Countdown to the Midterms! I Calculated That the Republicans Have Only a 2.6% Chance of Keeping the House and a 66.6% Chance of Losing Both Chambers! The Debt Ceiling Hits the Wall in 2027, Iran's Interceptor Missiles Won't Be Restocked Until 2029, and the US Stock Rebound Is Doomed! Ukraine and Taiwan Go from Depending on Old Trump's Mood to the Force of Law! The CCP Finally Gets an Opponent Who Wants to Deal but Has No Chips

This episode calculates various probability models for the U.S. midterm elections in detail, analyzes the different outcomes where the Republican Party might lose both houses, and explores the impact of the debt ceiling, the attrition of the war in Iran, the rebound of the U.S. stock market, and the data center electricity bill on U.S. stock capital expenditures. It also discusses how these political shifts will reshape the Russia-Ukraine conflict, cross-strait relations, and the external environment faced by the Chinese Communist Party (CCP).

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Observe things as they are, reject fragmented cognition. The U.S. Bureau of Labor Statistics has released the CPI for September. The year-on-year CPI for September rose by 3.7 percent. Gasoline alone as a sub-item rose by 34.2 percent year-on-year. In the single month of September, gasoline rose by 9.1 percent month-on-month. Counting from now, there are less than 20 days left until the midterm elections on November 3rd. Today, we will take a look at the current U.S. midterm election situation and the probability table I have calculated. What is the purpose of calculating this stuff? Because after the midterm elections, there will inevitably be major changes to the current geopolitical and capital market ecosystems, and we also need to delve into how these changes will reshape the direction of Iran, Russia-Ukraine, the CCP, and cross-strait relations. Let's first calculate the election situation clearly. Currently, after synthesizing the results of various polls, the weighted average of Trump's net approval rating is negative 22.4 percentage points.

The current breakdown of betting numbers looks even worse. The net approval rating for inflation is negative 47.5, for the economy it is negative 29.9, and for trade it is negative 28.7. On the generic ballot, the Democratic Party is leading by 8.8 percentage points. What does this number mean? Let's look at historical data. In 2024, the national popular vote for the House of Representatives saw the Republican Party leading by 2.6 percentage points; now, it has shifted to the Democratic Party leading by 8.8 percentage points. In other words, the swing magnitude has reached 11.4 percentage points. What is the relationship here? Historically, for every percentage point the U.S. House of Representatives swings, it translates to approximately 2.3 seats. So, 11.4 multiplied by 2.3 is approximately 26 seats. However, didn't the Republican Party redraw districts starting last year? By redrawing districts in states like Texas, Florida, and Ohio, Texas gained five seats, Florida gained four seats, and Ohio gained two seats. Then, North Carolina, Missouri, Tennessee, Alabama, and Louisiana each gained one seat. This means a total of 16 seats lean toward the Republican Party. On the Democratic side, after redistricting in California, they reclaimed five seats, plus one more seat reclaimed due to a map ruling by the Utah court. With this give-and-take, the Republican Party nets eight to ten seats. In this situation, it's easy to calculate: 26 minus 8 means the Republican Party will fall from its current 220 seats or so to around 196 seats, while the threshold for a majority in the House is 218 seats. Now let's look at the Senate. What is the situation in the Senate? The Republican Party has 53 seats against the Democratic Party's 47. If the Democratic Party wants to flip the chamber, they need a net gain of four seats. Let's see where these four seats might come from. The Republican Party currently needs to defend Maine, North Carolina, Ohio, and Alaska. In these four regions, Democratic candidates are already leading across the board. There is something even more interesting: even in a Republican stronghold like Texas, the Democratic candidate has surpassed Cruz. Even Texas is becoming hard to hold. This is no longer a question of the strength of candidates in any specific state; this is a nationwide wave, pressing down on all exposed Republican seats. Meanwhile, the states the Democratic Party needs to defend—New Hampshire, Michigan, and Minnesota—are not trailing in any of them. Therefore, the only states the Republican Party can hold are Iowa and Kansas. But the leads in those two states are within the margin of error. What is the Democratic Party relying on to flip seats? It is the four seats that should have been flipped anyway. Texas is an extra bet; if they win it, they head toward 52 seats, and if they lose it, they don't fall below the 51-seat baseline. I fed this data into a joint Bayesian model for both chambers. What does this mean? It means using historical patterns to set a prior. Generally speaking, with such low approval ratings for Trump, empirically, the ruling party in midterm elections historically loses an average of over 37 seats. Then, by multiplying this with this year's polling data, we can obtain a posterior. I don't make any assumptions; instead, I calculate each chamber separately because polls are often wrong, and if the polls are wrong, it would cause both chambers to be calculated incorrectly. For instance, the polls in 2016 and 2020 clearly underestimated the Republican Party, so both chambers had errors in the same direction. In 2022, they underestimated the Democratic Party, and both chambers again had errors in the same direction. Therefore, I used a binary t-distribution with fat tails, and the correlation coefficient of the errors between the two chambers is around 0.7. After running two million simulations, my posterior is as follows: the probability of the Republican Party holding the House is only 2.6%, while the probability of the Republican Party holding the Senate is 33%, and within that 33%, 19% is a 50-50 split. At this point, it depends on Vance. The probability of losing both chambers is 60.6%, and the probability of losing only the House while holding the Senate is 30.8%. There is also a very counter-intuitive conditional probability here, which I will calculate for you. The formula for conditional probability is the joint probability divided by the marginal probability. The joint probability of holding both chambers is 2.1%, and the marginal probability of holding the House is 2.6%. So, 2.1 divided by 2.6 equals 81%. In other words, once the Republican Party holds the House, the probability of the Senate also being held is as high as 81%. Why? Because the Republican Party holding the House is itself a low-probability event. What is the premise for this event to happen? It is that the polling data was systematically wrong in favor of the Republican Party—that is, it was systematically underestimated. Once the polling data is wrong, the calculated results for both chambers will be wrong together, so the Senate will naturally be held as well. Conversely, if the House is lost, the conditional probability of holding the Senate drops to only 31.7%, which is basically consistent with the Senate's own marginal probability of 33%. Why is it different? Because losing the House is a high-probability event, and if a high-probability event occurs, it does not provide any additional information. Therefore, if you just change the condition for the same Senate, the probability will drop from 81% to 31.7%.

