The morning after: What Iowa has to say now

the little arbitrage game that keeps John Edwards contracts selling at 1/10th of 1 cent

Barbara, a nit pick, but there's no arbitrage here. Arbitrage is defined as a strategy with some chance of profit but no chance of loss. The bid for Edwards may just reflect that people think there is a remote but nonzero probability (0.1%) that (metaphorical) lightning will strike Obama and Clinton so that Edwards could win. Or it may reflect some technical aspect of the market (e.g. maybe shorts will pay up 0.1 cents to cover to free up capital even if they think there is literally zero chance of a payoff).

Did you see Meckler in the Journal yesterday on McCain's economic "plan"? Lots of good stuff. Check out the bit at the end. Apparently the McCain campaign doesn't believe in time value of money:

His campaign also says there is no cost to a proposal regarding the tax treatment of capital expenses. Outside experts put the cost at tens of billions of dollars a year.

Under that plan, the federal government would take an upfront tax hit and be forced to pay additional interest on a larger national debt, said Ronald Pearlman, a tax professor at Georgetown Law Center and assistant secretary for tax policy under President Reagan.

To say there is no cost to the government is "so intellectually dishonest it's outrageous," Mr. Pearlman said. Mr. Bounds, the McCain spokesman, responded: "Clearly there is a difference of opinion here."

Some people think a dollar today is worth more than a dollar years from now, some people don't. Some people believe tax cuts reduce revenue, some people don't. Some people think the Earth is round, some people don't. It's all just a "difference of opinion".

Barbara, since I seem to be in a nit-picking mood (though see also my more substantive, but off-topic comments on McCain's voodoo economics), note that these data represent trade prices, not quotes. As you know, a quote consists of a bid price and an offer price: the bid is the price at which one can sell and the offer is the (higher) price at which one can buy at any point of time.

So while it's true that somebody bought at 0.1 on April 18 and somebody (most likely somebody else) sold at 0.2, that doesn't necessarily mean that any one market participant could have traded at both prices. (It's quite likely the quote was 0.1 bid, 0.2 offer all day long.)

By the way, it's not entirely obvious to me that 0.1 or 0.3 are too high. 0.1% and 0.3% are pretty low probabilities. While highly unlikely, it's not impossible to imagine a scenario where something crazy happens in the campaign, Edwards jumps back in and ends up as the nominee.

Ok, the best way to think of what is happening is in terms of a sports metaphor. Now, Ms. Clinton at the beginning of this contest was the undisputed champion, and if I remember correctly, was just going through the motions to win a commanding nomination. Oops. Well, like any underdog team that unexpectedly scores a whole bunch of points early in the game, it starts to become inevitable as the game progresses and the teams just exchange scores, that the underdog is going to win. It may be painful to the Clinton faithful, but the loss IS coming (short of Obama being linked to al Queda). The sad part about it is that she cannot see it, most likely because she never played sports.

So, even though Clinton "won" PA, the clock is ticking, and she is NOT gaining. All that can happen now is to she how go a sport she is (I have a feeling she will not be gracious).