this campaign,” he quipped. “I am not going to exploit, for political purposes, my opponent’s youth and inexperience.”
Wealth365 Summit The election edition of the Wealth365 Summit features more than 60 speakers, including tastytrade co-CEOs Tom Sosnoff and Kristi Ross, and a featured segment from The Political Trade podcast. The conference is free, and registrants can find out more about the event and speaker lineup at summit. wealth365.com.
2012 Before the second debate between President Barack Obama and former Gov. Mitt Romney had ended, the web was abuzz with criticism of a statement Romney made about having “binders full of women.” Despite referring to female candidates qualified for positions in his cabinet, his choice of words became prime fodder for internet humorists.
november 2020 | luckbox
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BECOME A MARKET MASTER!
OPTIONS
FUTURES
Sign up for FREE!
tastytrade.com/tt/learn
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BASIC
Just Another Trading Day Markets don’t move much when America goes to the polls By Anton Kulikov
PHOTOGRAPH: REUTERS/MARIO ANZUONI
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hat happens to the markets during a presidential election? Not much. History indicates traders need not fear a large move to the downside or the upside. Take a look at all of the presidential races since 1932, and see how the market reacted after election day. The market tends to sell off just a hair on election days, as opposed to any randomly chosen market day. However, a statistical test of those results does not indicate a significant difference between the returns on election day versus returns on any given day. That’s because the average election day returns of -0.18% are within the realm of possibility based on the standard deviation—or typical difference from the mean—of daily S&P 500 returns since 1932. If average election day returns were either less than -0.44% or greater than 0.50% per day, then one could argue that election day returns differ from any random day’s returns. Those upper and lower bounds of
-0.44% and 0.50% are calculated assuming that stock returns are normally distributed. Now, returns are not perfectly normally distributed, but for the sake of this example and simplicity that assumption is OK. Some takeaways from this information:
Voting day in Los Angeles during the 2016 presidential election
here’s no statistical difference T between the return on any given day in the S&P 500 and an election day in the S&P 500. ven though the average return E on election day is less than on any random day, statistically, one cannot conclude with any certainty that it’s because of anything other than chance. ith that in mind, traders have W no reason not to be invested in the market through election day. Treat it as any other day in the market. Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97
Insignificant downward shift A look back through history reveals that markets experience a minor sell-off after presidential elections, but statistical tests confirm the movement isn’t significant. S&P 500 Returns
Any Day since 1932
Any Election Day since 1932
Average
0.03%
-0.18%
The market’s average election day returns of -0.18% falls within a standard deviation of the mean. november 2020 | luckbox
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Talking heads. Their time is up. It’s our time now. Explore your financial curiosity. dough.com dough is a registered broker dealer offering self-directed brokerage services. *regulatory & other fees apply. member FINRA/SIPC. ©2020 dough.
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INTERMEDIATE
Three Election-Day Hedges Check out the pros and cons of three ways to protect a portfolio amid the uncertainties of a race for the presidency By Michael Rechenthin
Buy a put This is the least favorite approach to “portfolio insurance,” but it does provide a high degree of protection. Say, for example, that Advanced Micro Devices (AMD) is trading for $80 a share. The at-the-money 80 put, a little more than one month away, is trading for 7.20 and the 70 put is trading for 3.10. The 80 put would provide the most protection, but it costs the most—$720 for $8,000 worth of stock. That amounts to paying $720/$8,000 = 9% for protection that lasts for only 41 days. Paying 9% for “insurance” is far too costs prohibitive. The only logical reason to do this would be if the potential returns, or probability of returns, far outweigh the spent costs of the insurance. Many would prefer the 70 put. The cost is $310 for $8,000 worth of stock, but it doesn’t add protection until the stock falls below $70/ share. That’s the equivalent of paying $310/$8,000 = 3.9% for protection that doesn’t “kick in” until the stock declines by (80-70)/80 = 12.5%. Adding insult to injury, the strategy of buying puts is far more expensive when the protection is most desired. Protection never comes for free. Sell a call Selling calls against a long portfolio of stocks is often used to “smooth out the bumps” in a portfolio. Instead of being a “cost” to your account, like when buying a put, selling a call
actually adds money from the credit received from the call. This provides a buffer against losses. Consider being long 100 shares of Apple (AAPL). The stock is trading at $120. The 120 calls are trading for $8. By selling the calls, the investor is bringing in $800 on a $12,000 investment. This is equivalent to earning 800/12,000 = 6.7%. That reduces the cost of the investment by the amount gained as well. The disadvantage: If the stock goes up by more than 6.7% in that time, it was better not to have sold the call. But this article is about adding protection. Anyone worried about gaining protection can avoid limiting upside potential by selling the call slightly above the current market. For example, sell the 125 call for $6.5. While it does offer less protection at only $650/$12,000 = 5.4%, it offers more room for the stock to “grow” before a loss is taken on the short call. At the most, the stock can gain 9.5%. So, covered calls limit upside but provide a high degree of consistency. Hedge with futures This is a cost-effective strategy that requires investors to put down only a little money, but it can provide significant protection for a portfolio, especially when needed quick. Suppose, for example, that an investor holds $5,000 worth of mostly technology-related companies. She can hedge with a Small Exchange Technology 60 futures contract. One contract is currently
equivalent to roughly $5,000 worth of stock, and it has a highly correlated movement with the Nasdaq. Each futures contract requires an investor to have approximately $440 set aside. A decline of 7% in the portfolio would be offset by an approximately 7% increase in a short position of the futures. Futures are a useful strategy, especially if an investor needs protection quickly. Most futures trade outside normal hours for stocks. The conclusion? Any of these three methods for protecting a portfolio should offer traders some relief from runaway anxiety as the uncertainty of election day draws near.