Prediction markets are a bit more aggressive than I am. On October 13, Porsche and Polymarket priced the Democrats winning the Senate at 62% to 64%, and the House at 90% to 91%. The Silver model gives a Senate probability of 74.8%, while mine is 67%, right in the middle.

Alright, we've finished calculating the election scenarios. So both defeat states now emerge. That is, either losing just the House of Representatives, or losing both chambers. After losing the House, what cards does Trump have left in his hand? This brings us to something called the budget reconciliation process. This process is extremely important to Trump. What is this process for? Normal legislation in the U.S. Senate requires sixty votes to end debate, but the budget reconciliation process allows what? It allows fiscal-related bills to pass with just fifty-one votes. The major tax cut bill on July 4 last year went through this budget reconciliation route. At that time, it passed relying solely on Republican senators' votes without borrowing a single Democratic vote. But this process also has a prerequisite, which is what? The prerequisite is that both chambers must first pass the same budget resolution. If the House is lost, this budget resolution will likely fail to pass. Therefore, first for Trump, the key of budget reconciliation is gone. Without this key, what does it mean? It means that the provisions in last year's tax cut bill that are set to expire and need to be extended will have to scrape together those sixty votes in the Senate. If they can't scrape them together, it means that all subsequent appropriations will completely stall. Speaking of money, the issue of the debt ceiling must also be put on the table. Last year's July 4 bill raised the debt ceiling by five trillion dollars, directly lifting it to 41.1 trillion. Last week, which was October 8, the Treasury Department released a total public debt figure. The total public debt announced by the U.S. Treasury last week has already hit 40.31 trillion, leaving only about 800 billion dollars away from the ceiling. What is the judgment of the Committee for a Responsible Federal Budget? Their judgment is that the debt ceiling will hit the cap again in the mid-to-late period of 2027. This year's federal deficit has already reached two trillion dollars, 200 billion more than the previous fiscal year. Federal interest payments accumulated to 1.02 trillion dollars by August, which is the first time in U.S. history that the annualized figure broke one trillion. So where will these two defeat states differ regarding the debt ceiling? Well, we need to discuss it based on different situations. If only the House is lost, then the chairs of the House Ways and Means Committee and Appropriations Committee will all be replaced by members of the Democratic Party. Appropriation bills are drafted from the House, so what can the Democrats do? The Democrats can tie a clean debt ceiling increase together with the restoration of Obamacare subsidies. Although Senate Republicans can strip out the additional provisions, if the stripped-down bill is taken back to the House, it certainly won't pass again. Trump won't be able to get the money either. At this point, Trump's only remaining weapon is to let the Senate drag it out, dragging the time of hitting the cap all the way into next autumn. If both chambers are lost, then the power to set the Senate agenda will also belong to the Democrats. The Democrats can directly write additional provisions into the debt ceiling bill, such as prohibiting the use of tariff revenue for subsidies. Or for another example, prohibiting the use of defense funding to fight Iran, or directly using subpoena power to investigate how much the Iran war actually cost. Because this number right now has always been a mystery, since there are too many definitions of the metrics. Secretary of War Hegseth said himself in July how much it cost: 37.5 billion dollars, but third-party metrics aggregated show that by June it had already cost 113.3 billion dollars, directly three times the metric from Hegseth. This is the thing that needs to be investigated. At that time, Trump will only have the veto power left. But if he vetoes appropriations, it equals taking on the risk of a technical veto himself. And everyone must note, the Democratic senators' backyard average is 51 to 52 seats, which is still a long way off from the 67 seats needed to override a veto. Therefore, losing both chambers does not mean Democrats can legislate; it means the Republican administration cannot legislate independently. The entire U.S. at that time will enter a state, what state? That is a state of stalemate between pure executive orders and pure veto power. This stalemate will be used later when discussing U.S. Treasuries.

