Sustainability Arbitrage LLC and 2021 Surprise Forecast
Gregory C. Beier
Macro ESG Strategist & Founder
Sustainability Arbitrage LLC
Monday, December 14, 2020 11:40PM ET
“Markets, politics, and technology for a sustainable future.”
I am pleased to announce that Macro ESG is now the research product of Sustainability Arbitrage LLC, a company that I founded. Macroesg.com will be the research portal for Sustainability Arbitrage.
BBC Radio Appearance
As this weekend marks the 5-year anniversary of the Paris Agreement on Climate Change, I had the great pleasure of appearing on the BBC’s radio program Over To You that aired this Saturday to ask the presenters, Neal Razzell and Graihagh Jackson, of the BBC’s new climate change program and podcast, The Climate Question, a question (at the 5 minute mark) that’s been on my mind.
Pink is controlled by the Kabul government and white by the Taliban. Source By Ali Zifan, CC BY-SA 4.0
Pink is controlled by the Kabul government and white by the Taliban. Source By Ali Zifan, CC BY-SA 4.0
2021 Surprise Forecast
I believe that a significant surprise event likely to happen in 2021 will be the massacre by the Taliban of mid-level and low-level collaborators in Kabul, Afghanistan. I have not seen this idea stated anywhere and as it is so obvious – it leads me to believe that this could be a surprise with power in the markets.
The US is drawing down forces to 2,500 while Afghan government air attacks on the Taliban are already creating the highest Afghan civilian casualties ever (a sign of Kabul’s desperation). Moreover, 5,000 Taliban prisoners were released in a deal between the US and the Taliban over the objections of Kabul which will likely raise morale in the Taliban ranks.
What’s also worrying is that the leaders of America’s foreign policy and intelligence establishment are worn out and exhausted from their years of effort that have failed, so they are exasperated with their counterparts in Kabul – they are ready to be rid of the whole thing. And the Afghan elites are ok with a loss – they have squirreled away so much money, that they will be fine.
But the Taliban fighters have endured countless punishing air attacks and have lost a great many friends and relatives. They are going to be out for blood when they take control of the country. And that is exactly the problem.
Why? Because it will likely happen during the Biden Administration’s first year in office, when President Biden will be seeking to reassert America’s position at the Head of the World Table and reinvigorate unity amongst the leading democracies.
The Taliban massacre in Kabul – or perhaps more accurately – the systemic retribution of foreign collaborators (the Taliban have their own people in Kabul to note who did what), will revive memories of the Fall of Saigon, generate a national dialog about the thousands of American service members who died and suffered life changing injuries – not to mention the spectacular cost of the endeavor – all of this will stir-up the painful failed decade of the 70’s for America. If these executions are broadcast, the impact will be higher.
And as Joe Biden and much of his team were part of the Obama Administration – they will have to accept partial responsibility for the failure in Afghanistan, and more so for Mr. Biden who was in the Senate approving the war in Afghanistan and its subsequent operation before 2008.
Russia and China
America’s adversaries are going to push this development hard.
The Russians are still angry about the US carrying stinger missiles into Afghanistan on pack mules with Navy SEAL teams that ended their war there. So, they will not be friendly. The Russians will use the failure in Afghanistan as a wedge between the US in NATO. That is to be expected.
But it is the engagement of China that presents the real wild card. If China is linked to helping the Taliban take control in any way, there is the small yet interesting chance that this could spiral into a serious military confrontation between China and the US. Afghanistan has huge, untapped mineral deposits so that would be China’s incentive combined with a desire to benefit from another failed US foreign adventure – China is Iraq’s number one buyer of crude oil now.
In fact, the Russians may have an interest in getting the US and China into a fight. A standoff between the Americans and the Chinese would drive up the value of its precious and industrial metals and would also mean that the West would not be scrutinizing Russia so much for human rights violations. It may even, temporarily, help push up crude oil prices.
I find it shocking that nobody is considering the realistic outcome of events in Afghanistan. As Iran now controls Iraq such that even an Iranian journalist living in exile in Paris was lured back to Iraq and arrested by Iran for fomenting public demonstrations over a rise in food prices a few years back, was hanged this weekend in Iran – why couldn’t China end up controlling Afghanistan with the same effect?
As China’s biggest problem is securing its energy supplies over sea routes – hence the “8 dashed lines policy” in the South China Sea, China could take advantage of the British trick when it used a sliver of Afghanistan to separate India from Russia at the height of The Great Game. That spit of land on the map is sufficient for China to build a pipeline to Iran, Iraq, and the petro-states of central Asia.
China could offer the Taliban their first ever partner in development. China’s primary interest is the mineral wealth of Afghanistan which could be eventually followed by a land route to the major oil fields of the Gulf. And China could run the whole thing over a slice of land that is 200 miles long and no narrower than 20 miles - right from China’s border.
And as the Taliban could use a friendly foreign partner, once they started making money from the venture – it could become a major boon to them.
And if the Taliban decided to reneg on a deal with China – then China could either pull the deal or invade, and they would hold the country with a brutality that even the hardened Taliban would wince at. And as the Chinese have Xinjiang solidly locked down now, they have no blowback risk at home.
Conclusion
While the world aspires to go clean energy on the fifth anniversary of the Paris Agreement that prompted another virtual gathering of world leaders and Tesla is added to the S&P500, the ugly geopolitical truth is that China is likely preparing to take control of Afghanistan’s mineral wealth and build pipelines west from their border through Afghanistan to the oil of the Persian Gulf.
Investment Implications
This is an inflationary event though likely deflationary on a 5+ year basis.
It will create a genuine moment of crisis in Europe about trusting American leadership and will dampen enthusiasm to strike up the old alliance.
If China is found to have any role in supporting the Taliban, then US politicians will come together and go after China in a way where events could get out of control.
If events do start to take on a dangerous life of their own, then we may be in a for a perfect setup for US Treasuries to be sold off and interest rates to rise – which would knock equities down. And as low interest rates seems to be a fait accompli now - that change would really roil the markets.
With America’s standing in question, interest rates rising, and equities down – where the dollar finally settles would ultimately depend on how the diplomatic and military options are resolved.
How Joe Biden Can Fix This Problem
(added 7:45 pm ET 15 December 2020)
I forgot to include a list of ways that the Biden Administration could turn Afghanistan around in the piece as I often end on Investment Implications. In light of the anonymous car bomb assassination of the Deputy Governor of Kabul today - it looks like it is becoming more important than ever to think through the long-term game plan.
If President Biden recognizes the likely threat that America’s exit from Afghanistan poses to his plan to reassert US global leadership, manage China, and foster a positive growth environment, then he could change what happens by getting the people out who are likely to be harmed.
Once it’s clear that the Afghan National Government is not going to be able to hold, the US and its allies would need to begin an airlift of people likely to be targeted out of Afghanistan and distribute them across the developing world: Africa, Nepal, Southeast Asia, and Latin America would all be fair destinations. Anyone who worked directly with the US and NATO military as an interpreter or in a similar support role of high trust should be offered asylum in the US and NATO countries.
This would prevent a bloodbath which would be a destabilizing way to end the war. It would also open the door to other more creative solutions that could avert the other risks described above that are beyond the scope of this 2021 Surprise Forecast.