Geopolitics & The Markets: An Explanation of Why Afghanistan’s Disaster Makes Global Investors Feel Confident

Biden’s Saigon moment in Afghanistan ramifies into slightly higher confidence in the US and global stock markets. The logic is simple and based on the notion that more complications for the Chinese Communist Party mean less scope for it to become aggressive and wreck the global geopolitical order and trade relationships, which the market loves because it powers corporate earnings and valuations.

Below I explain the logic and its geopolitical, financial and cultural tentacles. The bottom line is the S&P 500 powers to new higher highs in the near-term. The volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's action across fixed income, currency and commodity markets signified no meaningful changes to the global macro environment. Expect the S&P 500 to rise modestly over the next few days.

By leaving Afghanistan and allowing the Taliban to co-rule it with weak mainstream actors (e.g., the curent government leadership of Ghani and Abdullah) Biden is presenting China with two problems: namely how to work with the Taliban while persecuting its own muslim citizens in the western edge of the country (Uyghurs), and how to maintain the Pakistan relationship now that Pakistan has effectively beaten the US and will naturally feel less dependent on China and more likely to stake a Russian relationship. Making life more complicated for Xi Jinping makes investors confident that Xi will be forced to be cautious rather than aggressively ideological, and thus spare the global economy the risk of aggression in India and Taiwan, and deeper socialist policies that wreck the second largest economy in the world.

Xi will likely be cautious because he’s already overtaxed trying to finesse an incredibly large list of policy fronts that make Biden’s challenges look puny. These are: monetary stimulus while simultaneously lowering financial leverage among shadow banks; anti-corruption while simultaneously maintaining the CCP’s strict authority and cohesion, and thus its support by the PLA; pension reform & raising the retirement age while simultaneously keeping the populace from rebelling at these higher demands and risks, at a time when Princelings like Xi live high and pedantically try to alter popular culture; higher social welfare spending while simultaneously restraining CEOs and other capitalists while simultaneously keeping the small & medium enterprise sector confident enough to grow the economy & the tax base, and thus keep government debt manageable; and finally, harassing and patronizing neighbors in the South China Sea and beyond while maintaining key trade relationships. Xi’s success so far has ramified across the world: LatAm, Eastern Europe and Italy remain stable because of global trade, despite having significant global debts and the socioeconomic hit that Covid presents. The EU continues to grow because Italy is able to escape downgrade/default (which would trigger cross-defaults and likely redenomination of the Italian lira). This in turn allows the eurobond implementation that has the possibility of eventually stabilizing the EU’s internal economy (i.e., target2 imbalances) and paving the way for structural reforms. So confidence depends on global trade which in turn depends on a rational CCP, which Biden is fostering by curtailing their scope for aggression.

Yesterday I added a position in Starbucks (SBUX), and my other current market positions are in Facebook (FB), Korn-Ferry (KFY), MKS Instruments (MKSI), Pfizer (PFE), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).