The odds of Obama’s re-election, according to Intrade, has correlated very highly with the S&P 500 in recent months (Chart via Safehaven.)

Intrade Predicts an Obama Reelection in 2012

As I wrote here, the most historically accurate predictor of the outcome of U.S. presidential elections has been the S&P 500. But here’s another: Intrade predicts  an Obama reelection. And the site has an incredible track record at predicting election winners. Intrade, “the world’s leading prediction market,” is an actual market where visitors can buy or sell “shares” and make or lose real money in a particular event’s outcome, presidential elections included.  James Brumley of InvestorPlace writes:

Looking for a good bet? Bet on Barack Obama to be re-elected as president of the United States. And yes, you can legally make that wager. Just make sure you’re getting 2-to-1 odds on an Obama victory. As of this morning, the users who make up the polling/sampling body of prediction-making website Intrade are saying Barack Obama has a 64% chance of winning 2012’s presidential race. Conversely, Mitt Romney’s odds of being this nation’s 45th president are 36%. And given the site’s past success with picking presidents, I wouldn’t dismiss these numbers lightly.

The Intrade Market Is Open

Here’s how it works: users buy shares at the prevailing market rate ($6.44 for an Obama victory), and get paid if it happens. In an Obama win, Obama shares would be worth $10, and Romney shares $0. But what makes these people so knowledgeable?

There is one distinct difference between the people who handicap the presidential race on Intrade and the talking heads who predict winners on TV — the folks at Intrade are putting something of real value on the line, while the television gurus can hit or miss with little consequence.

And the Intrade crowd is good … really good. For example, the site’s bettors not only correctly predicted George Bush would be re-elected in 2004, the group even properly predicted which candidate would win each state (and subsequently how it would cast its electoral college vote). In 2008, Intrade’s bettors correctly predicted Barack Obama would be victorious; they picked wrong on the voting outcome for two states — Missouri and Indiana, each with 11 electoral votes, were flipped in the run-up to the election — and the final electoral vote count was off by just 1 (due to Nebraska splitting its votes for the first time in history).

If the tide turns for Romney, the site will update the odds and, just like the stock market, Obama or Romney sharescan be bought or sold at any point before November 6th for a loss or a gain as their market values change. Whoever Intrade favors on Monday, Nov. 5 is a virtual shoe-in.

Why The Stock Market Is Rooting For Obama Reelection

Kyle Spencer of Seeking Alpha holds his nose to do something he doesn’t like to do: delve into the realm of the political. He cautiously excuses himself, saying it’s not because he wants to but because it has major market implications.

Regarding monetary policy, Kyle agrees with me that Romney isn’t a deficit cutter. I’ve pointed out before that Romney’s never balanced a public budget before. And Kyle doesn’t see Obama making a big dent in the budget either. He writes:

Romney…will come in and run deficits just like Bush did. He’ll just do it through tax cuts, etc. So I think the big budget cuts from the Romney camp are election talk. Clearly, Obama isn’t in favor of big cuts at this point either so I don’t think we’re looking at big changes there.

It’s the Uncertainty Stupid!

But Orcam Investment Research reveals that one of major current market trends is the uncertainty around the election, and the specific source of uncertainty that Kyle notes is the removal of stimulus by the Federal Reserve:

Romney has been very clear that he doesn’t approve of QE or the Fed’s policies under Bernanke. He’s explicitly stated that Bernanke will not be Fed Chief past 2014. What the market is really rooting for is the continuation of Bernanke’s policies, so the market is indirectly rooting for Obama. The perception under QE is that the Fed will do whatever it takes to keep asset prices elevated. And as long as the Bernanke remains in place the market is reassured believing that downturns simply won’t be sustained. Whether or not Romney could even move the needle on Fed policy is unimportant because the risk will be priced in regardless. The market hates uncertainty and Romney’s victory would put Fed uncertainty front and center for all of 2013.

Don’t Mess With Ben

By picking a fight with the Fed, says Kyle, Romney became the anti-market candidate. And he points to the close correlation between the odds of Obama’s re-election and the S&P 500 in recent months.