U.S. Army soldiers in Kuwait board an aircraft to Afghanistan in support of Operation Allies Refuge on Aug. 13.
U.S. Air Force/UPI/Shutterstock
The contrast between Wall Street and the rest of the world rarely has been this stark. Notwithstanding the U.S. foreign policy-debacle with the Taliban’s takeover in Afghanistan, the stock market is extending its long winning streak with barely a hiccup. Perhaps with good reason.
While images of the chaos in Kabul are filling the news, the events there probably will have limited macroeconomic impact, argues Matt Gertken, BCA Research’s head of geopolitical strategy. In fact, the devastating setback will free U.S. foreign policy to focus better on theaters of greater strategic importance. “We’re at a critical juncture with Iran,” Gertken tells Barron’s. The U.S. will also gain greater maneuverability in dealing with China, its main geopolitical and economic rival, he says.
Looking ahead certainly is more productive than dwelling on comparing the U.S. pullout from Kabul with our exit from Saigon in 1975, or playing the blame game about the stunningly swift collapse of the U.S.-backed Afghan military and government.
After all, President Joe Biden’s decision to remove American troops from Afghanistan after 20 years was in line with popular opinion. Remember, Gertken notes, President Donald Trump was an antiwar Republican who defeated Democrat Hillary Clinton, a stronger proponent of military offensives. “I don’t see the withdrawal in itself being a lasting problem for Biden,” Gertken contends, adding that negotiations with Iran are more important. “It is possible for the U.S. and Iran to somewhat normalize relations, and that would be a gigantic event in geopolitics,” he says, warning that the window for detente is narrowing in the intermediate term.
With Iran no longer subject to a “pincer movement” by U.S. troops in Iraq and Afghanistan, Tehran could feel emboldened to pursue more rapid uranium enrichment, moving toward an eventual capability to produce nuclear weapons. “If that happens on Biden’s watch, we will look back and say, not only did we have a ‘Saigon moment,’ but it became even worse because it exacerbated the conflict with Iran,” Gertken says. “And Biden will look like he has mismanaged U.S. foreign policy dramatically.”
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But the odds favor a less dire outcome.
Much will depend on the decision of Iran’s supreme leader, Ayatollah Ali Khamenei, not the recently elected hawkish president, Ebrahim Raisi. Khamenei, 82, was behind the 2015 nuclear agreement, but faces pressure from several sources, including U.S. economic sanctions, incipient social unrest, and questions about who will succeed him. Making a deal with the Americans during the succession would enhance the regime, Gertken observes. “And remember, they don’t have to give up their nuclear program just to rejoin the old deal, which has a time limit.”
No longer being “bogged down in the Himalayas” increases Washington’s maneuverability with Beijing, in the BCA strategist’s view. After the mess in Afghanistan, some in China’s leadership might view the U.S. as ineffective, self-doubting, and inept, and might seek to exploit America’s perceived weakness. Still, he says, the U.S. will gain capability to counter Beijing as it shifts its focus to the Asian-Pacific region, including devoting more resources and attention to shoring up economic and military ties there, Gertken writes in a note to BCA clients.
The Chinese are likely to “double down on their Eurasian strategy because they know they can’t defeat the U.S. Navy,” he maintains. China will try to increase its influence in Pakistan, Afghanistan, and central Asia, he predicts. Indeed, Beijing already is reaching out to the Taliban.
But China depends on Middle East oil, which gives the U.S. enormous leverage, given its influence there. “That again is why the negotiations with Iran and the Persian Gulf will remain the central focus for the economy globally, rather than Afghanistan,” Gertken says.
The market impact of these developments likely will be felt in currencies and crude.
While America’s twin deficits in the federal budget and trade normally would be negatives for its currency, geopolitical tensions are likely to make the dollar more resilient. Moreover, those deficits actually give the U.S. greater influence, Gertken adds, because America is the No. 1 consumer market for exporters around the globe. The U.S. also has the world’s main reserve and transaction currency, the dollar. (For why that’s important, see the Aug. 16 Up & Down Wall Street column.) China’s slowing economic growth also will provide a base of support for the greenback during a period of geopolitical uncertainty, he says.
As for oil, tensions in the Middle East could lift prices. But Gertken says that OPEC 2.0 has regained discipline after last year’s market-share wars. The group won’t want prices to rise too high, which would accelerate global green-energy efforts. The most likely outcome is increased volatility in petro markets. The near-term trend is decidedly negative, however, with crude down 15% from its mid-July peak, based on macroeconomic fundamentals, notably slowing demand, owing to the spreading impact of Covid-19’s Delta variant.
Nothing can change what’s transpired in Afghanistan. But now, at least, U.S. foreign policy can fully focus on what matters more for the future: Iran and China.
Read more Up and Down Wall Street: The Fed Is Trying to Sort Out Its Bond Buying. Here’s What It’s Looking At.
Write to Randall W. Forsyth at [email protected]