What does chaos in Kabul mean for the global economy?

The sudden collapse of the US-backed government in Afghanistan is tragic on many levels. The murderous Taliban regime is likely to seek revenge on thousands in the country who supported the previous administration and/or American troops. Women and girls will fall victim to a stone-age mindset on gender equality and will likely be forbidden from going to school, getting a job, driving a car, or tasting freedom. Thousands of brave American men and women answered the call of duty and made the ultimate sacrifice for a cause that was ultimately lost.

I will leave for the pundits to debate whether the US objectives could ever have been met, whether the government would have fallen regardless of when or how the American military left, or what this means to elections or politics in the US and elsewhere.

But I would like to opine on what it could mean for the markets and the global economy.

It may be tempting to conclude that it will mean nothing to global markets, or at least nothing bad. After all, Afghanistan has no real economy, although they are believed to be sitting on a wealth of rare earth minerals. According to the World Bank, “Afghanistan’s economy is shaped by fragility and aid dependence. The private sector is extremely narrow, with employment concentrated in low-productivity agriculture.” So the tumult there will have little to no impact on global trade, commodities, currencies, investment, or the other important economic indicators.

The refugee crisis that will ensue will impact the governments and economies of neighboring countries, Pakistan in particular. Though horribly tragic, compared to other refugee situations over the decades, it would not be particularly large or sudden. People have been leaving for the past 40 years due to violence and disorder.

But, I think it is unwise to dismiss altogether the impact of the chaos in Afghanistan on markets because it may contribute to a larger sense of uncertainty that is emerging. And markets hate uncertainty.

While the economy in the US has been white hot, the concern over inflation is growing, even among some Fed officials. Inflation fears have been driven in part by massive deficit spending in the US which appears unlikely to end any time soon.

Additionally, just when we thought COVID was under control, the Delta Variant is causing people to think twice about getting on an airplane and going to a restaurant or theater. Some parts of the world are even shutting down. Ominous. And public health officials are expressing concern that the immunity afforded by the vaccines is showing signs of diminishing over time.

World peace seems tenuous. Violence in the middle east is back to a slow boil for now. Beijing has brought its boot down on Hong Kong. And tensions between the superpowers — the US, China, and Russia — appear to be getting worse, not better.

And while everyone assumed that the true economic impact of climate change was decades off, we’re not so sure now. Temperatures are breaking records, and we still have months of hurricane season ahead of us which could be costly and disruptive.

So Afghanistan is not a problem in and of itself to the global economy, but it could contribute to the sentiment that times — though good for now — are far too uncertain.

In spite of the flashing yellow lights, I am still hopeful that there is a long way to go before the bull market ends. Earnings have been strong, job creation robust, and people who have been in lock down for nearly two years are eager to spend. I am also confident that the markets know that tighter monetary policy is coming and, though most won’t like it, a little tapering will be manageable.

But the chaos in Afghanistan has enough people wondering “what’s next?” And that kind of uncertainty could make an economic downturn a self-fulfilling prophecy.

Danilo Diazgranados is an investor, collector, and lover of fine wines and a member of the prestigious Confrérie des Chevaliers du Tastevin, a fraternity of Burgundy wine enthusiasts.