AFGHANISTAN FOR MARKETS: INCREASED GEOPOLITICAL RISKS, DOMESTIC POLITICAL DISRUPTION

(This is Pangaea's recent full note on Afghanistan implications for markets in the short, medium, and longer term.)

August 15, 2021

AFGHANISTAN FOR MARKETS: INCREASED GEOPOLITICAL RISKS, DOMESTIC POLITICAL DISRUPTION

The size and speed of Afghan disintegration, largely unanticipated by US policymakers, is the clearest evidence yet of rising geopolitical strains that will affect markets and likely creates larger aftershocks than most anticipated.?

• In the short term, the defense sector likely is market positive and ‘Green New Deal’ sectors and industries likely are market negative, as the already 30% likely “human infrastructure” initiative becomes even less likely to become law thanks to new focus on defense readiness.??
• In the longer term, there are many types of geopolitical and domestic political disruptions, from emboldened China, Russia, Iran, and North Korea, to an increased likelihood of at least one house of Congress going Republican.?
• Politically, in part thanks to Afghanistan, Biden increasingly is losing Democratic centrists, independent voters who put him in office, the US foreign policy establishment, and the mainstream media. That downward arrow will be difficult for Biden to correct and today threatens to put his presidency in disarray.?

The most likely short-term market impacts:?

Market positive for the defense sector?due to the now-likelier defense spending increase for the next fiscal year to shore up and demonstrate renewed US resolve and vigilance on both organized and terror threats.?

Market negative for Green New Deal-related sectors and industries?thanks to?

• The Washington policy shift to improving immediate security needs;?
• Decline in influence by progressive GND champions?whose foreign policy and domestic views are increasingly isolated within the Democratic party and are not shared by the vast majority of the public;?
• The already apparent lack of support for much of the GND agenda even within the Democratic party,?and the increasing desire of Democratic centrists not to be identified with progressive priorities to bolster centrists’ chances of 2022 reelection.?(More on that below.)
• All are major reasons for our view that the “human” infrastructure concept is only about 30% likely to become law at $3.5T and must become much smaller (~$2T) for Democrats to unite and get it passed under the simple majority “reconciliation” process.?

In the medium and longer term, there are many significant likely disruptions to US geopolitical interests and US domestic politics that affect markets.

Top increased geopolitical risks include:?

• Increase in US terror possibilities from Afghanistan and the region.??Today the Chairman of the Joint Chiefs of Staff told Congress that the terror threat assessment from Afghanistan would be revised, implying that the only direction for that revision is up.??
• US loss of power and influence in Asia largely negating 20 years of effort.
• Lack of allied confidence in US security assessments/resolve:?if the US foreign policy team could get Afghanistan this wrong this fast, what else in the world situation might it be missing??And, will that affect allies’ views of desired US policy direction on China, Russia, Iran, and North Korea??
• An emboldened China?that redoubles efforts to increase its own influence and fill the US regional vacuum, and senses US weakness in Asia that could affect its strategies and tactics to take Taiwan and establish its desired Asian security dominance.?China already thought the Biden “containment” strategy lacked teeth and resolve, and likely feels confirmed in that judgment today.
• An emboldened Russia?that increasingly acts in furtherance of Chinese interests in exchange for economic support.?
• An emboldened Iran?that likely now is even more likely to push its agenda and not agree with denuclearization efforts, or at least demand much more concessions from the US and allies.?
• An emboldened North Korea?that likely will make the same calculations.?

Top domestic US politics disruptions: the fall of Kabul is a Biden negative with politicians and voters.?Partially thanks to Afghanistan, Biden is losing Democratic centrists, independent voters who put him in office, the US foreign policy establishment, and the mainstream media.?That downward arrow will be difficult for Biden to correct.?

Both the reality and optics of the Afghanistan fall make it harder for the “human infrastructure” legislation to succeed, because there’s now even less incentive for centrist Democrats in Congress to support anything that’s on the progressive wishlist, and also less incentive for Biden to support it.?

• That already was starting to be the case last week, as centrists crucial to the House Democratic majority told Pelosi they would not support her holding the Senate-passed “real infrastructure” bill hostage until the “human infrastructure” bill is agreed to.?Pelosi already is maneuvering to head off the likely collision.?
• It will be even more true going forward post-Afghanistan.?
• As long as Biden looked like a safe, secure, and boring bet with the public, centrists could use that smokescreen to go along with progressive priorities proposed by Biden.??
• But Biden promises of competence and certainty from government are evaporating quickly on a number of fronts, and the Kabul/Saigon optics likely become a prime and sustained symbol of undermined centrist voter confidence in Biden.?
• Centrist Democrats now won’t trust Biden’s team on foreign policy, and it’s only a short jump for them to think Biden’s team doesn’t have the proper answers on domestic policy, either - at least ones that might help centrists get reelected in 2022.?
• It’s increasingly every centrist Democratic Member/Senator for him/herself, and they will have less problem bucking their leaders and trying to preserve their own seats, because…..

There’s now an increased likelihood of at least one house of Congress becoming Republican majority in 2022.???

• The evolving redistricting maps following last week’s census results already likely tilt towards Republicans, particularly in the House.?
• Combine that with the Afghan disaster, inflation concerns, and other strains, and the suburban independents who put Biden in office are poised to flee.?
• It’s too soon to call one or both houses for 2022 - until redistricting is finished and candidates are selected, that can’t be done - but the direction of travel already was largely Republican, and Afghanistan boosts that.?

The US Afghan withdrawal strategy disregarded the views of the US foreign policy establishment, a disruption that undermines confidence in US foreign policymakers and won’t easily be repaired or papered over.??Council on Foreign Relations head Richard Haass wrote in 2020, even before the Trump deal, "the US and its coalition partners would be wise to fall back on a strategy that protects their core interests, above all ensuring that Afghanistan does not once again become a haven for terrorists planning and carrying out attacks against the West.”?By JCOS’ admission, that’s a failure.?

The mainstream media sharply turned on Biden over the last week, becoming sharply critical of the Biden “shock” over Afghan events.?This MSM change likely affects Biden coverage in other areas as well, and with it public perception of the Biden presidency.?