Buying a put can be the least favorite approach to “portfolio insurance,” but it provides a high degree of protection.
Michael Rechenthin, Ph.D., aka “Dr. Data,” is the head of data science at tastytrade.
november 2020 | luckbox
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tactics
Cheat Sheet #10 Calculating Tradability
Rem o and ve save this page !
Before placing a trade, confirm liquidity, implied volatility rank and risk exposure. Then make sure it fits the portfolio. By Mike Hart
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efore executing a trade, confirm a product’s tradability. Do it by checking liquidity, implied volatility rank and risk exposure, and by ensuring its size fits the portfolio. Strive for consistency through a more conscious and precise approach. So with a particular trade in mind, it’s time to run the tests. Liquidity is an absolute necessity. Think of it as the ability to enter and exit a trade easily. To determine liquidity, look to the bid/ask spread; the closer they are in price, the better. Also, look for high volume and open interest because they indicate lots of participation in the market and hence more liquidity. IV rank determines whether an investor is applying the correct strategy. Don’t place a trade without properly identifying whether it fits the volatility environment. Typically, if it’s above 30%, look to sell premium. If it’s below 30%, look to buy premium. The last step is ensuring size and risk fit the portfolio. First, consider notional size. Is it a $10 stock or a $1,000 stock? The higher the price, the greater the buying power needed and, without proper strategy adjustments, the greater the risk. If risk is too high (a trade should not represent more than 5% of total portfolio value) consider a smaller size or change the level of risk through the strategy approach. These steps (right) represent the fundamental building blocks of a successful trade approach with the ultimate goal of creating a functioning and profitable portfolio. Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79
Volatility The level and the role it plays in risk evaluation
Correlation
Liquidity The ability to enter and exit a trade easily
TRADABILITY
The strategic diversification the trade contributes
Exposure Capital at risk as well as delta exposure
Active Investor Alert! Follow @mikehart79 on Twitter for daily trading ideas and tactics.
november 2020 | luckbox
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luckbox | november 2020
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ADVANCED
Exploiting Election Week Volatility Stock options can triple in volatility as election day approaches, creating opportunities for traders to sell when prices skyrocket
Learn more about IV Rank and options
By Michael Gough
Traders can use a comparative measure like implied volatility rank to gauge the richness of options for a given underlying.
Excitable Volatility surges for options when America goes to the polls to choose a president. 60
1 day before 2016 election
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Implied Volatiliy
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xpectation of movement in the markets helps determine the price of the options that traders rely on for “insurance.” The greater the risk of loss, the greater the cost of the insurance. Expectations are measured with implied volatility, and its level can help traders strategize. The period around a binary announcement, like an earnings release or presidential election, can sway levels of implied volatility, presenting trading opportunities for active investors. As noted earlier in the Basic Tactics section of Luckbox (p. 47), stock price returns on the day of an election fall within the normal distribution of returns for any given day. But what about options? On the surface, markets may appear quiet, but options traders who dig deeper will discover potential opportunity. Excitable (right) depicts the implied volatility for SPY over several days leading up to the 2016 election. Nine days before election day, the implied volatility of the out-of-the-money options (the lightest line on the chart) was around 15—close to its long-term average. As the election approached, implied volatility increased every day until it tripled the level of an average day. Knowing that implied volatility increases, traders can create a strategy to capitalize on richly priced options. One such scheme involves selling exuberant expectations
9 days before 2016 election
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of movement with a directionally neutral bias. Using a short option strategy, such as a straddle, strangle or iron condor, traders can remove their directional assumption of predicting up or down movements in the underlying stock and simply play movements in implied volatility. Consider the short straddle, which involves selling an out-of-the-money call and an out-ofthe-money put. On election day in 2016, traders could sell a SPDR S&P 500 (SPY) straddle expiring the next day for $4.00. One day later, after the votes were tallied and expectations eased, that same straddle could be bought back for just $2.50, netting a $1.50 profit per contract. The collapse in option prices is attributed to the deflation in implied volatility, not the performance of
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SPY. To define the risk and lower the buying power requirement, this trade could have been turned into an iron condor by buying further out-of-the-money options. Because expectations of movement differ for each stock, traders can use a comparative measure like implied volatility rank to gauge the richness of options for a given underlying. Implied volatility rank compares the current IV with levels from the preceding trading year. So, the higher the rank, the more expensive the options prices of that underlying are relative to their history. Keep an eye on implied volatility before this year’s election because opportunities may arise to sell inflated expectations. Michael Gough works in business and product development at the Small Exchange. @small_exchange
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STOCKS
R ESTAU RA N TS
Restaurant Shocks: Maximum Impact of the Minimum Wage By Kevin Mackie
aising the federal minimum wage has long been near the top of the agenda for the Democratic party. It’s remained stagnant at $7.25 for more than a decade, and Joe Biden wants to more than double it to $15 if he’s elected president. That increase would have a disproportionate effect on the profits of businesses that employ minimum wage workers and, unsurprisingly, a huge cohort of minimum wage workers are employed in the food-service industry. “Just under three-fourths of workers earning the minimum wage or less in 2019 were employed in service occupations, mostly in food preparation and serving-related jobs,” according to the Bureau of Labor Statistics. Let’s examine the general implications of the minimum wage changes for restaurants across the board and then dig into a couple of specific publicly traded companies to elaborate on potential effects.
