Investors may have underestimated the biggest risks. Imagine that.
While there’s no straightforward, mechanical read-through for markets from the fall of Afghanistan to the Taliban, it wasn’t a positive development. In many cases, the resolution of a conflict reduces uncertainty, even if the outcome is decidedly suboptimal. This isn’t one of those cases.
As it turns out, many fund managers were likely just as surprised by the Taliban’s rapid takeover as The White House. “Geopolitical risk was not at the forefront of investors’ minds as expectations of risk fell -2% MoM to 41%, lower than the long term average of 52%,” BofA’s Michael Hartnett wrote, in the color accompanying the latest edition of the bank’s Global Fund Manager poll. The survey period ended just days before Taliban reclaimed Kabul.
On Tuesday, the US froze some $9.5 billion in Afghan central bank assets, a sizable percentage of which is held in accounts with the New York Fed. The Taliban won’t be able to access the funds. Shipments of dollars to the nation were suspended.
Again, I doubt the situation in Afghanistan is capable of destabilizing markets by itself, but let’s not forget that while America’s two-decade involvement in the country was a textbook case of mission creep gone horribly awry, there was a reason the US invaded and toppled the Taliban in the first place. The group may decide that winning international recognition is more important than providing a safe haven for ideologically-aligned extremists in the near-term, but who knows how things will unfold after Moscow and Beijing recognize the government in Kabul. Once the Taliban has Security Council cover, it’s possible they’ll abandon pretensions to “inclusion” and jettison pledges to prevent the country from becoming a haven for groups planning extraterritorial attacks.
So, that’s geopolitics. As for that “other” problem, the figure on the right (above) shows that while COVID concerns rose materially from July to August, just 19% identified the Delta variant as the biggest tail risk. Inflation jitters moderated, but still topped the list.
Over the past several days, it’s fair to say news around the pandemic deteriorated meaningfully. New Zealand’s new lockdown turned Wednesday’s RBNZ decision into a coin toss. Ultimately, the bank left rates unchanged. Oh what a difference two days and one asymptomatic case makes. “The Monetary Policy Committee agreed to retain the current stimulatory level of monetary settings, keeping the Official Cash Rate at 0.25% for now,” Wednesday’s statement read. “Today’s decision was made in the context of the Government’s imposition of Level 4 COVID restrictions on activity across New Zealand.”
Although there was ample justification for a (previously consensus) rate hike, the prospect of an outbreak and the potential for Jacinda Ardern’s “snap” lockdown to be extended, changed the game. Traders are now compelled to reassess the outlook. On Wednesday, the country confirmed that the case which prompted the lockdown was the Delta variant. Four new cases were identified, each tied to the first.
Meanwhile, Texas Governor Greg Abbott tested positive. He was fully vaccinated. News of Abbott’s breakthrough case comes amid a bitter dispute over mask mandates and other COVID protocols, which the governor is against.
In March, when Abbott declared Texas “100% open” and dropped mask mandates, Joe Biden accused him of “Neanderthal thinking.” Fast forward less than six months and Texas is in crisis. The positive-test rate in Houston is nearly 20%, for example.
Down in Florida, where Ron DeSantis is fighting tooth and nail to preserve parents’ “right” to choose whether their children wear masks to school, DHHS data suggested the death toll from the latest surge is mounting (figure below).
One wonders if DeSantis will relent if the worst case scenario unfolds and children start dying.
In Palm Beach County, there were more than 550 student cases as of Tuesday evening, according to data published by the school district. A similar dashboard for Hillsborough appeared to show more than 700 new student cases reported over just 48 hours early this week. Hillsborough reported a total of 8,771 cases from March of 2020 through the first of this month. In just a little over two weeks, it reported 1,603 infections.
On the bright side for markets, trends like these aren’t conducive to policy tightening. So, traders needn’t be overly concerned about the second biggest tail risk on BofA’s list. Just ask RBNZ.
I think Afghanistan is sort of a generalized reminder that we can get surprised, but not a material market factor in itself. More terrorist attacks a year from now is, well, a year from now.
Covid has stomped back on the scene, jealous of the attention paid to inflation or whatever. I think about a month ago we talked about that in the comments, and noted that a resurgence of Covid, especially in China, was a real risk that was getting overlooked.
What’s the rule of thumb? When risk X is the lead story on every news media source you can find, then X is probably fully discounted in prices, and you need to be looking for the next risk Y. We’re surely very close to that now, for X = Covid. So we’re probably very close to being too late to sell X, if not already there. And we need to be focused on the risk Y. What is Y?