And then there is the Iran war thread, which is the most fucking tedious and exhausting one. How many times has it dragged on back and forth? What is Congress's attitude on this matter? Let's take a look. On June 23 of this year, the Senate passed a War Powers Resolution by a vote of 50 to 48, demanding an end to military operations against Iran. By July 22, the House passed a $95 billion budget and reconciliation framework by a vote of 216 to 214, of which over $70 billion was for war funding. This framework took the shortcut of the 50-vote threshold mentioned earlier. But if the House changes hands, this framework will be dead on arrival. So, regardless of which losing scenario occurs, the supplemental appropriations for the Iran war will have to go through the normal appropriations process. And the drafting power for the normal appropriations process at that time will be in the hands of the Democratic Party. In the event that only the House is lost, the Democrats will certainly add this rider to the defense appropriations bill. Of course, the Republicans in the Senate could strip this rider, but even if they do, the money still won't be secured. And if both houses are lost to the Republicans, then the War Powers Resolution could be attached directly to the appropriations bill. Trump would then face a choice between vetoing the appropriations or accepting the restrictions, and the Senate Foreign Relations and Armed Services Committees could also freeze the Department of Defense and State Department's power to make personnel appointments. But I must say one thing here: these congressional constraints are no match for a harder constraint, which is the U.S. ammunition stockpile. Let's look at the data. What is the estimate from the Center for Strategic and International Studies? About 1,000 to 1,400 Patriot PAC-3 interceptor missiles have been fired, and as of July 27, the inventory was down to fewer than 840. To return to pre-war levels, it would take at least until mid-2029. As for THAAD interceptors, out of 450, only 250 remain. The CNN version is even more severe, claiming that 80% have been expended. To replenish the inventory, it would take until the mid-to-late 2029 period. Over 1,000 Tomahawk cruise missiles have been fired; the pre-war inventory was 3,100 to 4,500, and replenishing them would similarly take until early 2030 or 2031. As for the Army's tactical missiles, if we go by the camel-car's version, they are basically all gone. After seeing these reports, Trump was furious, calling them treasonous. So, everyone can chew on this: congressional resolutions can decide whether to give money, but they cannot decide the speed of the production line. The interceptor inventory simply cannot be replenished before 2029. This is the bill for Trump's "wanting it all" approach without any strategic planning. And his attitude is still fucking extremely wavering. So, this is the long-term cost and price for the United States.

As for the CCP side? Hey, let's talk about tariffs first. A large portion of the tariffs Trump imposed actually hit allies; the steel and aluminum tariffs hit Japan, South Korea, and the EU. Among the 60 economies covered by Section 301, a large number are America's own allies. This has been discussed quite a bit before, so I won't repeat it. Let's just talk about the changes. If the House is lost, the Trump administration's money can only be requested from Congress, because he won't be able to use that simplified procedure. And if Congress is controlled by the Democrats, they will certainly add conditions to the funding clauses, and among these, there will definitely be a requirement to consult with allies—such as coordinating on critical minerals with Australia, Japan, and Canada, coordinating with the Netherlands and Japan on export controls for semiconductor equipment, and enforcing secondary sanctions on Russia and Iran together with the EU. If both houses are lost, it will be even more direct. The Democrats will likely write export controls into law, and if they are written into law, what does that mean?