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Minimum-wage patchwork States and municipalities have the option of imposing a minimum wage that’s higher than the feds require.
$1.60
Source: Economic Policy Institute
WA $13.50 OR $11.25
MT $8.65 ID $7.25
NV $8.25
UT $7.25
CA $13.00 AZ $12.00
WY $7.25
CO $12.00
ND $7.25
WI $7.25
SD $9.30 NE $9.00 KS $7.25 OK $7.25
NM $10.00
TX $7.25
NH $7.25 VT $10.96
MN $10.00
IA $7.25
MI $9.65
NY $11.80 PA $7.25
OH IL IN $9.25 $7.25 $8.70WV $8.75 MO 25 VA $7. $9.45 KY $7.25 NC $7.25 TN $7.25 AR SC $10.00 $7.25 AL GA MS $7.25 $7.25 $7.25 LA $7.25 FL $8.56
AK $10.19 HI $10.10
$7.25 (federal minimum) $7.25–9.00 $9.00–11.00 > $11.00
ME $12.00 MA $12.75 RI $10.50 CT $11.00 NJ $11.00 DE $9.25 MD $11.00 DC $14.00
Federal minimum wage in 1968
$12.00
Value of 1968 federal minimum wage in 2020 dollars
$19.33
Value of 1968 federal minimum wage adjusted to reflect productivity gains and inflation as of 2017 Source: Congressional Budget Office
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Just the minimum The federal minimum wage notwithstanding, cities and states retain the right to set their own minimum wage. Seattle, New York City, Washington and San Francisco are already at $15. Many other places have made smaller increases in the minimum wage. (See Minimum-wage patchwork, p. 53.) On the other end of the spectrum, some 21 states have stayed with the federally mandated $7.25. A federally mandated $15 minimum would slice into the profits of food-service businesses operating restaurants in states that currently require only the federal minimum. Businesses in California have already been dealing with higher wages for a while and wouldn’t experience a swift decline in profitability if this change went into effect. Companies that rely on the franchise model and operate in low-wage states might have difficulty dealing with an increase in the minimum wage. The fees the franchisor pulls from each franchisee would probably remain the same regardless of a minimum wage hike. That would protect the franchisor’s profits but leave franchisees shouldering the increase. That pressure could make it more challenging for franchisees to expand, says David Tarantino, an analyst at Baird Wealth Management. “Franchisors would have less direct exposure, but profitability pressures for franchisees could hinder investments and growth,” Tarantino says. “If franchisees aren’t growing, the franchisor will have a hard time growing, too. So, the downside is somewhat insulated for franchisors, but the upside from expansion could be throttled.” A company that’s mostly franchise-based and has a strong presence in states that already have higher state or local minimum wages would feel the least impact from a federal minimum wage hike. Conversely, any restaurant chain that owns and operates most of its
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Faced with a rise in the minimum wage, companies that supply food and equipment to restaurants might charge higher prices for their products, striking a blow to restaurants’ gross margins.
stores and has a high concentration of locations in low minimum wage states could be walloped. Getting specific Let’s look at how some specific restaurant chains might cope with an increase in the minimum wage. A higher minimum might hit hard at Texas Roadhouse (TXRH). The company has only a few franchised locations and does business in states with low minimum wages. Compare the map below (Texas Roadhouse) with the map on p. 55 showing state minimum wages. The chain’s top four states by location concentration are Texas ($7.25 minimum wage), which has more than double the locations of any other state; then Florida ($8.56), Ohio ($8.70) and Pennsylvania ($7.25). Gross profits would be slashed severely if starting wages
more than doubled in Texas and Pennsylvania, which account for 18% of the company’s restaurants. Also, Biden advocates barring eateries from counting tips as part of wages. In full-service restaurants, employers might pay servers only $2 or so hourly, expecting tips to make up the difference. Without the ability to rationalize wages in that manner, servers would make at least $15 an hour, plus tips. Having to allocate a great deal more money toward payroll would crush some full-service establishments where servers make up a high percentage of the employee base. With plummeting profits, the share price will go down. Lower profits also mean less capital for growth or at least growth that comes with a debt or share issuance price tag. Lower or more expensive growth will result in investors assigning a
Texas Roadhouse and the minimum wage Two factors make Texas Roadhouse vulnerable to an increase in the federal minimum wage: 1. Instead of relying on franchises, the company owns most of the restaurants in the chain. 2. Most locations operate where state and local minimum wages remain low. Source: A 2019 Texas Roadhouse investor presentation
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Primary company Primary franchise Split
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lower growth multiple to the stock, causing the share price to suffer.” Relative Immunity Jack in the Box (JACK) could more or less shrug off a higher minimum wage. Of its 2,243 restaurants, only 137 are company-owned-and-operated. In other words, 94% are franchised. The company will continue to collect franchise fees regardless of hikes in the minimum wage. What’s more, Jack in the Box locations are mostly on the West Coast and a few other states such as Arizona where minimum wages are already high. Naturally, Jack in the Box would feel some pressure, especially with a big presence in Texas, but compared with Texas Roadhouse its exposure would seem minimal. Plus, as a quick-service restaurant chain, Jack in the Box has no wait staff and wouldn’t have to deal with the wage increase for servers. Del Taco (TACO), another restaurant chain that works on the fast-food model, also operates without servers. It’s been working hard recently to move locations to franchise mode, and only 50% of its locations are now company-operated. But with 62% of of the chain’s locations in California, the company and its franchisees have experience in coping with higher minimumwages. That places Del Taco and Jack in the Box among businesses that would be affected less by minimum wage increases. More trouble While it makes sense for investors to consider franchising, location, and format when evaluating how an increase in the minimum wage would affect stock prices in restaurant chains, that doesn’t tell the whole story. Companies that supply food and equipment to restaurants would also face pressure with a rise in the minimum wage. In response, they might charge higher prices for the products they sell, striking another blow
Jack outside the box An increase in the federal minimum wage would hardly faze Jack in the Box restaurants because 94% of its locations are franchised and most are already subject to relatively high state or local minimum wages. Source: Red Lion Data
to restaurants’ gross margins. Bearing all that in mind, investors may want to look at some additional restaurant empires. Yum Brands (YUM), which includes Taco Bell, KFC and Pizza Hut, has established a sizable international presence beyond the reach of United States minimum wage laws. Wendy’s (WEN) also operates internationally.
