With the Democrat convention and the Palin choice making for an event ridden week in US politics, the big question remaining is “Did it make a difference?” — And that’s a question we can probably answer, yet the answer is one we may not be expecting.

The Gallup Daily Tracking polls since the beginning of August tell us all we need to know about the way the “Convention Bounce” played out for the Democrats, where the period of the convention itself is shaded in the chart below.

But the problem with the bounce in polling that usually occurs with political conventions in the US is that it tends to only be a bounce, and one that quickly washes out of the system. Yet the complicating factor here is the Palin effect, where the announcement of Palin as the McCain Veep choice seems to have benefited both the Republicans and Democrats in the polling, making us question whether the current Democrat polling levels are solid because of a public reaction against Palin, or merely a post convention balloon that has yet to deflate because of all the Republican Convention hoo har.

Thankfully we have other tools at our disposal here for digging deeper into the way the politics are playing out — the markets. My esteemed colleague Richard Farmer takes the odd dig at me for being a betting market sceptic. It’s not that I’m a skeptic, but rather, if we are going to look at the markets, we need to do it properly — preferably with large amounts of number crunching and plenty of spiffy charts.

If we look at the chart above, but this time replace the McCain Gallup tracking with the current Intrade “Democrat as President” market probability (that can be read from the right, below), we find something interesting.

As the polls for Obama went north, the markets became cynical and went south, yet reacted strongly for the Democrats with the Palin announcement, suggesting that the Palin effect is floating the Democrat vote and preventing any post convention deflation in Democrat public support that might ordinarily have been expected.

Yet even this headline Intrade market doesn’t tell the full story, in fact, it’s not a very good metric to use at all — if we want to get to the real guts of public expectations in the market, we need to look at how things play out collectively in the individual State Intrade markets — after all, the US election is effectively the combined result of 50 separate, but interdependent electoral contests. Electoral College votes are the only game in town.

For a few months now I’ve been running a weekly 100,000 trial simulation based on the State Intrade markets that not only adjusts for the fact that US States aren’t independent events, but also adjusts for the dodgy nature of the long probability tails of political futures markets — you can see more about the simulation and the methodology soon here at Crikey, but for the moment, here are the results from the overnight Intrade numbers.

That last chart tells us the probability of the Democrats winning at least any number of Electoral College Votes — simply choose a number from the bottom, trace it vertically until the bar ends, then trace horizontally to the left to find the probability of the Democrats winning at least that many ECV’s according to the current State Intrade markets.

So far this year, the simulation results have been a leading indicator of the headline “Democrat as President” market, and are far more attuned and sensitive to political events as they unfold. Redoing the simulation again using the last two days worth of Intrade data, we can see clearly that the Democrat Convention dragged the markets down, but Palin is quickly becoming McCain’s nightmare.

Firstly, we need to have a squiz at the comparisons between the Democrat as President headline market probability and the simulation probability using State market data — the highlighted region on the right of the following charts shows where the data changes from its usual weekly period, to a daily period starting last Sunday:

Since Sunday, the combined State markets have moved strongly to the Democrats, lifting the simulated probability of a Democrat victory from 58.7% to 64.9%. Yet the week before, the Democrat Convention actually dragged the Democrats down. The headline “Democrat as President” market probability on the other hand, well, it’s still having a nap — but if history is anything to go by, that will change soon and catch up with the simulation.

If we move on to the Electoral College Votes that are currently allocated to the Democrats in the State markets (remembering folks, it takes 270 to claim the Presidency), as well as the simulated Electoral College vote allocation we get:

Again, the Democrat Convention drove the markets down, but the Palin announcement has lifted the Electoral College vote numbers for the Democrats up from 293 on Sunday, to 311 today, with the simulation results all measuring a large, broad, State by State movement toward the Democrats every day since the Palin announcement. 26 States have actually moved to the Democrats since Sunday, with Missouri, Pennsylvania, Colorado, Nevada, New Mexico, Wisconsin, North Carolina, Montana and Florida all moving by more than 5%.

More importantly for the Democrats though has been the way the Palin announcement has stalled the two month Republican recovery in public opinion and market expectations, giving momentum back to Obama and returning the Republicans to the electoral position they were experiencing at the beginning of August.

It wasn’t the Democrat Convention that has become the Republican’s problem — in five days, the McCain campaign has been Impalined.

Peter Fray

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