Then the paradigm for the Chinese Communist Party (CCP) will shift. Because Trump himself cannot change the law, the subsequent script—and I'm not blowing smoke or being biased here—is that the pressure the CCP faces will shift from one person's tariffs to a collective containment. Tariffs can be negotiated, but a joint blockade cannot. What is the CCP's calculation now? It's to wait until the war-time authorization expires on January 10, 2027, which happens to be a transition vacuum period for the U.S. Congress. However, what they will likely get is a president whose hands are tied by Congress, and a Congress that leans even further toward allies. This is very, very bad news for the CCP. Let's look at the capital market. Now, let's replace institutional constraints with prices. First, look at U.S. Treasuries. What does the 10-year Treasury yield equal? It equals the average of future 10-year short-term interest rate expectations, plus the term premium, right? What is the term premium? To put it plainly, it's the extra compensation you demand for lending money to the Treasury for ten years instead of one. The object of this compensation is the uncertainty of inflation and the uncertainty of Treasury supply. The object must be uncertainty; it is not any specific thing. What is the starting point now? The federal funds rate was raised by 25 basis points on September 16, and it is now in the 3.75% to 4% range. The 10-year yield has topped 5.3%, the highest level since 2002. If we estimate based on an average short-end rate of 4% over the next ten years, 5.24 minus 4, the term premium is roughly 120 basis points. The effect of a divided government on the deficit is unidirectional. A divided government means the executive power is in the hands of the Republican Party, but at least one house of Congress is in the hands of the Democratic Party. After the midterm elections, this is the baseline state. If a new spending bill cannot pass, there will be no new deficit, and thus no new Treasury bonds to issue. If the uncertainty of Treasury supply decreases, the deficit component of the term premium will also converge. I estimate that if both houses are lost, it will narrow by 20 to 40 basis points. If only the House is lost, it will narrow by 10 to 25 basis points. There are mainly two forces in the opposite direction. One is oil prices under the influence of the U.S.-Iran war. The September CPI was 3.7%, and the energy component within it rose by 20.4%. This figure locks the short-end interest rate expectations onto the path of interest rate hikes. The minutes of the Federal Reserve's September meeting show that most officials expect another rate hike before the end of the year. The futures market is pricing in a rate hike in December. The other force is the debt ceiling game. The two parties drag out raising the ceiling until the very last moment. While they are dragging it out, the market has to price in the possibility that the Treasury might pay late. Old players are very familiar with this script; it is also a trading window that comes around like a period. In May 2023, before hitting the deadline, the yield on one-month Treasury bills jumped by more than 100 basis points. I think this scene will likely repeat in the second half of 2027. If both houses are lost, the magnitude of this repeat will certainly be greater. When these two forces combine, the long end will move downward due to the convergence of the term premium, while the short end will move upward or remain flat due to inflation and default risks. The yield curve will likely turn from a bear steepener to a bull steepener by next year.

What about the U.S. stock market? I did a backtest using ten midterm elections, tracking stock trends after ten midterm elections from 1986 to 2002. In the 12 months following the elections, the S&P 500 was positive all ten times, with an average of positive 14%. This is direct evidence of the existence of an uncertainty-elimination premium. Furthermore, the returns within 12 months for both divided-government and unified-party-government scenarios were similar; the average for the seven instances of divided government was 13.6%, and the average for the three instances of unified party government was an increase of 15%. Next, we have to look at the Federal Reserve cycle. Let's look at three tightening years: 1994, 2018, and 2022. The statistical interval is the three months starting from the month of the election. The S&P 500 index fell 0.4% in 1994, fell 0.3% in 2018, and rose 5.3% in 2022, with an average increase of 1.5% across the three times. The other seven times, the Fed was either cutting rates or standing pat. In other words, if the election falls within a rate-hike cycle and inflation is still rising, then, in other words, if the election coincides with rate hikes and inflation is still picking up, the market rally that people are used to seeing in the 3 to 6 months after the election—the so-called "priced-in" rebound—basically falls through. This year, both conditions of rate hikes and rising inflation are met, with the added condition of a 10-year Treasury yield above 5.3%, a precedent not found in the ten sample groups. The closest is 1994, when rates were raised by 300 basis points, but inflation was only 2.7% at the time. However, in 1994, there were no war-driven oil prices, so we cannot use the historical average of 4% as a baseline. So what is my deduction? The S&P return for the three months after the election will be at least between negative 6% and negative 8%.

