Political insiders have long known that the best way to predict the results of American elections is to follow the Iowa political markets, on which anybody can buy "shares" in outcomes of particular races. Trading on the 2008 Presidential race has been open since June 2006, and the stock prices are quite interesting. For the category of winner-take-all, one buys shares in either the Republican or Democratic candidate. One share of the Democrat returns a dollar if a Democrat wins and nothing if a Republican wins, and vice-versa. If the odds were even money, then Democratic and Republican shares would both be trading at $0.50.
As it happens, the Democratic candidate has been ahead almost continuously since this market opened in June. However, in mid-November, the Republican candidate started to gain ground and essentially pulled even on November 19. Since then, the Republican price has fallen fairly continuously, while the Democratic price has risen. As of yesterday, the split was close to 55-45. What explains the rise and then the fall of Republican fortunes?
Although conventional wisdom holds that economic issues usually decide Presidential elections, there has been no major economic news in the relevant period. However, there have been significant developments with respect to Iraq policy. During mid-November, after Secretary Rumsfeld resigned and President Bush was indicating that he would take the advice of the Iraq Study Group, political investors may have thought that the U.S. would have sufficiently extricated forces from Iraq by November 2008 that the war would not be the decisive issue. Since then, as Bush has made plain his plans for troop increases, fewer investors believe this. If I'm reading the data correctly, people who are betting real money on the question think that Iraq will be an albatross for whoever is the Republican candidate in '08. And that means these usually-savvy investors do not think that the "surge" will be temporary.