"If something cannot go on forever, it will stop." ~Herbert Stein
Thinking about the current state of affairs, the first thing that popped into my mind was Wile E. Coyote, who famously keeps blowing himself up or dropping off a cliff in his attempts to get the Road Runner. Applicable in some sense, but the underlying causality isn’t there. Instead, my mind shifted to the 1991 classic,
*Thelma and Louise.*For those readers too young (or unsophisticated 😉) to have seen it, it famously ends, after an epic road trip, with the two women deliberately driving off a cliff.It’s the deliberateness of the act that grabbed my attention, the brazen disregard for what happens next. To me, this is what we are seeing right now. Blatant grift and corruption. Insider dealing and trading at a breathtaking scale, for all to see. Policies that seem focused on personal financial gain—or revenge—rather than the public good. Inflation? ‘Whatever.’ Loss of allies? Well, they didn’t do exactly what we told them to, or worse, they said the wrong thing. Rules? They’re actually just suggestions! Economic policies are beholden to loyalty and popularity rather than to concerns about deficits, inflation, or public welfare. I could go on, but you get the drift.
The latest, which is really gobsmacking: ProPublica dropped a bombshell Monday morning, and I’ve read it three times now because it keeps getting worse. Umar Kremlev, a Russian oligarch with a direct line to Vladimir Putin’s inner circle, quietly paid hundreds of thousands of dollars toward Don Jr.’s three-day wedding blowout in the Bahamas this past May. He rented one of the two private islands. He paid for the fireworks show that launched off a barge while Junior lifted his new bride into the air for the cameras. His staff helped plan the whole thing.
Rabbi Buchdahl of Central Synagogue is NY discussed her Rosh Hashanah speech: I think it’s worth the time to listen to her perspective:
https://www.facebook.com/share/v/1HwzTpBNqJ/?mibextid=wwXIfr
I am long the front end’s consequences and own nothing that pays if the committee blinks. Two runs with that hole, and I will not fill it with another hawkish ticket.
The barrel is a supply event with no inventory behind it. I restored the premium leg to a third at today’s open, and the bypass line staying shut is the only condition that matters.
Gold fell on a shut export route, a 108 print, and a 5.9% semiconductor drawdown. I read that as an equity tell before a metals call, and 4,250 is the level that settles it.
Six of my 13 lines can leave on measurement inside two sessions. If that happens I am nine lines and 4.75 units by tomorrow night, on nothing I decided.
Brent settled 105.68, the ninth settle above 95 and the second above 105, with a 108.43 session high.
The 10Y closed 4.97%, the 30Y fell a basis point, and 2s10s sits at 32bp after nine basis points of flattening in four sessions, all of it from the front.
Diesel printed a record 6.23 dollars a gallon, up almost 69% on the year. Gasoline is 4.32.
Saudi Arabia’s East-West line is shut on day five, with Yanbu carrying five to seven days of export cover.
Semiconductors fell 5.9% on Monday and the index fell 0.48%.
Stein’s law is the least dramatic sentence anybody ever wrote about a catastrophe. Things that cannot continue do not announce themselves; they stop. I think that’s what is approaching.
**THE SETUP.**Four buffers ran out inside one week; three were reported inside 48 hours.Chevron’s chief executive said in Austin on Friday that the mechanisms which absorbed six months of this “have largely now played out, and we don’t have nearly the buffers in the system that we did when it began” (WSJ). He runs one of the companies that would know, so I take ‘largely played out’ as a statement of inventory and not of mood.
The Pentagon’s inspector general reported Monday night that the campaign against Iranian targets “has resulted in strategic inventory shortfalls and revealed industrial base bottlenecks for munitions resupply” (Bloomberg). Riyadh asked for direct strikes on the Houthis last week and got intelligence sharing; now I know one reason why.
The household buffer is a 2.76% savings rate against a record 195.9 trillion dollars of net worth at 8.28 times disposable income. People have never looked wealthier on paper at a moment when their cash flow was thinner (and ‘wealthier’ is doing a lot of work there). Real estate fell to its smallest share of net worth since 1973 last quarter while equities hit a record share, so the wealth that feels safe is now the wealth that reprices fastest.
The fourth is high-yield at roughly 270 basis points, which has absorbed all of the above and moved by three basis points in a week.
**WHY OIL IS A SUPPLY, NOT A PRICE STORY.**The East-West line carries up to seven million barrels a day from the Gulf coast to Yanbu. It went down Thursday to drones launched from Iraq, not from Yemen; that is a second proxy in a second theater. Regional officials put the outage at three to five weeks (AP).Yanbu has five to seven days of export cover left.
Hormuz is running about eight million barrels a day against fifteen before the war, the UAE’s bypass line is at capacity, and Kuwait, Qatar and Bahrain have no alternative at all.
Saudi output was the lowest in more than three decades in August, and the IEA has pushed full recovery to 2027.
The Houthis hold Mokha, Perim and now the Hanish islands. They command the Bab al-Mandab.
