‘Dutton deal’ and ‘Albo arbitrage’: Can markets predict the next PM?

Once again, and for the third election in a row, the pollsters got it terribly wrong, but to those of us who watch financial markets, Donald Trump’s victory was no surprise.

Right up to election day, mainstream polls painted a murky picture: they predicted it was too close to call, giving Kamala Harris an edge in the popular vote and warning the count could drag on for weeks. Some polls even showed Harris gaining momentum in the campaign’s final days.

What happened was less red wave and more red tsunami, with Trump winning the electoral college, popular vote, all seven swing states, the House and the Senate.

The pollsters may have thought Kamala Harris had a chance, but the markets were all in on Donald Trump.Credit: AP

“For the first time in 50 years of public polling, the average survey in every state underestimated the same candidate [Trump],” data scientist John Burn-Murdoch wrote in the Financial Times in the days following the decisive victory.

The result should be the final nail in the coffin for the obsolete art of polling. From now on, financial markets, specifically prediction markets, will play a much greater role in gauging public sentiment.

They are superior simply because they harness the “wisdom of the crowds”. Unsurprisingly, when people have money on the line, they tend to take their predictions more seriously.

“Financial markets are going to dominate traditional polls going forward,” foresees David Scutt, analyst at StoneX Financial.

“I was watching the swings in the betting and bond markets, and they were telling me everything I needed to know. They nailed Trump’s victory months out.”

To those watching the charts, Trump’s momentum began to appear in September, as the prices of certain financial assets that stood to benefit from a Trump win started to rise.

Collectively these were known as the “Trump trades”, which included the likes of the US dollar, bond yields, crypto, big tech stocks, private prison stocks and, of course, Donald Trump Media Group, which rose 300 per cent from early October to election day.

Further signals also came from hedge funds, which in early September began building short positions, whereby you profit from a falling share price, in renewable energy companies, expecting them to suffer under the coming Trump White House.

The most well known of the prediction markets, Polymarket, never had Trump below 50 per cent odds, and had him well ahead of Harris while the polls showed a tie.

I found myself among those convinced by these market indicators, so, after observing these trends, I placed a modest wager on Trump in early October, much to the ridicule of my non-financial-market-savvy friends and family.

While my bet proved correct, it pales in comparison with some of the “yuge” wagers now coming to light.

Julian Petroulas, a 32-year-old Australian entrepreneur, placed a $1 million stake on a Trump win, while the now famous “Trump Whale”, known only as “Theo”, pocketed $US85 million ($131.6 million), according to The Wall Street Journal.

Also seeing an opportunity to tap punters’ desire to wager is broker Robinhood, which became the first mainstream investing platform to offer contracts to bet on the election.

No doubt more will follow in the future, and I suspect it won’t just be betting on elections, but sports and other popular cultural events too. Further blurring the line between investing and gambling.

For example, you can already place bets on “highest grossing moving of 2024”, “Taylor Swift to get engaged in 2024″ and “the next James Bond actor”.

So, while Australian politicians begin searching for lessons from Trump’s victory, the phenomenon of the “Trump trade” raises the question – could there be a “Peter Dutton deal” or some “Albo arbitrage” ahead of our election?

“Nuclear is a platform that the Coalition is running on and thus there’s the potential boost to the uranium sector should a pro-nuclear party that supports a local uranium industry come to power,” speculates Scutt.

We are now supposedly six months out from the federal election, and the bookies already have the Coalition favourite to win.

Australian miners, including those owned by Gina Rinehart, a close friend of the opposition leader, as well as oil, gas and coal stocks could also stand to benefit from a Coalition government that would favour cutting red tape and taxes, and is pro-environmental deregulation.

“Dutton has previously talked up the Coalition’s defence spending relative to Labor, so we are assuming more contracts for shipbuilders and engineering companies over the next few years should the Coalition win,” adds Geoff Wilson of Wilson Asset Management.

On the other hand, monopolistic companies such as the big supermarkets and airlines could be disadvantaged should competition policy become a party platform.

Gina Rinehart with former Liberal Party vice president Teena McQueen (left), and Nigel Farage, the leader of the conservative UK Reform party, at Trump’s election watch party.

“You could also potentially see a strengthening in the Aussie dollar should the market believe that the Coalition will rein in spending, take some of the heat out of the economy, and pave the way for the RBA to cut rates,” says Scutt.

We are now supposedly six months out from the federal election, and the bookies already have the Coalition favourite to win, while Jim Chalmers is favourite as the next Labor leader – the existence of such a market says everything.

What we can be sure of is that going forward financial markets, and in particular prediction markets, not polling, will play a much greater role in predicting the outcome of elections.

One of the first lessons you must learn as a trader is “the market is never wrong”, and now this mantra extends outside of finance to elections as well, and it means I will be watching markets much more closely for any signs of an Aussie Trump trade.

Meanwhile, my thanks go to Trump – for making my bank account great again.

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