Our Early 2018 Election Analysis

Originally sent to VIXCONTANGO subscribers on August 3rd, 2016, three months before the 2018 election

Will Republicans Keep the House?

Politics is a fast moving sport and things can change very quickly. While the map in the Senate remains daunting for Democrats and Republicans are widely expected to keep their majority and even extend it, in the House the picture is far more fluid. As the prime election season is approaching in the next 2-3 months, I will be looking at the political situation more closely – specifically as it relates to the House – at least once a month. Yesterday, I did a review of how things have progressed over the past month and it seems that Democrats have been making a bit of progress on the House front.

To be honest with you, what triggered this review so soon after I sent out my analysis last month is seeing Bannon in the news over the past week. He was on Hannity calling for Republicans to unite together. Trump was recently seen attacking the Koch Network on Twitter. Trump himself has started doing rallies which are broadcast on Fox News almost every day now. That got me thinking – why is Bannon on TV all of a sudden? Didn’t Trump throw him out? Didn’t McConnell brand him a loser and together with Trump cast him out of the party for his “divisive” influence. Why is Bannon out there making a call to arms? Why is Trump campaigning every day again?

Because the Republicans are losing the House.

Democrats have big leads in Voter Registrations & Fundraising

What happens in an election in a given year is largely driven by who shows up at the voting booth. In the US, elections hardly get half the population to vote. The voter turnout for presidential elections is about 55% while the voter turnout during mid-term elections is far far lower at 40%. Basically barely only a third of the country shows up to vote in a mid-term election and then who shows up really drives the result of election.



One way to measure potential turnout is voter registration during the primaries. In 2018, the Democratic lead in voter registration is staggering. There are 44.2 million registered Democrats vs 32.5 registered Republicans in 2018. This is a lead of 12 million voters. This is a massive advantage. While most of that comes from California which has an almost 4 million spread, what should be particularly worrisome for Republicans is WHERE ELSE this deficit is coming from. North Carolina is not a good place to be posting a 500K deficit. Pennsylvania is not good place to post 800K deficit. West Virginia (?) is not a good place to have a 128K deficit. Florida is not a good place to have a 200K deficit. Trump won West Virginia by 40 points yet Democrats are leading in registrations there.

The voter registrations together with the fundraising numbers that have come out lately paint a fairly grim picture for Republicans. At this stage in the game, Republican incumbents are raising less money than Democratic incumbents did in 2010 when they held the House. In 2010, 44 incumbent Democrats were outraised by Republicans who then captured their seats in the fall. The GOP picked up 60 seats and flipped the House. In 2018, you have 56 incumbent Republicans who are outraised by their Democratic challengers. Republicans in 2018 are in worse shape from a fundraising perspective than Democrats were in 2010!

Enthusiasm is key in a mid-term election and Democrats are more enthusiastic to come to vote than ever. In 2016, you had only 7 million total Democratic voter registrations. In 2018, you have 14 million new registrations. Double 2016! All of these people woke up really pissed off on November 8th, 2016 and have had rage building inside them for 2 years. This really is not about the economy or anything else, this is about getting your way and what appeared to be a sure thing for them with Hillary slipped away. So in 2018, Democrats are not taking anything for granted and are playing a very organized game. They are getting people to come out to register and vote and they are getting the money. They hope to produce at least one check to Trump’s power by flipping the House. On the other hand, voters of the party in power are generally more complacent, because well – they already hold the power. So the combination of the 2 is why so often you have changes in House leadership during the mid-term elections.

