Geopolitical Developments: Pulling Out of Afghanistan Was Smart Geopolitically, But Consequential Domestically Too

The fallout from the tragic pullout of Kabul last week continues to rile Biden as progressives and conservative democrats like Joe Manchin and former senator Heidi Hietkamp are putting his economic agenda in peril. Ironically it’s principles winning out over party loyalty. That’s a modest negative for the markets, but optimism still reigns a deal will be done and other issues like the Debt Ceiling won’t be get caught up in a political brawl. 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 several positive factors for US stock: oil's chart is signifying global growth, while the action in major currencies indicates the $US is weakening, though other commodities have not risen to reflect this. Expect the S&P 500 to rise modestly over the next few days.

Pulling out of Kabul remains a positive for markets as long as democrats don’t self-destruct on Biden’s key priorities. By unloading Afghanistan onto China, India and Pakistan, Biden erases a major distraction but at a humanitarian cost and to the benefit of Russia. But as I noted in Tuesday’s posting Russia can’t leverage geopolitical wins into economic gains or profound geopolitical influence. And as pointed out on oilprice.com, Russia is not just facing the indignities of US-led sanctions, but a new policy coming 5 years from now that will stunt its economic power even more. This is the carbon border tax. They note:

“The European Union's carbon border tax, to enter into effect in five years, was conceived with the idea of leveling the playing field for European industrial producers and importers who manufacture their goods in much laxer emissions-related regulatory frameworks. But the border tax could have a welcomed side effect for Brussels: it could have a more devastating effect on Russia's economy than sanctions.

This is the warning Rosneft's head, Igor Sechin, recently gave President Vladimir Putin in a letter detailing the steps that could be taken to address the emissions problem, per a report in business daily Kommersant. According to the letter, initially, the carbon border tax would affect Russia's exports of metals, fertilizers, electricity, and cement, but could later expand to oil products, of which Rosneft is the largest Russian exporter, Kommersant wrote…However, the EU carbon border tax mechanism is not the only emissions-related problem looming on Russia's industrial horizon. The United States is considering its own version of a carbon border tax, and none other than the International Monetary Fund recently proposed what it calls an international carbon price floor…Carbon taxes, therefore, are increasingly looking like they will be a fixture of the global economic future. Russia is among the top five emitters of carbon dioxide, so the losses it could suffer from such taxes would only rise in the future…”

Constraining Russia is a major geopolitical objective that concurrently makes the markets bullish. Russia is a chauvinistic nation seeing itself as the New Jerusalem and thus will rule out nothing in harming the West whenever its interests can be furthered. The combination of western geopolitics and environmental/ESG demands from leftwing consumers and centrist investors is a two punch that keeps Russia an irritant rather than a threat to the West. This is one reason I believe the geopolitical foundations to the bull market are sound, with only the volatile Kim Jong Un being a true threat.

Yesterday I added a position in Johnson & Johnson (JNJ), and my other current market positions are in Pfizer (PFE) and Starbucks (SBUX), and a short position in the SPX (UPRO and SPXU).