"If you can't spot the sucker in your first half hour at the table, then you are the sucker." Mike McDermott, Rounders
For a while, one of the popular buzz phrases was the “Dunning-Kruger effect,” in which someone with a little knowledge believes, and acts as if, they know a lot. It is a real thing, and we see it all the time. This morning I’m thinking about the flip side of that: intellectual arrogance and intellectual laziness.
We all know the type. They have “done the research” or “know all about it,” and they barely tolerate hearing other opinions, let alone considering them. Your input is unnecessary. They talk over you, dismiss you, and even demean your perspective as — in so many words — uneducated. We see it in our social circles, and we see it in the markets. In the markets, at least, those types inevitably flame out in spectacular fashion. In life, unfortunately, not so much.
Then there is intellectual laziness, and I stand guilty as charged. Its hallmark is generalization: taking one specific event or situation and extending it to a broad conclusion. We reject it when others do it, yet we slip into it easily ourselves. Fauci was either the savior or the devil. Trump is either the savior or Hitler. “All Republicans.” “The Democrats.” And these days, “the Muslims” or “the Jews.” The Muslims did not attack the World Trade Center or commit the horror of October 7th; small radical groups did. The Jews, or the Israelis, are not currently carrying out pogroms on the West Bank; a tiny group of religious zealots is. And so on. Push back on these statements at your peril.
Maybe if we all stopped thinking we were so well informed, and took the time to dig deeper into our own generalizations and first-order thinking, we would all be better off. Life is not black and white. In fact, there are many, many more than 50 shades of gray.
A few things troubling me this morning:
The US has
deployed weaponsin orbit, officials revealed Monday, marking the first public acknowledgment of US space-based weapons. Officials offered few details, describing them as “on-orbit space control weapons” designed to protect against hostile action. The disclosure comes amid growing space-military competition, with the US saying that China and Russia are developing capabilities that could threaten US satellites. In 2025, the US announced plans to developGolden Dome, a missile defense network that would include space-based interceptors to destroy missiles in flight. One Congressional Budget Office model estimated a system could require 7,800 orbital interceptors and cost $1.2T over 20 years. The 1967 Outer Space Treaty bans nuclear weapons and other weapons of mass destruction in orbit, but does not ban conventional weapons. Meanwhile, a Pentagon watchdog found the Iran war has strained US interceptor inventories, with operations costingover $42B(see real-timecost tracker).When did education basically become a place where we give out participation trophies like it was 2nd grade rec soccer?
**OIL MOVES THE FED.**A shut Yanbu line and a contested Bab el-Mandeb mean a diesel shortage, answered with a hike and more coming. I’M WRONG IF the median 2026 dot shows no second hike.**THE BARREL STAYS BID INTO OCTOBER.**Both Saudi exits are compromised and no repair date is credible. I like crude and the producers from the long side. I’M WRONG IF Brent settles below $95.**THE TEN-YEAR IS A POLICY TRADE.**Five-year breakevens sit at 2.42% with WTI above $100, so the move to 5.00% is real yield. I’M WRONG IF the 30-year closes below 5.30%.**ONE AFTERNOON DECIDES MOST OF WHAT I OWN.**Nine of my 13 lines are paid by a hawkish afternoon and none by a hold. I’M WRONG IF the committee holds at 3.50 to 3.75%.
The 10Y closed at 5.00% Tuesday, up 3bp, after touching 5.04% intraday (Bloomberg). The 2Y closed at 4.67% and the 30Y at 5.36%; 2s10s widened a basis point to +33bp.
Brent trades $107.20 this morning, down 1.4% from a $108.75 settle, the tenth straight settle above $95. Gold is $4,389.70, up 1.3%. VIX is 16.88.
The S&P fell 0.45% to 7,585.73 for a second down session. Energy rose 2.17% and discretionary fell 1.75%.
Saudi Arabia’s East-West pipeline is shut on day six. No Saudi crude has loaded at Yanbu since 11 September, and Aramco canceled or delayed late-September cargoes to at least three European refiners (
OilPrice).The committee announces at 2:00 PM ET. Swaps price about 93% on a 25bp move to 3.75 to 4.00%, the first hike since 2023, with another priced by December.
I think the market is right that the Fed hikes today and wrong about why it matters. The committee is being pushed by a barrel it cannot produce, and the curve is already doing the tightening.
THE SETUP.
Drone strikes launched from Iraq shut the East-West line to Yanbu, and the attribution is still disputed (some say the Houthis, the NYT says an Iran-backed militia). The line carried roughly 4 million barrels a day, about 4% of world supply (
New York Times via gCaptain). Chevron’s Mike Wirth says 2.5 million is stranded and the buffers are spent (Reuters).The Houthis took the Red Sea port of Mokha and a string of islands near Bab el-Mandeb, tightening their grip on the southern mouth of the Red Sea (
NBC News). Riyadh issued Mecca’s first security alert since 2017 after destroying a drone south of the city (NYT).Hormuz was already contested. Yanbu was the bypass. Barrels leaving Yanbu for Europe sail north to Suez, and those bound for Asia sail south through the strait the Houthis now watch. Riyadh’s answer is to push more crude back through Hormuz, which concentrates the risk in the chokepoint the pipeline was built to avoid.