Y = climate change and all of its implications.
Even though many people are (still way to slowly) starting to get the idea that blowing ever more greenhouse gasses into the atmosphere is not going to benfit mankind, I do not believe the consequences, even the short-term ones, are in any way “priced in” into anything.
imho one great and vastly underappreciated risks is large scale crop failure due to, for example, exceptionally long dry periods followed by torrential rain.
As stated in a previous article (can’t remember the title) famine is a policy choice in almost all countries in the world.
Modern mankind simply cannot imagine to live through periods of food scarcity.
While even really bad harvests would probably not be sufficient to put a dent into the worlds population, simply deverting crops away from feeding animals to humans, would be enough to freak people out. Especially so in western societies with their meat-heavy diet.
It really bother me that anyone is suprised by Afghanistan. This is not a geopolitical risk. This is a profound moral risk. That poor country has been at war for a very long time and this is the second time we abandoned them. Insanity. Then again, how many times did we harn the Kurds? When we invaded Afghanistan, we should have left after six months, and let the Taliban know that any more trouble from their country and from their organization would be dealt with severely. Democrats and Republicans alike fucked up.
Listing ‘tail risks’ hazards the presumption that they are each separate. But we know many linkages exist between them. Inflation is linked to supply chain interruptions which can result from Covid lockdowns or geopolitical kerfuffles.
Take ‘China Policy’ for instance. A motivated RBOC can pull the devaluation card. Is that risk in markets’ cross-hairs? What about following through on the previous threat to strangle exports of rare earth products? With today’s world, singularly dependent on China for those products, the linkage to inflation is a trivial leap.
All that aside, where the hell is climate change on that list? Crop failures? Give me a break. Soylent Corp is standing by to handle the business of keeping us fed. What, Me worry?
Biden announced last April that all US troops would be out of Afghanistan by September 11. Did anyone honestly think this final step would go smoothly? I can not imagine that the country will not now erupt into a massive civil war, but hopefully, the Taliban and Al Qaeda do not join forces or decide to co-exist (potential big tail risk for US equities). The other “hope” is that the US and other “civilized” countries will provide a home to as many “vetted” Afghans as possible, on a humanitarian basis. The women are really going to be in trouble over there. I believe the Taliban’s direct quote was that the rights of women “will be respected within sharia law”. They might as well just said, “Here’s Johnny”.
How would there be a civil war in Afghanistan? That would require a second, competent militia to take on the Taliban and I don’t believe that exists.
Afghanistan has been, always will be fiercely tribal…..the Taliban are well financed and armed…..burrowed in rugged, barely accessible mountains…..patiently .waiting for the inevitable…. .in 20 years if the US could not train a competent army and police force…..lost cause comes to mind…..
Wait and see. There are enough ethnic divisions that one will eventually materialize.
Between a $65B annual poppy farming industry and a $2-3T cache of rare earth metals, including lithium- who knows what will happen between the Taliban, China and Russia.
Throw in 20 years worth of weaponry, courtesy of the USA, and as much as I love the mountains, pretty sure I won’t be visiting Afghanistan, as beautiful as parts of that country must be.
Geopolitics is hard to figure- like figuring out bond rates. Somewhat unpredictable. So China and Russia live in the neighborhood. And they have Muslim populations. The changes going on in Afghanistan provide them plenty of risk. The most interesting case is Pakistan- can you say, “be careful for what you wish for” to their notorious intelligence service.
The Florida schools mask policy has nothing on Texas.
New Guidance from T.E.A (Texas Education Authority) https://finance.yahoo.com/news/new-texas-school-guidelines-rattle-medical-experts-161539300.html
1. Schools DON’T have to inform parents of a POSITIVE CASE.
2. Schools DON’T have to conduct CONTACT TRACING.
3. If a school does contact trace, parents CAN STILL CHOOSE TO SEND A CHILD TO SCHOOL if they are a close contact of an infected student.
Texas is about show why everything is bigger in Texas, including pandemics.
Climate change mentioned twice in the comments.
David Attenborough says we’ve got about 7years (at the end of his 2020 documentary “Breaking Boundries”) to completely eliminate GLOBAL greenhouse gases emissions, bring them to net zero. If we pass that it is game over.
Talk about timing the market, I’m trying to figure out when to get out for good. And what to do with the cash. Buy land? Buy beans?
I don’t know how literally I take that, but even at full literal, he’s not saying it is “game over” in seven years.