Weigh the likelihood of Biden winning the presidency and the likelihood he would make good on his promise to raise the minimum wage. Then position the portfolio accordingly.
Restaurant Brands International (QSR) owns Burger King and Popeyes. Darden Restaurants (DRI), runs Olive Garden and Longhorn Steakhouse. Weigh the likelihood of Biden winning the presidency and the likelihood he would make good on his promise to raise the minimum wage. Then position the portfolio accordingly. Kevin Mackie is a financial writer, analyst and coach.
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FUTURES
A SAV V Y F U T U R ES T RADER’S TAK E O N T HE M AR K ETS
Bond Basics By Pete Mulmat
Bond price confusion Bond pricing involves many factors, and the way bonds are traded makes determining the price even harder. Because stocks are traded in dollars and cents, profit and loss are straightforward. Trading bond futures in 32nds or 64ths of a point adds to the confusion of trying to understand the world of yield traded in terms of bond price. Yield is the anticipated return on an investment, expressed as an annual percentage. For example, a 6% yield means that the investment averages 6% return each year. Investors can calculate yield in several different ways, but with each method the relationship between price and yield remains constant: The higher the price of a bond, the lower the yield, and vice versa. Here’s the simplest way to calculate yield: Annual Interest ($) Price
x 100
For example, if a trader pays $20,000 for a bond paying $1,200 each year, its current yield is 6%. To understand bonds in relation to Treasury futures prices and yields, be aware of the following challenges.
Only logical A bond’s price always moves in the opposite direction of its yield.
140 3.0% 135
2.5% 2.0%
130
1.5%
125
1.0% 120 0.5% Jan 2016
Jan 2017
Jan 2018
Challenge No. 1 What is DV01 and why should anyone care? DV01 is the dollar value change in price (value) of a fixed income instrument, such as a bond, in response to a change of one basis point in the yield of the instrument. A basis point is one hundredth of 1% (1% of 1%). The yield referred to above is the yield-to-maturity, the interest rate at which the present value of cash receipts (coupon and principal payments) equals the current price, assuming the investor holds the instrument to maturity. DV01 measures the sensitivity of the value of a bond in response to changes in the interest rate. DV01 never remains constant for any bond. It differs depending upon the level of interest rates. Challenge No. 2 Measuring bond risk: What is duration? The inverse relationship between price and yield is crucial to understanding value in bonds. Another key is knowing how much a bond’s price will move when interest rates change. To estimate how sensitive a bond’s price is to interest rate movements, the bond market
Jan 2019
Jan 2020
uses a measure known as duration. Duration, like the maturity of the bond, is expressed in years, but as the illustration shows, it’s typically less than the maturity. Duration will be affected by the size of the regular coupon payments and the bond’s face value. Thus, it is always changing. The link between price and yield When price goes up, yield goes down, and vice versa. Technically, the bond’s price and its yield are inversely related. Trading bonds or bond futures comes with a great deal of baggage. If traders live in the world of yield, why wouldn’t they bypass the lingo and confusion. Instead, they could trade what they know. A yield-based treasury future may be the answer for anyone looking to make trading interest rates straightforward, taking ideas to execution without the confusion. Pete Mulmat, chief futures strategist at tastytrade, serves as host for a number of daily futures segments on the tastytrade network under the flagship programming slot called Splash Into Futures.
november 2020 | luckbox
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10 Year Yield
/ZN
he stock market comes to mind when people think of trading. After all, stocks breed excitement. Equities have been on a tear for most of 2020. Some potential investors find bonds mysterious, but it all comes down to lending. Companies and governments require funding as well, and they often meet their need for capital by issuing bonds that investors can buy. The buyers, in effect, loan money to the bond issuer. The issuer of a bond must pay the investor something extra for the privilege of using their money. This “extra” comes in the form of interest payments, which are made at a predetermined rate and schedule. The date on which the issuer must repay is called the maturity date. Bonds are known as fixed-income securities because buyers know the exact amount of cash they will get back, provided they hold the security until maturity.
