Market Thinking

making sense of the narrative

One door closes…

Print Friendly, PDF & Email

As the twittersphere morphs from being experts on infectious diseases to experts on Geo-politics and ‘The Great Game’, it is worth remembering that it is an assessment of what policy will most likely be enacted by those in a position to do so rather than what we ourselves (or any other armchair experts) think should be done. Don’t fight county hall as they used to say. Thus as Covid recedes as a (bad) policy driver, the concept of the Shanghai Cooperation Council (SCO) and an emerging Central Asia economic and political power bloc emerges from the US retreat from Kabul. It is very early days, but an unbiased observer listening to what is being said by the Taliban (undoubtedly reflecting their SCO neighbours) should thus be encouraged at the prospect of a change and in the words of Ronald Reagan ‘trust but verify’. Meanwhile, as China, Russia and the SCO look to rebuild Afghanistan without any US influence, the blame game is escalating back in the US, which is not going to be pretty.

While on the one hand it seems at the moment that the correct answer to the question of “What is the difference between a Conspiracy Theory and the Truth?” is “about six months”, we are always conscious of the concept of Hanlon’s razor , which is that one should “never attribute to malice that which is adequately explained by stupidity“.

Thus when looking at the latest quixotic attempts to enforce Zero Covid in Australia, New Zealand and (for personal reasons particularly) Hong Kong, Hanlon seems more on the money than any conspiracy theory about Global control. However, with the latest moves that overnight switched enforced Hotel quarantine for anyone coming to HK from most countries in continental Europe from effectively one week to three weeks (!) on the basis of one helper testing positive from the US, one is reminded of a previous observation that “While the HK authorities probably don’t actually have a plan to get rid of all the expats, if they did have one, it would probably look exactly like this”.

In a similar vein, and from an historic perspective much more important, is the botched retreat from Afghanistan by the United States leading to ‘the fall of Kabul’ this week. In a carefully crafted but strangely delivered and ultimately surreal speech, President Biden repeated the reasons why the US was leaving Afghanistan, which few if any would disagree with, while carefully avoiding discussion, and indeed questions, as to how they were doing it. The conspiracy theorists are suggesting that in fact the US wants a civil war and something of a ‘scorched-earth’ policy so that its great geo-political rivals in China, Russia and Iran can not benefit from Afghanistan. Alternatively, some are suggesting that the mess is simply part of a plan of seeking to hand over the problems of Afghanistan to China in order to destabilise its rival. On balance though, we think there wasn’t really much of a plan and that Hanlon is probably right on this one too.

From an investment perspective, the timing is both interesting and ironic. The original, Trump negotiated, withdrawal date was May, but team Biden pushed it back to September 11th to mark the 20th anniversary of 9/11. The Taliban claimed that the reason they moved, and moved so quickly to Kabul, was to prevent looting and destabilisation taking place ‘in their name’ and there is no doubt that some of them, as well as many of their neighbours in the Shanghai Co-operation Organisation (SCO), will have been buyers of the ‘deliberate destabilisation’ conspiracy theory and in that sense encouraged the Taliban to move more quickly. As with many issues in the New Cold War between the US and China, it doesn’t matter whether the theory is correct (for example a belief in foreign interference in Hong Kong), policy will reflect belief. Moreover, this is not just about China, as the map shows, Afghanistan and its neighbour Iran are observer members of the SCO, shown in green, along with Mongolia and Belarus. The interesting story emerging here then is less the decline in influence of the US and more the rise in influence of the SCO.

The new power bloc, Shanghai Cooperation Members (blue) and observers.

Shanghai Cooperation Organisation Countries.

It is thus interesting to observe that while the western media is almost universally focussed on the downside of the US withdrawal (including, incidentally, harsh criticism from previously resolutely pro-Biden media in the US), the noises from Afghanistan’s SCO neighbours are much more positive and supportive and from an investor perspective it may pay to at least give the new regime the benefit of the doubt at the start. Certainly the initial news conference statements from the Taliban about no reprisals, the involvement of women and wanting no internal or external enemies are encouraging and the clear involvement of Russia and particularly China suggests at least the possibility of a Vietnam style rather than an Iraq style rebuilding.

Golden Anniversary of the end of the Gold Standard

The irony of the timing is that the Fall of Kabul, as dictated by the Taliban rather than the US government, came not on the 20th anniversary of 9/11, but on a different anniversary, the 50th anniversary of the closure of the US$/gold window by US President Nixon in 1971. This was a move that many, including ourselves, see as a major error, as it allowed a major expansion in the money supply at a time of increased attempts to regulate prices and markets and undoubtedly triggered a decade of stagflation in the US and the west. As previously noted, history may not repeat, but it rhymes (Mark Twain) and stagflation remains a serious risk for the west, especially Europe, if the wrong mix of policies emerges from the current ‘crisis’. To the extent that the exit from Afghanistan triggers a broader shift to ‘team SCO’ and a rejection of US influence, including in particular a move to trade in currencies other than the US$, it may well be that hindsight shows this as the beginning of the end for the $ as sole global reserve currency.

In the short to medium term it looks likely that all US influence will be purged from Afghanistan and, most obviously, telecom infrastructure in Afghanistan will be removed and likely replaced quickly with 5G, funded by the Chinese and supplied by Huawei. It is not that Afghanistan is a large economy so much as in the SCO working together to (irony alert) Build Afghanistan Back Better, they create a template that embeds the One Belt One Road initiative into the whole region and that the US sees a different type of Gold WIndow, the window to Asian Growth has closed.

Share this article