By Michael Every of Rabobank
Kabul Market
US stocks narrowly closed at another record high on Friday. It didn’t matter that the Michigan consumer sentiment index collapsed back from 84.5 to 77.9, and the sub-readings for purchases of homes and vehicles both plummeted further. It didn’t matter that the apparent reason for the drop was the Covid Delta variant, which led Bloomberg –the barometer of the market’s lizard brain– to write a weekend piece bewailing “The World May Never Reach Herd Immunity Against Covid-19”. (The body of established science that said you can’t ‘one-and-done’ vaccinate against a mutating coronavirus, just as you can’t against ‘flu, never reached the ‘scientists’ on Wall Street who, as we have also established re: Marxism, never read.) The odds are therefore that US stocks may find a way to elevate again today. After all, this bull market seems resistant to both data and science, so it will probably also be resistant to events transpiring in Kabul.
The US Beltway experts who six weeks ago said the Taliban could not establish an Islamic Emirate for at least a year, and then suddenly revised that down to six weeks, and then to 72 hours, still got it wrong: it happened on Sunday evening. The Afghan president has fled, along with his artificial $88bn “army”, but the actual weapons are now in the hands of the Taliban. Crowds of desperate Afghans are flooding the runway of Kabul airport –requisitioned by the US Army because it surrendered Bagram airbase without warning weeks ago, and the Taliban now control it– in scenes that look like Saigon in 1975. Or, tragically, like the Khmer Rouge entering Phnom Penh in ‘The Killing Fields’ (in Cambodia, a few years later); and there seems a very real risk the comparison won’t stop there.
Yes, markets will try to brush this geopolitical earthquake off: It’s just Afghanistan; It’s a long way away; We never wanted to go on holiday there anyway; They don’t even buy much cheese. There will probably be attempts to talk of a ‘New Taliban’, as we did with New Labour in the UK, brushing over the fact that the latter ‘New’ was vs. 1970’s socialism, and the former is vs. 7th century fundamentalism. Indeed, the Taliban seem to now realize which Western memes make it look more palatable, and are promising to be “inclusive”. They may only need to throw in “diverse”, “equity”, “green”, and “sustainability” for Wall Street to perk up and ask “Are you in favour of free trade and QE?”, and for EU foreign policy representatives to sit next to them.
But what to do? Michael Bloomberg has already penned an editorial that says “The US Can’t Walk Away From Afghanistan”, which is correct: the US *ran* away in the eyes of Afghans. He then Bloombergs that: “Words are easy. Solutions are hard,” and suggests the US continue to fund the Afghan government and army as long as viable (too late!), help people to flee (where?), and use airstrikes and special forces to keep terrorism at bay, which will involve “Cajoling neighbouring countries for intelligence support and basing rights.” (Neighbours like China; Turkmenistan; Tajikistan; Uzbekistan; Iran; and Pakistan.) Hey, words *are* easy! And solutions hard.
Yet Bloomberg is right in that this geopolitical nightmare is almost certainly only just beginning. As noted here on Friday, if you don’t see this US policy debacle increases the risks of ‘red-line’ incidents in the Asia/Indo-Pacific, perhaps you should look for a desk job at the CIA.
The US now looks like it is flailing around like a social-media influencer discovering not just a micro-aggression, or that life contains people who don’t agree with you, but that there are people who aren’t even on Twitter that can punch you in the face and break your nose and teeth (and far, far worse). Geopolitically, opportunists of all stripes may now be considering if they may not be able to earn theirs, so to speak, by kicking the US while it is down. And yet the US is clearly swinging most of what is still the world’s most formidable military muscle squarely towards the Asia/Indo-Pacific region, and will almost certainly not want to be seen to ‘do a Kabul’ in that jurisdiction too. Or a Nord-Stream 2. Or an Iran.
(The above list of concessions rather underlines the credibility problem the US is facing. Indeed, allow me to quote a Tweet from a MENA Lecturer at John Hopkins University that echoes the “Comfortably Dumb” Daily from Friday: “If nobody gets sacked due to this nightmarish fiasco then we are truly lost in the careerist phony baloney land. Do you feel comfortable in your comfy jobs as people suffer from your made up nonsense?”)
Particularly if DC heads don’t roll, and there seems little sign that they will, then this backdrop is a growing fat tail risk of the kind that was ignored by everyone doing business in and with Kabul until yesterday afternoon: and now they are on the runway with their families, screaming for help, and praying they can get a seat on any plane leaving.
So by all means, ignore Kabul and focus on just ‘bull’ – for now. After all, the ludicrous liquidity being thrown at markets by the Fed is enough to pay for a fake Afghan army with real weapons every month with money to spare. (Question: Why did the US not just do that to begin with – QE bribes of billions to key leaders as the solution to all foreign policy problems? Answer: It did – just to the wrong people/contractors!) However, be aware that when/if the penny drops, it will be you, your portfolio, and/or your supply chain on that Kabul airport tarmac, metaphorically. And a year from now can become six weeks can become 72 hours can become Sunday afternoon. When markets are closed.
This is, perhaps, one of the saddest images I’ve seen from #Afghanistan. A people who are desperate and abandoned. No aid agencies, no UN, no government. Nothing. pic.twitter.com/LCeDEOR3lR
— Nicola Careem (@NicolaCareem) August 16, 2021
And as we all rely on QE to solve all structural problems, consider that 20 years ago, the US rolled into the Greater Middle East guns blazing with plans to remake it in its own image; today it is retreating with socio-economic polarization, cronyism, populism, and “careerist phony baloney land” starting to make *it* look Middle Eastern; and if the current trend is projected forward 20 years, some doomsters wonder if the US may not by then be retreating from parts of itself.
But, remember: It’s just Afghanistan; It’s a long way away; We never wanted to go on holiday there anyway; They don’t even buy much cheese. And stock indices might go up a fraction of a percent today, bond yields might move a few basis points, and the US dollar may shift a fraction. Focus on the important stuff!
