Get Ready For Another 2016 Surprise: "The Trump Mutiny"

Regular readers know that I produce a list each December of 15 "surprises" for the coming year, which I define as "possible improbable events."

One of this year's surprises has recently come true:

"Surprise No. 10: It's Hillary vs. The Donald

Despite his rude and crude campaign, Donald Trump [comes out] ahead of all of his Republican competitors.

He takes on Democrat Hillary Clinton, and their first televised debate attracts nearly 100 million viewers. Given the world's chaotic landscape, the November election is much closer than expected, but Clinton beats Trump 293 electoral votes to 245."

-- Doug's Daily Diary, 15 Potential Surprises for 2016 (Dec. 29, 2015)

But now, I'm modifying that with an additional surprise that most would consider as having a low degree of probability:

"Surprise No. 16: Trump Bows Out

Donald Trump bows out of the presidential race some time between the Republican National Convention and Election Day."

Let me start by reiterating that this missive isn't a personal political statement at all. I'm simply weighing the high odds that the consensus holds against a particular event occurring vs. the much stronger probabilities that I foresee.

Let's look at why I think The Donald might drop out:

Polling Woes

Trump is already about 5% to 7% behind Democrat Hillary Clinton in the major polls, and his campaign is arguably in disarray. He fired his campaign manager yesterday and hiscampaign's finances are low.

It's my view that Trump will fall much further behind Clinton as his campaign evolves and develops after the July 18-21 GOP convention in Cleveland.

Funding Woes

Let's assume that Trump continues to face a lack of support from many GOP leaders, Republican political operatives, large contributors and House and Senate members (who are worried about their own political fates).

In that case, it's easy to see Trump falling even further behind Clinton in the polls. Embarrassing defeats in the first two televised debates on Sept. 26 and Oct. 9 could then lead to a more than 10% polling deficit for The Donald.

If that happens, we could foresee Trump's war chest failing to attract funds and dwindling rapidly. Let's also assume that he grows increasingly reluctant to self-fund.

Captain Trump and the USS Caine

"Ahh, but the strawberries. [That's] where I had them. They laughed at me and made jokes, but I proved beyond the shadow of a doubt ... that a duplicate key to the wardroom icebox did exist, and I'd have produced that key if they hadn't of pulled the Caine out of action. I know now they were only trying to protect some fellow officers."

-- Captain Queeg (played by Humphrey Bogart), The Caine Mutiny

Humphrey Bogart delivered one of his most memorable performances in 1954's The Caine Mutiny. He played Philip Francis Queeg, a paranoid ship captain relieved of command in a mutiny by his junior officers after he makes a series of irrational and dangerous decisions.

Well, Trump seems in many ways like the Captain Queeg of 2016's presidential race. Like Bogart's character, he's arguably made some questionable policy statements and shown a temperament and character traits unusual for presidential nominees. He seems like an independent but tightly wound and impatient individual, given to making impetuous statements and policy pronouncements and unwilling to listen to even his own consultants.

In the "16th surprise" above, Trump would initially fight Clinton, but ultimately display more and more animus toward non-supportive Republicans as he began to resemble Captain Queeg. The tensions would grow ever more conspicuous as he morphed into a weaker and more-damaged candidate with a diminishing support base.

The Surprise

In this scenario, Trump would have few endorsements from within his own party, and he'd find by mid-October that his campaign's many flaws had been exposed in the presidential debates and other venues.

Add in a dwindling war chest and dramatic drop in the polls that had him trailing Clinton by low double digits and I could see Trump announcing after the second debate that he'd "no longer actively campaign."

In effect, he'd quit the race, becoming the first major-party presidential candidate to not actively participate in his own campaign. While Trump would technically remain on the ballot, Clinton would essentially run unopposed.

In this scenario, I could see Trump winning electoral votes in just Mississippi. He'd wind up losing to Clinton by the largest popular- and electoral-vote deficit ever, trailing even George McGovern's 1972 landslide loss to Richard Nixon.

Gridlock

Of course, that wouldn't necessarily mean that the Democrats would control the U.S. government, as Republicans currently hold majorities in both the Senate and the House.

However, 34 Senate seats and all 435 House seats are at stake in this year's election, so Democrats have a shot at recapturing Congress. But to do so, they'd have to pick up at least five Senate seats and 30 House seats from the Republicans.

Is that possible? For some perspective, here's a rundown of the historic gains and losses in the Senate, House and governorships during all presidential-election years since 1948:

Source: Wikipedia

Most polls expect the Republicans to remain in charge of the House, but see control of the Senate as a toss-up. But with Trump offering a non-campaign in the scenario above, I believe the Senate would easily tilt back to Democratic control.

Here's what well-regarded University of Virginia political scientist Larry Sabato currently predicts:

Source: Sabato's Crystal Ball

So, let's say that the Democrats take the Senate and win more than 25 House seats, but that the GOP still retains control of the lower chamber. What does that mean going forward? Two words: "More gridlock."

Possible Market Ramifications

With the Federal Reserve losing its effectiveness, the scenario I just outlined would mean that needed fiscal stimulus -- which I believe is many investors' bullish baseline expectation -- simply wouldn't happen. There'd be too much gridlock and partisanship in Washington, where Democrats would control the White House and Senate but Republicans held the House.

Recognizing the dwindling policy alternatives to catalyze growth, global markets would then plunge during the fourth quarter. That's one reason why I'm net short in the market.