Alex Vatanka of the Middle East Institute said the quiet part plainly: Iran welcomes Yemen because the fastest way to raise the political cost for this administration is to raise the price of diesel and gasoline (The Dispatch). Diesel is 6.23, and 8.15 in California, up almost 69% on the year. If that is the war aim, it is working. The alternative explanation is that the Houthis moved on their own timetable and Tehran is taking credit for the weather, and Vatanka argues that too.
**THE CASE AGAINST ME, and it is not weak.**Core CPI is 2.4% and has fallen every month for a year, straight through the energy shock. Core goods contributed 0.165 percentage points, and tariff inflation would appear in that column. Breakevens fell on the print that sent the odds to 90. Canada’s headline CPI came in at minus 0.1% m/m in August.
Dudley’s answer is that financial conditions are the loosest this century. The livelier version says a hike here is an error that becomes rocket fuel, breaking the front end and running the index into a blow-off by October.
Tuesday’s tape argues the other way: yields up, the dollar up, and gold down. Both cases present the same argument about whether a supply shock without a cushion behind it is still a ‘relative price’.
**WHAT I THINK.**The committee hikes tomorrow because Kevin Warsh has nowhere to stand. He opened in June promising muscle, held in July without explaining how that got him to 2%, corrected at Jackson Hole, and Friday’s core print closed the last exit inside the quiet period (WSJ).
A hold now would leave him a chairman whose warnings cost nothing to ignore(his own phrase at Jackson Hole was that the Fed has ‘work to do’).But- the hike raises the government’s own funding cost at the front end while the long end sits at 5% for reasons the hike does not touch. Net interest is 1.02 trillion dollars with a month left in the fiscal year, up 8.9%, on an average coupon of 3.48% repricing toward 4.77, and there are 1.2 trillion dollars of proposed checks on the table. More than half the move across six markets is in real yields, and the explanation is supply and weaker absorption, not institutional breakdown (Bruegel).
Eurointelligence made the sharper point this morning: 2007 is when this level was touched briefly; the 1990s is the last time it was sustained. Foreign flows into American equities have surpassed flows into government debt for the first time this century, outside the pandemic and the crisis that followed (FT). Capital is not leaving the country; it is leaving the government’s books, and the household is paying for it through a 30-year mortgage at 6.85%.
08:30 Empire Manufacturing, survey 15.0 against 20.6 prior. The first read on whether the soft patch is arriving before the meeting.
08:15 ADP weekly employment, prior 12,000.
The repricing is not American. European money markets imply four more from the ECB and five more from the Bank of England over twelve months, both ahead of guidance. The BOE goes Thursday, the Bank of Japan Friday, and all 52 surveyed watchers expect 25 basis points out of Tokyo.
China’s August retail sales rose 0.4% y/y against 0.8% expected, fixed asset investment fell 7.2% year to date, and no stimulus was signaled. Emerging market equities hit a three-week low and the yen sits at 154.82.
Bessent testifies at House Financial Services, with the 5,000-dollar checks and a 5% ten-year both in the room.
Tomorrow 14:00 the decision and the projections. The 2027 median is the number, not the 25 basis points.
The Senate takes a procedural vote on the Clarity Act today. Bitcoin sits at 76,992 on the doubt.
Faster Japanese hikes push global yields up through repatriation, which is the road from a Tokyo wage print to my 30Y.
**Goldman Sachs, 988.45, down 3.96%.**It fell on somebody else’s guide. A universal bank set third-quarter investment banking fees at 1.6 to 1.8 billion dollars against 2.0 a year ago, and the tape applied a balance-sheet franchise’s mix to an advisory-led one. Management speaks at its own conference today and tomorrow, so the verification has a date. I hold half a unit, 1.9% above my stop.**Enova, (18%).**It withdrew its applications with the Comptroller and the Federal Reserve for the Grasshopper Bancorp acquisition and reaffirmed guidance in the same breath. A consumer lender walked away from a bank charter and said it does not need one. In a week when the Bundesbank is reopening the sovereign-bank nexus, deciding a charter is not worth the price is the more interesting signal.**Bank of America, down 5.1% Monday.**The chief executive said third-quarter trading revenue will be “relatively flat” against last year. Goldman fell 4% beside it, the KBW Bank Index lost 2.4%, and Europe followed this morning with UBS minus 4% and Deutsche minus 3.3%. Five sessions of record volatility across rates, energy and semiconductors, and the trading floors did not monetize it. I have spent a long career listening to banks explain a soft trading quarter, and the explanation that never holds up is the one blaming a quiet tape. This tape was not quiet. The benign read is a calendar quirk in a quarter that ends in two weeks; the other read is that the risk was not taken, and that one is worse for the multiple.
**Behind the wall this morning:**THE BOOK: 13 live lines carrying 6.75 units, 4 new today and one dated to this morning’s ex-dividend open, each with the factor it monetizes, its size and the condition that kills it.
The financials sleeve on the morning a consumer lender handed back a bank charter, and why my equal-largest line is an insurer and not a bank.
Every kill switch with its distance to trigger as a number, including the one sitting 4bp away that my own best outcome arms.
What a hold tomorrow does to seven of the 13 lines, position by position, and why I still own no offset against it.
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This publication is for informational and educational purposes only and is not investment advice, nor an offer or solicitation to buy or sell any security. Opinions are mine alone as of the date of publication and are subject to change