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A V E T E RA N T RA D ER TAC K LES T EC HNICALS
The Stock Market is Apolitical
Staying cool Calvin Coolidge’s heavy tax cuts bolstered the stock market in the Roaring ‘20s.
By Tim Knight
casual observer might assume that who wins or loses the presidency would have a profound effect on both the economy and the stock market, but that’s not the case. History has shown presidents are the unwitting beneficiaries of economic good times (such as Bill Clinton in the 1990s) or unfortunate scapegoats during severe downturns (such as Herbert Hoover at the start of the Great Depression). Clinton didn’t singlehandedly create prosperity any more than Hoover was responsible for calamity, but the public tends to attach the ups and downs of the economy (and the markets) to the occupant of the White House at the time. Sometimes, however, an election marks an inflection point in the nation’s mood and, thus, its economic activity. In the accompanying charts, a red arrow indicates approximately when a particular presidential election was held. All of the charts contain the germane portion of the Dow Jones Industrial Average from just before the election to the next important pivot point in the market, encapsulating the broad reaction of the nation’s economy to its new leadership.
A
A history of apathy In the 1920s, the Warren Harding administration—a notoriously corrupt period of D.C. history—was
58
cut short by Harding’s death. His Vice President, the taciturn Calvin Coolidge, served the remainder of Harding’s term and won the election in his own right in 1924. Coolidge and Harding both embraced a “hands-off” approach to business, and Coolidge’s aggressive reductions in taxes were part of the reason the 1920s were such a bonanza
1920
1922
1924
1926
1928
Path to recovery From 1933 to 1937, the market responded positively to the sweeping liberal reforms of FDR’s New Deal.
Apr 1932
Oct 1932
Apr 1933
Oct 1933
Apr 1934
Oct 1934
Apr 1935
Oct 1935
Apr 1936
Sep 1936
PHOTOGRAPHS: OFFICIAL WHITE HOUSE PORTRAITS VIA WIKIPEDIA
THE TECHNICIAN
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for the stock market. Coolidge’s bestknown quote is “The business of America is business,” and he enjoyed tremendous popularity throughout the 1920s because of the nation’s prosperity. But Coolidge’s successor, Herbert Hoover, would find himself in much different circumstances because the Great Depression plunged the nation into darkness during his first year in office. Nothing to fear The Great Depression, which gripped the nation in a stranglehold in late 1929, ground away through 1930, 1931 and 1932. Although no one could have known it at the time, the market finally hit its ultimate low on July 8, 1932, at the nearly inconceivable price of 40.60. (The Dow 30 was about 750 times higher than that in February of 2020.) In the midst of a worldwide depression, Franklin Roosevelt campaigned successfully against the incumbent Herbert Hoover. FDR won in a landslide with 472 Electoral College votes against Hoover’s mere 59. It was a stunningly lopsided election and a humiliating coda for the Hoover administration. But FDR’s victory didn’t cause the market to roar higher right away. Back then, the president did not take office until five months after the election. The market continued to fall after the votes were counted. When FDR was sworn in he immediately took dramatic actions, such as declaring a bank holiday and outlawing the possession of gold. The stock market would enjoy a gain of about 300% from March 1933 until June 1937, when a “second wave” hit the economy and the market. The stock market would not push above 1937 levels for almost a decade, but the period from 1933 to 1937 demonstrated that the market responded positively to the radical reforms FDR executed—to say nothing of the tremendous expansion of the nation’s money supply, which inflated asset prices.
Morning in America Ronald Reagan campaigned in 1980 for the top office. At that time the nation was weary from the doldrums of the 1970s. His optimistic declarations about American free enterprise and the nation’s potential swept him into office, preventing Jimmy Carter from serving a second term. In the early 1980s, the stock market was ripe for a rise. It was as recent as August 1979 that Business Week famously made “The Death of Equities” its cover story. Stocks were undervalued, and the combination of historically low valuation multiples and a decade of nearly uninterrupted growth gave Reagan tremendous economic tailwinds. As the arrow shows on “Ups and downs,” (right), the market tumbled early in Reagan’s first term, as the Fed sent interest rates sky-high to stop inflation. Once the economic pain subsided, however, the market ascended powerfully from 1982 through 1987, only to be violently derailed by the October 1987 crash. In hindsight, the crash amounted to little more than a blip over the long haul, but at the time some observers expressed serious concern that America was heading into another version of the 1930s Depression. “W.” goes to war The examples provided so far center on presidents who had the positive backdrop of a surging stock market during most of their tenure. But look at George W. Bush, who came into office on the heels of one of the most spectacular run-ups in equities ever. Although tech stocks had already fallen precipitously, the components of the Dow 30 were holding up relatively well, spending most of 2000 range-bound. However, from Bush’s election late in 2000 through October 2002, the Dow dropped from about 11,000 to nearly 7,100, losing more than one-third of its value. A number of major events weighed on the market, includ-
Riding the seesaw The market tumbled early in Ronald Reagan’s first term, then recovered, then crashed again.