The Shanghai premium might just be a yuan contract squeezed by a few buyers, so I lean on Orlen’s scramble for North Sea, WTI Midland and Kazakh CPC Blend barrels.
Four repair estimates are in circulation: ‘days’ from the US energy secretary, five to six weeks from the engineers (CNBC, Reuters), six weeks from UK officials (
Bloomberg), and months fromSimon Hunt. I lean toward the engineers.
THE EVIDENCE.
Distillates are where it bites. The Gulf Coast diesel crack closed at a record $107.72 on September 10th, US refiners are already running near their limits, and August distillate stocks were the lowest for the month since 1951 (
RBN Energy). Retail diesel hit a record $6.23 (The Daily Doom).What does a quarter point do for a refinery already running flat out? Nothing. It works on demand and on the dollar, and a committee holding only that tool is about to use it.
The bond market has been trading crude for months. The 40-day correlation between WTI and the 10Y is 0.77, near its high for the year. A correlation that high does not have to mean crude drives yields; both could also be pricing the same war.
Breakevens are not following. The 5-year breakeven is 2.42% with WTI above $100, well under its 2022 peak. The long end is pricing the committee’s response, not an inflation scare.
THE CASE AGAINST, and I respect it.
Goldman switched to a hike call Friday, and David Mericle wrote that the CPI “has not changed our fundamental inflation view. We do not see a strong economic case for raising.” Anna Wong at Bloomberg Economics thinks a move risks a mistake.
Citi’s Andrew Hollenhorst said he does not see “the momentum in the data for further hikes.” The IMF, Citi and ING all have 2027 cuts penciled in (
FXStreet on ING).If the dots say ‘one and done’, the 80bp gap closes from the top and the front end rallies on a hike day.
The other reading of Tuesday’s curve: the belly led at 3bp with both ends at 2bp, an inflation premium repricing across every tenor. Harvest arrives as diesel runs short, with a record El Niño building.
**8:30 ET, August retail sales.**Survey +0.8% on the month after -0.6%, control group +0.5%. A hot nominal print on higher prices gives the committee cover. A miss gives the doves their only data point.**10:30 ET, EIA crude inventories.**An industry report showed a build overnight and Brent’s relative strength index had pushed above 70. A second build would extend the pullback without changing the physical story.**2:00 PM ET, the decision and the projections. 2:30 PM, Warsh.**Warsh told us in June “we’ve got some work to do on the price-stability front” and at Jackson Hole wanted confidence that prices were heading back to target “clearly and at sufficient speed.” Friday’s CPI gave him neither. If he doesn’t hike, nobody believes the rhetoric next time. The median dot for 2027 is the print that moves me.**After the close, Lennar.**The largest builder reports with mortgage rates rising and the stock near its lows.**Thursday, the Bank of Japan and the Bank of England.**UK headline CPI printed 3.1% y/y this morning with input prices up 6.1% y/y.The political clock is running. Among voters 18 to 29, Trump’s net approval is -60 against -36 a year ago (
NYT/Siena), and the CBO puts the war’s cost at $38 billion with about half a point added to inflation by early 2027 (NYT).
**The conflict, up top:**ConocoPhillips rose 3.33% Tuesday while the oil service complex fell 4.42% on the same barrel. Oil in the ground gets paid; drilling tomorrow does not.**ConocoPhillips (COP), 141.22, +3.33%.**A producer collects the realized price now, and no board raises a capital budget on a five-week outage. I like the producer from the long side and the service names not at all.**GS 976.67, -1.19%; JPM 352.49, +0.67%.**JPMorgan guided third-quarter investment banking fees up mid-to-high teens (Bloomberg); Bank of America guided its own down at least 10%. The pool is intact and the share moved. I was wrong about Goldman, and I like JPMorgan from the long side.**Enova (ENVA), -17.7%.**Enova withdrew its applications to buy Grasshopper Bancorp, citing unclear standards for nonbank acquirers. A lender that wanted deposit funding walks into a hike without it.
Behind the wall this morning:
THE BOOK: 13 live lines, 6 new today, each with the factor it monetizes, its size and the condition that kills it.
The financials sleeve on the morning I traded a fee house for a deposit franchise, and the private credit pair that runs through this afternoon.
Every kill switch with its distance to trigger, including the one Branch A arms by itself.
What a hold does to the book, line by line, and the offset I still don’t own.
You’ve had my read of the oil and the Fed for free. What sits below the line is what I’m doing about it, with my own money, and where I get out. $450 a year at marketmusing.com.