There is another issue that everyone needs to pay attention to today, which is electricity prices. Because the electricity price issue has already become part of the election battle. On September 30, the Senate voted down the Electricity Consumers Protection Act. This bill essentially does one thing: it requires data centers to bear the costs for new substations and transmission lines built near the power grid themselves, meaning these costs cannot be passed on to ordinary citizens. However, it only requires state regulatory agencies to consider how to handle this rather than making it mandatory. Why did a large number of Democratic lawmakers oppose it? Because the restrictions were not harsh enough. What the Democrats wanted to push was a mandatory version. In addition, two Democratic lawmakers directly pushed for a data center construction suspension bill. This matter will not only cause a shock to the capital markets, but its relationship with the the Chinese Communist Party (CCP) is also enormous. Look at this: the capital expenditures of hyperscale cloud providers this year total nearly 1 trillion, with Microsoft alone at 175 billion, Alphabet at 200 billion, Amazon at 220 billion, and Meta ranging from 130 billion to 145 billion. The current economic ledger of the CCP relies solely on the single leg of exports to stand. My consistent assessment is that China's current GDP growth rate is at best around 1 percent. That single leg rests on the assumption that the U.S. capital expenditure cycle will continue indefinitely. Once Democratic regulation imposes this cost-sharing rule on data center electricity prices, the marginal returns on these tech giants' capital expenditures will drop immediately, and the leg upon which the CCP leans will wobble along with it. This is also something Taiwan needs to pay attention to. Although the U.S. midterm elections are for the U.S. Congress, whether computing power capital expenditures accelerate or decelerate serves as a switch for the CCP's export orders and even global export orders.

Let's look at the situation in Russia and Ukraine. What was it like before the election? Trump had not applied for a single cent of new money to aid Ukraine; what is currently being delivered is still Biden-era Chengdu stockpiles plus intelligence, and all new money is now being paid by Europe. How will Ukraine's situation change? Before the election, all power rested in Trump's hands alone—he could give things if he wanted, stop if he wanted, and try to trade Ukraine for something from Putin without anyone stopping him, because no one could stop him. What changes after the election is this: if only the House of Representatives is lost, House Democrats will most likely insert European aid clauses into must-pass appropriations bills, along with the ability to write anti-Russia sanctions into law. In that case, Trump's room to use Ukraine as a bargaining chip will shrink significantly. If both chambers are lost, then sanctions legislation and additional appropriations can both pass, which is also a good thing for Ukraine. To put it bluntly, how Ukraine's situation will change is that after the election, it will shift from depending on Trump's mood to being dictated by the law. And the marginal change for Taiwan will be even greater. Before the election, following the 11 billion dollar arms sales notification last December, Trump's administration has not notified any new major arms sales to Taiwan, and the widespread external interpretation is that this was making way for the summit with the CCP. Taiwan itself has actually finished doing its part of the job. Taiwan's Legislative Yuan passed a special条例 of 780 billion New Taiwan dollars for 8 years in May. If only the House is lost after the election, it is estimated that arms sales financing for Taiwan will be opened up. Right now Taiwan is paying out of its own pocket, but policies adding weapons financing for Taiwan will likely be added later, and the Trump administration can also be required to report regularly on the delivery progress of arms sales. Arms sales at this point will transform from Trump's bargaining chip against the CCP back into a routine matter. If both chambers are lost, then both chambers can write commitments to Taiwan into law. Come November's APEC or December's Miami summit, if the CCP wants to use Taiwan as a bargaining chip again, it won't be so easy.

Let's get back to the money! If both chambers are lost, it's not that the Democrats won't give money, but that they will definitely find another way to give it. Because at that point, both the purse strings and the key to the debt ceiling will be in the hands of the Democrats. What will the situation turn into? Well, what Congress wants to give can pass, but what Trump wants might not all pass, and every single bill passed will come with attached conditions, compressing Trump's independent decision-making power. Doesn't the CCP want an eager Trump who rushes to trade for political achievements? But if both chambers are lost, then tariffs, arms sales, and sanctions will all have their powers reclaimed by Congress. What will the CCP end up waiting for? An opponent who wants to make a deal but has no bargaining chips. The end of this month and the beginning of next month are going to be so lively, with both the CCP's Fifth Plenary Session and the midterms happening. There are not many days left from now until the end of the month, and we will follow up then.