1980
1982
1984
ing a weakening economy somewhat hung over from the excesses of the late 1990s, and the terrorist attacks of September 2001. Luckily for President Bush, his bid for re-election didn’t take place in late 2002 when the market was bottoming. Instead, the Dow was almost back up to 11,000 by election time in 2004, and he won a second term. The Great Recession The bear market of 2007-2008 was far broader than the one in 20002002. The most severe damage from the 2000-2002 bear market was in tech stocks, some of which were wiped out completely. However, the financial damage of the 2007-2008 market drop was more substantial both in absolute dollar terms and the number of sectors adversely affected.
1986
Presidents are the unwitting beneficiaries of economic good times or unfortunate scapegoats during severe downturns.
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What comes next? Any trader would understandably want to know the probabilities of who is going to win the presidential election on Nov. 3, and what it will mean for the markets. Investors generally assume a Trump victory would boost the stock market because of continued pro-business, low-tax policies, while a Biden win would lower stock prices because of the prospect of higher taxes and increased public spending. Recall, however, what happened on the evening of the election in 2016. The E-Mini S&P was sailing along smoothly and was modestly in the green until the shocking news hit that Trump was, in fact, the winner. The ES and Nasdaq both went limitdown. The market seemed to think declaring this unorthodox victory would mean disaster. But the Dow soon soared to almost double its election night low. So don’t expect anything startling late on Tuesday night. Elections can indeed become major inflection points, but the preponderance of the market’s moves take years—even on the heels of an important election. It will probably require weeks, or even months, to discern a general trend. Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.
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Double whammy Major events weighed on the market during George W. Bush’s first term, including 9-11 and the invasion of Iraq.
Nov ′00
Feb ′01
May ′01
Aug ′01
Nov ′01
Feb ′02
May ′02
Aug ′02
Ever upward The market bottomed late in Barack Obama’s first year in office, but the longest bull market in history followed and persisted until early this year.
2008
2009
2010
2011
2012
2013
2014
PHOTOGRAPHS: OFFICIAL WHITE HOUSE PORTRAITS VIA WIKIPEDIA
Barack Obama, a young and relatively unknown politician in 2008, captured the public’s imagination as the country was grappling with financial crisis. He handily beat his opponent—365 Electoral College votes versus John McCain’s 173—but concerns about his progressive politics caused the already-weak stock market to sink even further. As with FDR, the stock market bottomed late in the winter of Obama’s first term, only a couple of months after his inauguration. What followed was a bull market that persisted until early this year, the longest in history.
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CHERRY PICKS
R I PE & J U I CY T RADE IDEAS
All Your Options By Michael Rechenthin
ave a directional assumption about a stock? With options, traders have a much larger range of possibilities than with stocks. Instead of being just “bullish” or “bearish,” options provide ways to create trades with high and low probabilities of making money. Some of the strategies listed on this page
H
have pre-determined levels of risk and reward. In other words, traders can configure a debit spread to risk 1 to make 1. That’s different from a simple stock purchase, where the potential loss is conceivably the entire price of the stock. There’s no such thing as a “perfect trade in every scenario.” Read each strategy carefully
An abundance of strategies
Neutral
Bearish
Bullish
Options offer many ways to trade and a wide variety of probable profit and loss scenarios.
and then determine the acceptable gain/loss and probability. Michael Rechenthin, Ph.D. (aka “Dr. Data”), heads research and data science at tastytrade. @mrechenthin Sign up for free cherry picks and market insights at info.tastytrade.com/cherry-picks
KEY ITM: in the money; OTM: out the money; ATM: at the money
Strategy
Typically Involves
Max Loss, Max Gain
Probabilities
Debit Call Spread
Long 1 call ITM, Short 1 call OTM
Max gain is the spread of the strikes minus the price paid. Max loss is the price paid.
The strikes selected give this a probability of success of roughly 50%.
Credit Put Spread
Short 1 put OTM, Long 1 put below the short
Max gain is the credit received. Max loss is the width of the strikes minus the credit received.
This is generally a higher probability trade. The lower credit explains the high win rate.
Short Put
Short 1 put OTM
Max gain is the credit received. Max loss is the strike sold minus the credit received.
This is generally a higher probability trade and often considered safer than buying stock outright.
Put Ratio
Buy 1 put ATM (or OTM), Sell 2 further OTM puts
Max gain is the distance between the long and short options plus the credit received. Max loss can be high.
This is generally a higher probability trade.
Synthetic Long
Long 1 call ATM, Short 1 put ATM
The max gain and max loss would be the same as long stock—high on both.
Roughly 50%.
Debit Put Spread
Long 1 put ITM, Short 1 put OTM
Max gain is the spread of the strikes minus the price paid. Max loss is the price paid.
The strikes selected give this a probability of success of roughly 50%.
Credit Call Spread
Short 1 call OTM, Long 1 call further OTM
Max gain is the credit received. Max loss is the width of the strikes minus the credit received.
This is generally a higher probability trade. The higher loss explains the high win rate.
Short Call
Short 1 call OTM
Max gain is the credit received. Max loss is conceivably unlimited because the stock can keep increasing.
This is generally a higher probability trade. The downside is it may create a short stock position, which is often considered an advanced strategy.
Call Ratio
Buy 1 call ATM (or OTM), Sell 2 further OTM calls
Max gain is the distance between the long and short options plus the credit received. Max loss can be high.
This is generally a higher probability trade.
Synthetic Short
Long 1 put ATM, Short 1 call ATM
The max gain and max loss would be the same as short stock—high on both.
Roughly 50%.
Short Strangle
Short 1 put OTM, Short 1 call OTM
Max gain is the credit received. Max loss can be high.
