Gepolitical Developments: Biden’s Rational Approach To Afghanistan Is Misunderstood Due To The Horrors It Entails

The tragedy yesterday in Kabul has the perverse effect of stabilizing financial markets, since the markets actually applaud Biden’s rational approach to Afghanistan. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days.

Biden’s rationality is based on leaving Afghanistan to the actions of its own people and the headaches it causes to Asian nations which have been irritants, enemies or frenemies to the US. A key example is Iran: as a Shia nation bordering largely Sunni Afghanistan, the Taliban’s surge makes life more complex for Iran. Clearly Iran has some influence with the Taliban, as the Conversation notes “Iran’s influence on the Taliban can be gauged by the fact the group’s leadership participated in the Shia’ Majlis (a religious council delivering sermons) in Kabul after its takeover, which is highly unusual for the extremist Sunni Taliban.” But since most Iranians want a limited state and nothing to do with the Taliban, the Iranian theocracy are playing with fire that likely backfires on them based on the poor experiences other nations have had in dealing with the Taliban.

A case in point is Pakistan, which borders Iran and Afghanistan. The same article notes “In the past, the Taliban leadership had three consultative councils, known as shuras, based in Pakistan. At least one of these shuras, based in Quetta, still probably seems to be operating from Pakistan.”

And since Pakistan is playing a double game that has double consequences, the markets are not bullish on Pakistan, and are in fact taking the Rupee down. The article further notes “Pakistan can lose from the Taliban’s ascendancy, as well. If the Taliban fails to ensure stability, this can trigger another wave of refugees crossing the border. The Taliban’s takeover could also embolden domestic terror groups within Pakistan.”

So the days of Iran & Pakistan exploiting America’s problems in Afghanistan are about to end, and a new era of managing the Taliban have begun. This means Iran and Pakistan likely get closer to Russia instead of the US, which is expedient but a poor choice for these nations, as Russia is a chauvinistic nation with a strong Christian bent and anti-islamic history.

Another key issue the market is shrugging off is how Europe deals with potential migration. As Eurasia Group noted to CNBC: “...the European Union’s concerns about an influx of Afghan refugees may be overblown since the bloc has taken steps to reduce irregular migration…Additionally, anti-refugee sentiment in Turkey — where many refugees normally travel through — could mean President Recep Tayyip Erdogan may take a tougher stance against migrants. Any refugee influx that reaches the EU will likely be “manageable,” Eurasia Group said.”

So the market is not afraid for Europe and applauds Biden’s move to shift Afghanistan’s problems to Asian neighbors. Finally, there is the possibility that Biden is managing the situation rationally in the interests of America. As noted by David Ignatius in The Washington Post “A de facto U.S.-Taliban alliance against Islamic State extremists was outlined to me more than two years ago by Gen. Austin “Scott” Miller, the last U.S. commander in Afghanistan. In interviews in Kabul in July 2019, Miller and his colleagues described operations in Jowzjan and Ghor provinces in the north, where U.S. counterterrorism forces had killed top Islamic State leaders and Taliban forces had then consolidated control on the ground. Earlier, the United States had waged a relentless drone campaign against Islamic State leaders in Nangarhar, in eastern Afghanistan, with the Taliban’s quiet acquiescence.”

Moreover, the diversity within the Taliban is not only what one would expect in an organization with 30 years of dynamic history, but also confirmed by people who have interviewed low level Taliban. Here is a source:

https://www.c-r.org/accord/afghanistan/possibilities-peaceful-political-future-perspectives-leaders-five-taliban

A similar conclusion is echoed in the Ignatius op-ed, where he notes a high-level American diplomat named Carter Malkasian who said this: “One reason the Taliban balked at a real truce, according to Malkasian in his new history, “The American War in Afghanistan: A History,” is that its leaders feared that militant fighters would defect to the Islamic State and other radical groups. The peace deal itself was rushed and haphazard because Trump’s “impatience stampeded Khalilzad into giving a lot while the Taliban promised little and gave even less,” Malkasian writes.”

The Taliban is clearly frightened of their own radical elements, and need to hold things together by getting as much power as possible as quickly as possible, which is what they have done. Since they will have trouble governing due to their internal diversity, as well as troubling relations with their neighbors, Biden is effectively telling the world the Taliban has peaked and now its troubles really begin, and Afghanistan is only important to the US for one reason: should Al-Queda resumes operations in Afghanistan, it’s back to the post-9/11 policy of bombing and hunting them down to the detriment of the Taliban.

Yesterday I sold my position in American Express (AXP) and my current market positions are in Facebook (FB), MKS Instruments (MKSI), Starbucks (SBUX), and a short position in the SPX (SPXU).