Bloomberg Wins Iowa

No, this isn’t Fake News. I know Bloomberg didn’t even run in Iowa. But he still won it cause everyone else lost!

Loyal readers may remember I recommended buying futures on Bloomberg for President at 200-1 last fall. Yes, I am bragging about that call again! For non-loyal readers, insights like that one are why you should be reading more often! Mattress Mack would be a lot wealthier if he bet on my predictions.

Note, I am not saying I want Bloomberg to be President or even that I expect him to win. I was merely pointing out that he was undervalued. He is now down to 8-1 tied for 2nd among Democrats with Biden. I’d say that’s close to fair value.

What is Bloomberg’s Agenda?

Before I tell you why he won Iowa, let’s zoom out and talk about what he is trying to accomplish in this election.

Bloomberg’s Goals:
1) Stop Trump
2) Stop Bernie & Liz
3) If he can’t win, be a kingmaker
4) Avoid capital gains when he sells his company

I’ll expand on each of these in a bit, but the last one in particular is not well understood and very important. Note I didn’t say anywhere that his goal is to be President. That is one way to achieve his goals. It’s not the only one.

What Do You Mean Bloomberg “Won” Iowa?

Bloomberg made a conscious decision to sit out the early races to focus on the big March primaries. This was partly out of necessity because he entered the race late.

It was also good strategy as a) he could get more name recognition out of national advertising than spending on a catch up ground game in Iowa and New Hampshire b) people in Iowa probably weren’t going to vote for a rich guy from NYC and c) Iowa splits delegates so the reward for winning isn’t that meaningful relative to the effort.

Bloomberg acknowledged this thought process recently:
“It’s much more efficient to go to the big states, to go to the swing states,” Bloomberg said. “The others chose to compete in the first four. And nobody makes them do it, they wanted to do it. I think part of it is because the conventional wisdom is ‘oh you can’t possibly win without them.’”

The best outcome from Iowa for Bloomberg was an unclear winner in Iowa. JACKPOT!!! The less clear the front runner is entering March the better the case Bloomberg has to make that people should consider him as an alternative.

With the chaos undermining any momentum for the winner, Bloomberg lost nothing by sitting out. In fact, Bloomberg has announced that he will double his ad spend post the Iowa result.

Goal #1: Stop Trump

Bloomberg has made it pretty clear he doesn’t care who wins as long as Trump loses. Much of his advertising spend has been used to make the case against Trump. His ad spending in just three months has already surpassed Hillary’s entire campaign spend! You don’t do that if your only goal is to win the nomination for yourself.

Goal #2: Stop the Progressives

Bloomberg has also made it clear he wasn’t going to stand still and watch a Progressive win the nomination. He has too much risk to his personal wealth from that!

The reason he originally sat out was because he didn’t want to take votes away from the presumed favorite Biden. The reason he changed his mind and entered was because he saw Biden faltering and Warren and Sanders gaining. Biden’s disappointing finish in Iowa justifies Bloomberg’s rationale for getting in the race. He is now the moderate alternative.

One side effect of all his campaign spending is it has raised the price to buy ads thus decreasing the ability of Warren and Sanders to compete effectively. TV ad prices have soared from 20% to 45% since Bloomberg entered the race. That is one way to slow down the competition.

Goal #3: Be a Kingmaker

If Bloomberg can’t win himself, he wants to have influence. Spending $1B gets you influence. Look back at his midterm strategy of funding House candidates that let him brag he was responsible for Pelosi becoming Speaker.

What could influence look like? How about telling the nominee you’ll keep spending through the general if they let you pick the VP candidate…or make you Treasury Secretary? Speaking of which…

Goal #4: Sell Bloomberg L.P. Tax Free

Bloomberg will be 78 later this month. His company is worth a LOT of money. I assume he thinks about estate planning and, as part of that, whether it makes sense for him to sell the company.

One impediment to selling the company is his cost basis is very low and he’d have a giant tax bill. If his stake is worth $50B, then the capital gains bill is $10B.

However, there is a loophole! To access this loophole, one needs to either be President or work for the President (e.g. a Cabinet position). When you see Goldman Sachs executives leave to work for the government, don’t assume it’s because they have a sense of duty to “serve their country”. It’s because they were smart enough to find the loophole.

So what is the loophole? If you work for the President, you can sell any investments that present a conflict and defer capital gains on them. So Bloomberg can direct his lawyer to sell the company while he is President or Treasury Secretary and defer $10B of capital gains tax.

But wait, it gets better! When I say “defer”, I must mean defer until they leave office right? Nope. If the seller reinvests the proceeds, that new investment doesn’t have to pay gains until it is sold.

Let’s walk through an example. Michael Bloomberg sells his stake in Bloomberg L.P. for $50B. He reinvests $100M each in every stock in the S&P 500. If he never sells those stocks, he never pays capital gains tax (assuming he wisely uses trusts to pass along those investments). Ever!

That’s a $10B tax dodge! All of a sudden spending $1B on advertising seems like a wise investment rather than a frivolous expenditure!

The Wildcard: The Brokered Convention

While most people dismiss the possibility, there is a reasonable chance no Democratic candidate enters the convention with enough votes to win. In fact, the 538 model suggests the third most likely outcome is nobody clinches the nomination!

What happens in this scenario? We go back to the smoke filled rooms of yore! Said rooms would of course now be filled with marijuana smoke instead of tobacco – times change!

Anyway, what would happen next would ironically be pretty similar to the Iowa caucus…delegates would try to convince each other to switch candidates until they had enough votes to win a majority.

Let’s say Biden and Bernie each end up at 80% of the delegates they needed and Bloomberg had 25% of what was needed, aka enough to get one of the other two over the top. He could certainly demand certain people for cabinet positions (including himself) and certain positions in the platform. He has lots of ways to accomplish his goals other than being President or being the nominee.

What Happens Next?

I’m not ready to make the next prediction yet. I’m not against holding on to an 8-1 Bloomberg ticket but I also wouldn’t put new money into it.

If Biden continues to falter, the centrist Democrats will likely turn to Bloomberg as their best shot to stop Sanders. He has a lot more experience than Buttigieg, obviously has more $ available, and has won major campaigns before.

Bernie would obviously hit him with the “buying the election” charge but Bloomberg would be able to argue he has a better chance to win independents and thus defeat Trump.

One way to think about it is since Bloomberg’s path is dependent on whether Biden can recover or not, you could look at their combined odds. If you bought both at 8-1, you are essentially paying 4-1 that one of those two emerges. Coincidentally, that’s the same odds that Bernie wins. That suggests it’s a tossup which seems about right to me.