The probabilities can be high, especially when volatility is elevated.
Short Straddle
Short 1 put ATM, Short 1 call ATM
Max gain is the credit received. Max loss can be high.
The probabilities can be high, especially when volatility is elevated.
Iron Condor
Credit Put Spread + Credit Call Spread
Max gain is the credit received. Max loss is the width of the strikes minus the credit received.
The probabilities can be high—but generally lower than short strangles.
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DO DILIGENCE
QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS
Bump Stocks & Biden By James Blakeway
n that historic night in November 2016 when Donald Trump beat Hillary Clinton for the presidency, traders weren’t glued to news networks but instead to their trading platforms. As news rolled in that Trump had won enough Electoral College votes to clinch the White House, the S&P 500 futures dropped more than 5% in the overnight session. As reality set in, investors realized that this was a gross overaction to a newly elected president, Democratic or Republican. So, the futures started to climb back. By the time the market closed the day after the election, the S&P 500 gained over 1%. Moving away from the broad market, consider two specific stocks and their movement around the 2016 election: Sturm, Ruger & Co. (RGR) and American Outdoor Brands Corp. (SWBI). Both are large firearms manufacturers. American Outdoor is the parent company of the better-
O
known Smith and Wesson brand. Leading up to the 2016 election, both Ruger and American Outdoor saw gains in their stock prices. That was attributed to the belief that Hillary Clinton would win the presidency and be tougher on gun rights, potentially making it harder to acquire firearms. Thus, traders assumed consumers would quickly buy more firearms immediately after Clinton was elected. In the month preceding the 2016 election, Ruger and American Outdoor rallied 15% and 12%, respectively. After it was confirmed that Trump won the White House, both gun stocks dropped more than 25% in just three days. What insight does that anecdote impart to traders? Elections can move markets, based on knee-jerk volatility or predicated on slightly more logical, fundamental projections of what a new administration means for a specific industry. As the 2020 election inches closer,
models show Joe Biden and Kamala Harris likely to take the White House. At the time of writing, The Economist shows an 89% chance of Biden winning. While investors can make only limited preparations for heightened volatility and the large intraday swings that could come in November, they can position their stock portfolios for more fundamental investments that the election will likely affect. Firearms stocks Naturally, the firearms industry is worth considering again in 2020. Both Ruger and American Outdoor have seen large gains this year, but the pullback in late August may present investors with a buying opportunity if they believe a Biden-Harris White House is looking more certain. Two other stocks for investors to consider adding to their arsenal are Olin Corp. (OLN) and Vista Outdoor Inc. (VSTO). Olin,
Elections can move markets, based either on knee-jerk volatility or on logical projections of what a new administration means for a specific industry.
Democrats’ beneficiaries If Joe Biden wins the election, firearms makers and green exchange-traded funds seem likely to gain ground. Data as of Aug. 25, 2020
Firearm & Ammunition Stocks
Clean Energy ETFs
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Name
Symbol
Price
YTD Return
Expense Ratio
Sturm, Ruger & Co, Inc.
RGR
$71.29
63%
-
American Outdoor Brands Corp (Smith & Wesson)
SWBI
$17.26
86%
-
Olin Corporation
OLN
$11.00
-33%
-
Vista Outdoor, Inc.
VSTO
$19.74
164%
-
Invesco WilderHill Clean Energy
PBW
$55.79
64%
0.70%
iShares Global Clean Energy
ICLN
$16.87
44%
0.46%
Invesco Cleantech
PZD
$58.35
17%
0.68%
Evaluate any portfolio with Quiet Foundation
luckbox | november 2020
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a large chemicals manufacturer, also operates a sizeable ammunition business that’s grown during the Afghan and Iraq wars. Vista Outdoor also manufactures ammunition, and several of its subsidiaries focus on firearms accessories. Firearm stocks aren’t guaranteed to jump on a Biden win, but investors could look to diversify across these companies. In an ideal world, investors would use a firearm exchange-traded fund (ETF) to gain exposure to multiple stocks in the industry. Given the lack of a gun ETF, investors who believe Biden will win could consider breaking up a portion of their capital across these four stocks. That way they will feel less anxiety about whether they have picked “the right gun stock,” and any profits or losses are distributed across a more diversified portfolio. Clean energy stocks Another industry that could experience a boost under a Biden White House is clean energy. Democrats were frustrated when President Trump pulled the United States out of the Paris Climate Accord in 2017. His administration rejected the pursuit of clean energy and instead doubled down on burning
oil, coal and gas. If Biden becomes president, it’s likely the United States will rejoin the Paris Climate Accord. Biden would probably take executive action to fight climate change and work with Congress to push the nation back toward renewable energy sources. Investors who think Biden could win the election and lead a green initiative can choose from multiple clean energy ETFs. Using an ETF can help take the guesswork out of selecting specific stocks, given that the fund holds numerous stocks in a particular industry. Consider three clean energy ETFs with different goals: Invesco WilderHill Clean Energy ETF (PBW), iShares Global Clean Energy ETF (ICLN) and Invesco Cleantech ETF (PZD). The Invesco WilderHill fund and the iShares Global fund both seek to track clean energy indexes, the Wilderhill Clean Energy Index and the S&P Global Clean Energy Index, respectively. Each fund holds a diverse mix of clean energy stocks. An important differentiator is the geographical representation of stocks each fund holds. The Invesco fund currently holds roughly 80% U.S. stocks, while the iShares fund holds 40%. The more global exposure of the iShares fund
15%
How much Sturm Ruger stock rose when it appeared Clinton would win in 2016
25%
How much Sturm Ruger stock fell when Trump won
could make a compelling investment for those looking to diversify with a more non-U.S. focused product. However, given that the proposed goal is to find exposure to stocks that might benefit from a Biden win, the more U.S.-focused Invesco WilderHill fund may represent the better choice. The Invesco Cleantech fund is another interesting possibility for clean energy exposure. The stocks in that fund must derive at least 50% of revenues from clean energy business operation. A Biden win and bigger push for green energy could mean more companies pivot to green energy, giving this fund more flexibility. As with any ETF purchase, it’s important to consider the goals and expenses of any potential fund. (See Democrats’ Beneficiaries on the opposite page.) While a Biden win looks possible, investors should prepare for all scenarios and have a game plan if positions move against them. Regardless of an investor’s political sentiment, it’s important to diversify and, as always, do due diligence. James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors.@jamesblakeway
As it became apparent on election night four years ago that Trump had won enough electoral college votes to clinch the presidency, the S&P 500 futures dropped more than 5% in the overnight session. Reality set in the next day. Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.