Larry Sabato’s Crystal Ball

I know people will immediately say that he didn’t call Trump in 2016. Nobody else did. But Trump is not on the ballot in 2018. Bannon is not on the ballot in 2018. In 2018, you have a classic McConnell Neocon GOP against insurgent Democrats. The element of voter surprise is this time on the side of Democrats who have registered 61% participation by Democrat Socialists and liberal progressives. In the past, this percentage has been at best 30-35%. So the emotional part of the electorate is more involved on the Democratic side. Back to Larry Sabato and him not calling Trump. Sabato did call previous elections fairly accurately. I looked into his track record and I was very “disappointed” to find out that most of the time he made really good calls. So in a traditional scenario where you don’t have the Brexit/Trump voter out on the rampage screaming against the Obama era, Sabato’s traditional models might yet work. And what does his Crystal Ball says for 2018? He was on TV last week and starting to ever more meekly imply that Democrats might get the upper hand in the House? Why?

Too Many Republican Retirements

First of all, you have 26 Republicans retiring. Politicians retire because they can see that they can’t win their election. You have most of the GOP leadership including Paul Ryan retiring. Basically, every Never Trumper is retiring. The total of 26 retirements is the highest since 2008. As you can see in the chart below, a high number of retirements to one side tends to lead to wins for the other side. For example, in 2008 when 27 Republicans retired, Democrats won 21 seats in the House. If you look at the table below, whenever one party has more than 20 retirements, the other party tends to win a fair number of those seats.


More interestingly, Sabato has about 200 to 200 solid Democrats vs solid Republicans. And about 35 tossups. All of those 35 tossups (or majority of them) are held by Republicans. Thus Republicans are at the disadvantage of having to defend their seats. Well, guess how many of those Republican seats are in districts that voted for Hillary Clinton in 2016? About 26 of them – most of them are in California and Pennsylvania. And you saw the type of voter registration advantage the Democrats have in California and Pennsylvania. All the Democrats need to do here is split the tossups with Republicans. Which is very conceivable in a year where they have the enthusiasm advantage. And many Republicans that have to answer why they voted for a tax reform that eliminated the SALT. That issue may not be a national issue, but I am sure it is an issue in California, New Jersey and New York.

Republican House members who hold seats that Hillary Clinton carried



While it is still too early to draw any conclusions about the election, many signs that have pointed to a mid-term win for a given party in the past are this time favoring the Democrats. They have the voter registration advantage, they have fund raising advantage, they have the incumbent retirements advantage, all of the tossup seats are held by Republicans and many of those districts were won by the Democratic candidate in the 2016 Presidential election. In fact, the Generic Congressional Vote poll does a poor job of showing this discrepancy with only a 7% point lead for Democrats. I thought the election of Ocasio-Cortez would be a negative for Democrats but it seems that the opposite is happening. Since her election, polling numbers for Dems have gone up a little bit. So even though Fox News spends a lot of time attacking Democratic Socialism and Ocasio-Cortez, that doesn’t seem to translate into the polls. While initially there was boost in Republican support, that seems to have dissipated over the past month.


Ultimately my message here is with the market strength over the past month, it seems that the stock market is pricing in zero probability that the Democrats will win the House. That frankly strikes me as very naïve. And goes against every single observable metric out there. The market seems to be in the mode that every poll and every political number is wrong, just because Trump rendered them wrong in 2016. But the reality is that Trump is the exception, not the rule and Trump himself is not on the ballot. Obama was an extremely popular President, yet his personal numbers hardly translated into Congressional seats. The same could be true for Trump. It is very likely that we have a very conventional election where all the conventional polling numbers turn out to be a right. And THAT this year qualifies as the big blindside surprise that nobody is expecting.

In the book “Black Swan”, Nassim Taleb also talks about a White Swan – something that is starting you in the face that you know very well, but yet ignore. Ignoring the very obvious 7% Democratic advantage in the Congressional polls may very well be the White Swan of 2018.

A normally functioning market would assign at least a 50% probability of a House flip and currently the market doesn’t seem to be doing that. Which is very bizarre. Which tells me that markets are about to be blindsided again just like they were during Brexit and the Trump election. If you think Trump has problems with Congress today, you have hardly seen anything if Democrats take over the House. Once Adam Schiff get started with the impeachment proceedings, watch out.


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