Benefit Of The Doubt

It’s “unclear” whether the Delta variant will have important effects on the economy, Jerome Powell said Tuesday, during remarks at a town hall event with students and educators.

What’s more clear, he suggested, is that COVID-19 will be with us “for a while.”

Powell’s comments came on a day when US equities fell the most in weeks amid concerns about consumer psychology, ongoing jitters around China’s seemingly endless regulatory onslaught and a generalized sense of angst on the geopolitical front, as the world pondered the oxymoronic notion of a “moderate Taliban.”

Read more: Wary Eyes, Familiar Concerns

“The Taliban will seek international legitimacy to gain access to trade, as well as selective infrastructure and development assistance,” Stratfor wrote, in a short assessment, adding that,

Such legitimacy, which was denied to the Taliban in the 1990s, would also reduce potential external support for anti-Taliban movements inside Afghanistan. Russia is a particular concern, given its continuing relations in Central Asia and the history of ethnic conflict in Afghanistan. Recognition from China or Russia would also help shield a Taliban-ruled Afghanistan from UN Security Council actions. If these benefits outweigh the perceived benefits of allowing attack planning and training from inside Afghanistan, the Taliban may well be willing to selectively constrain the operations of its current partners, at least over the next year or two.

On Tuesday, the group sought to allay international concerns about its commitment to ensuring the country doesn’t become a haven for ideologically-aligned militants and extremists. Needless to say, the world isn’t convinced. Even nations predisposed to giving the Taliban the benefit of the doubt are skeptical.

Markets are willing to give them the benefit of the doubt, though. Tuesday was a bit of a rough ride on Wall Street, but it hardly counted as a bad day in Kabul.

“The fact that markets could shrug off what’s happening in Afghanistan is as damning of their lack of vision as it is of everyone responsible for the debacle inside the Beltway,” Rabobank’s Michael Every wrote, in a particularly pointed Tuesday missive. “US liberal-neocon imperialist nation-building is over,” he went on to say, adding that,

What we have left is the raw realpolitik of the US national interest and even where there is a national interest, the US will not fight for those who will not also fight for themselves. Let that settle in for a moment and consider the long-run implications for a world grown fat and lazy on the presumption of the US defense umbrella being there forever, for all, come rain or shine.

Although Every’s account struck a lot of the “right” chords from a kind of critical, cross-disciplinary perspective, the (admittedly lamentable) reality is that from a purely “because markets” perspective (as he’d put it), it wasn’t immediately clear why traders and investors should care. There’s no obvious hedge for the demise of the American military put, and there’s no ETF for playing the end of US imperialist nation-building. There are, however, ETFs for playing the rebuilding of America’s own nation, and that’s all most investors think they need to know.

Joe E*Trader and Plain Jane read a dozen generic “5 Ways To Play The US Infrastructure Boom” articles over the past two weeks. If they clicked on even one article about Afghanistan, you can be sure it was only for the videos. The average American would be more likely to say “Kabul” is a board game (a new, improved version of Scrabble maybe) than to identify it as the Afghan capital.

And don’t forget, there is plenty of demand for “crash.” Superficially, at least, folks are nervous despite the calmest market since the short vol bubble. “Outside of [the] decimated index-level realized volatility in isolation, many volatility metrics continue screaming ‘YIKES!,’ which is why we continue to see super ‘nervy’ jumps in the VIX space on utterly negligible moves lower in spot in recent months,” Nomura’s Charlie McElligott said Tuesday, before elaborating on a broken vol complex,

This is about complete and utter imbalance in the enormous demand for term volatility, versus little to no supply of volatility that’s not short-dated. Dealers can’t be short skew / crash / tails / gamma without causing knock-on into even more extreme vol metrics as they need to hedge themselves likely via liquidity from other risk-constrained dealers and a downsized market-maker liquidity profile.

So, you get a stark juxtaposition between what Charlie (very aptly) described as “super-tense, tightly-wound” vol metrics and crash pricing on one hand, and decimated realized vol on the other. “Eventually,” the two “will have to converge,” he suggested.

That makes it somewhat difficult to know what’s real angst and what’s just a function of supply/demand imbalances in vol land. And all against what, at least on Nomura’s models, is extreme exposure from vol control and CTAs, as rangebound equities dictate large “adds” in the former, while the latter loads up into a trending market.

Considering how many hats he’s been forced to wear over the past 15 months, it’s somewhat surprising that Powell hasn’t been asked to provide market participants with the definitive assessment of where things went wrong in Afghanistan, and also whether the Fed would be prepared to “respond appropriately” if the situation were to deteriorate — say, by pushing back a taper announcement until it’s clear the Taliban really are committed to forming an “inclusive” government. After all, isn’t inclusivity part of the Fed’s mandate now?

In a summary of Powell’s town hall event, Bloomberg managed to pack more irony into one bullet point than a US president explaining a bungled exit from a misbegotten war. “Powell recommended a few books for teachers and students who want to better understand the Fed,” Ye Xie wrote, adding that his recommendations “included Paul Volcker’s ‘Keeping At It,’ an autobiography co-written by Christine Harper, the editor of Bloomberg Markets magazine.”