november 2020 | luckbox
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CLOSING TICK
AMERICA NEEDS MORE PARTIES
Lee Drutman asserts that politicians in a multiparty America would form coalitions to govern. Moderate policies would result, tempering alienation and healing partisan wounds.
Multiparty democracy leads to more broadly legitimate, inclusive and moderate policymaking By Lee Drutman
I
n a two-party democracy, voters can collectively toggle between a left party and a right party. Think of it like a thermostat with just two settings: too hot or too cold. This is great for the voters who like it hot when they can collectively grab control of the dial and set it to hot. But it’s terrible for such voters when they lose control of the dial. And pity the voters who want something in the middle but must perpetually flip back and forth between sweating and freezing. In a multiparty system, voters get more choices on the political thermostat. Some voters might prefer it chilly, while others might prefer it sultry. But as long as some pivotal group of voters wants a middle setting, they’ll pick a party or parties in the middle. In a multiparty system, it is possible for them to register that preference. And this party can then become decisive in forming a governing coalition. Ultimately, the outcome is more likely to resemble something everyone can live with. In short, by giving diverse voters and politicians a broader range of settings on the policy dial, multiparty democracy enables easier agreement on a midpoint. But with just two divergent choices, there is no midpoint, just wild swings back and forth, and higher-stakes elections. Multiparty legislatures in proportional democracies have a strong record of producing broadly acceptable moderate policy outcomes. As a general rule, when a wider range of parties gets representation in the legislature, it’s hard to form a majority governing coalition that doesn’t include the political center. And once
coalitions form, they have a strong incentive to produce policy outcomes that are broadly acceptable because staying in the middle divides the potential opposition. True majority coalitions on complex issues are hard to build. They take time. But more inclusive policymaking brings in more diverse views, which almost always generates a more sustainable final output. In multiparty democracy, policymaking is more incremental, and thus more stable. In this respect, multiparty democracy is more conservative, at least in the Burkean sense of changing gradually and respecting the accumulated wisdom embodied in the current status quo, but being flexible enough to adapt in order to conserve itself. Gradual change is healthy because too much policy uncertainty undermines longterm investments for both businesses and individuals, and wild swings in policy erode political trust. A solid and growing economy depends on reasonably high policy stability. Because multiparty democracy demands broadly inclusive policymaking and makes it hard for minorities or even narrow majorities to change policy, voters in multiparty democracies are much more likely to view governments as legitimate regardless of how well their party did in the last election. If parties don’t campaign in all-or-nothing terms, voters won’t see elections in those terms either. As a result, voters in multiparty democracies are happier with their governments, regardless of whether or not their party won
Wild swings in policy erode political trust. From Breaking the Two-Party Doom Loop: The Case for Multiparty Democracy in America by Lee Drutman. Copyright © 2020 by Lee Drutman and published by Oxford University Press. All rights reserved.
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the last election. This satisfaction has important consequences. It lends more legitimacy and support to government, which gives political leaders more space to solve big problems. Voters are more likely to feel like they are being heard, largely because they are better represented. Multiparty democracies make space for an urban party on the right and a rural party on the left, thus mitigating potentially destructive urban-rural polarization. Governing coalitions on the right typically include some representatives of the urban cosmopolitan parts of the country, and coalitions on the left usually include some representatives of the traditionalist rural parts of the country. This means that whichever side is in power, half of the country doesn’t feel entirely unrepresented. By contrast, in current American politics, if Republicans win, urban voters are shut out of power; if Democrats win, rural voters are shut out of power. No wonder that in American politics, political losers feel absolutely devastated. Consider this: following the 2012 presidential election, in which Barack Obama defeated Mitt Romney, partisan Republicans reported levels of sadness twice as high as Bostonians experienced following the Boston Marathon bombing. This is part of the all-or-nothing, winner-take-all dynamic that is breaking American democracy. Lee Drutman is a senior fellow in the Political Reform program at New America, host of the Politics in Question podcast and author of Breaking the TwoParty Doom Loop: The Case for Multiparty Democracy in America (2020).
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BY 1893 INSPIRED
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