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Sunday, October 4, 2026

2026-10-04

 ***** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic Fare:

..................... This crisis is one of choice, and on top of that since there was no proper rationing which made sure that diesel and fertilizer and so on got to those parts of the economy which needed it most (yes, that means farmers in particular, but not just them) we’re going to be in a world of hurt.

Everyone with diesel refining who hasn’t already will put exports controls on at the least. That means if your country doesn’t produce enough, it’s not going to be able to buy enough otherwise. Yet another case of “no, you can’t buy anything that matters when it really matters.” Food exports will likely be restricted as well. Can your country feed itself? A lot can’t ..............


Tariffs, Hormuz, and fiscal policy are not good reasons to hike. The underlying growth trend and the asymmetric sensitivity of private sector spending to the level of interest rates are.

The test of whether you are genuinely sorry for a mistake, according to Maimonides, is if, when faced with the same circumstances as the last time you did wrong, you behave differently. “Not because of fear or a lack of strength,” but because you felt so much regret for what you did that you improved your character in response.

Federal Reserve officials may have started this process of atonement. For the past several years, they have repeatedly underestimated both the strength of the U.S. economy and the underlying inflationary trend. Those analytical errors led the central bank to wrongly lower interest rates in September-December 2024, and again in September-December 2025.

On September 16 2026, however, they raised their short-term interest rate target band from 3.5-3.75% to 3.75-4%. Tellingly, Fed boss Kevin Warsh characterized the move as “remov[ing] a dose of accommodation”, rather than a tightening or an increase in “restriction”. While many of his colleagues—most notably Governor Christopher Waller and New York Fed President John Williams—had been claiming that monetary policy was at least somewhat “restrictive” as recently as January, Warsh said that they “were hard-pressed to describe it that way” now. 

This shift has flowed through to the distribution of what officials believe will constitute “appropriate monetary policy” in the years ahead.

Almost all Fed officials now believe that short-term interest rates at the end of 2027 will be higher than they are now. None believed that as recently as the end of 2025. In fact, most officials back then expected rates to fall substantially from where they were at the time, with the vast majority expecting rates to be 3.25% or lower. (In January of this year I published a note titled "Is the Market Underpricing the Risk of Fed Hikes?" which I feel pretty good about now.) ...........



The summary is that:
  1. The bad news is that there really isn’t a reason for the sell-off to stop;
  2. The only way it could is if the Fed/ECB guided to a few hikes only;
  3. This means that the long end just won’t rally, but bull steepeners are the “bullish bond” play; and
  4. The out of consensus view is that it just doesn’t matter to risk assets at all.
....................... Inflation is a worry but isn’t driving these markets.

If the question comes to when this is all “priced in” I really can’t give that answer while growth is on the trajectory it is. Expectations were low into the middle of the year given that most thought the Iran situation would cause growth to slow. It clearly hasn’t.

These expectations need to be adjusted.  .................



..................... So we now have a Committee that just removed a dose of accommodation into a supply-driven inflation impulse while the demand side of the economy is already softer than the headline payrolls suggest. Housing is weak. The AI trade is crowded and levered. China is an acute problem. That combination has a name: policy error. Not because they raised 25 instead of 50 but because they are treating a supply shock as if it were a classic overheating demand problem and they are doing it with lagging, revised, and compositionally misleading labor data. ............

The cycle has not changed. Easy-money periods juice activity...sometimes with genuine investment and sometimes with fraud. Tightening and then the eventual easing cycle is when the previous juice gets exposed. We have seen the movie. The current episode has its own flavor: government deficit spending, labor-force distortions, an unprecedented illegal alien sugar high, speculative AI capex boom, an opaque private credit shadow banking complex and now a geopolitical supply shock layered on top. The Fed is late, as usual. Once they reverse course and start cutting again it will be into an accelerating slowdown. It will be too late as anything they do from here will take 12-18 months to hit the real economy. The next year is going to be tumultuous.

Ultimately rates are coming down, not because Warsh suddenly turns dovish, but rather because the real economy is already weaker than the official series admit and the lagged effects of tighter policy will show up in employment, housing, and credit. When that happens the Committee will discover, yet again, that they were fighting the last war with the wrong map.



Market Fare:

Every generation learns the right lesson about the wrong period. Which of the things we believe about investing are simply products of the world we happened to grow up in?

Part III of the regime-change series

For thirty-nine years, falling interest rates were the wind at every investor's back, and almost everything we were taught about markets was shaped by that one fact. In 2020 the wind stopped. This is the final part of a three-part series about what that means.

Part I asked why the price of money changed (our most read article)

Part II asked who has to sell into it

Part III (you are here): This one asks the question underneath both. It is also the only one that still matters if we turn out to be wrong about everything else.


Breadth breakdown and rising bond yields could test the resiliency of the bull market


Clarity In A Messy Tape

............... The Market of Stocks ≠ The Stock Market
This is where the breadth debate gets a little too simplistic.

The S&P 500 doesn’t care equally about all 500 stocks.

A relatively small group of mega-cap companies drives an enormous percentage of the index.

Mathematically, the S&P 500 cares as much about the top 20 stocks as it does the bottom 480.

Reread that. It’s not a typo.  ........

So yes, breadth can be bad.

But if Technology and the largest stocks in the market continue to hold up, the index can keep grinding sideways or higher while plenty of stocks underneath the surface struggle.

That’s exactly the environment we’ve been dealing with. ............


Why markets are breaking out into a new and final bull leg…

Summary: The weight of the evidence says the pain trade remains higher. Qs are breaking out from a tight daily compression regime. LQD/IEF is jumping to multi-month highs. Breadth has been weak and diverging lower, but the index has absorbed it on the resiliency of MAG7. That means a good chunk of the market has been in a deeper correction this past month while the index stayed buoyant on rotation into megacaps. The risks are real: weak seasonality and a buyback blackout over the next few weeks. But we overweight the read of the tape, and the tape says the path of least resistance is up. Positioning and sentiment back that up. So we’re buying here, but we’ll be waiting for breadth confirmation before we press, as we could see a shakeout first. 

................... 9. If the Iran escalation takes a breather and crude trades sideways, bonds get some relief and attention turns back to earnings. Those should keep coming in strong as long as the AI CAPEX cycle runs.




The first principle is that you must not fool yourself — and you are the easiest person to fool.— Richard Feynman

As the year has moved into autumn, the dominant topics in geopolitics and macroeconomics have remained largely unchanged. Oil prices and bond yields are still considered the key factors that could become a dagger for the economies of Europe and the US at a time when hard data shows few signs of slowing.

US 10-year yields reached 5.27% on Monday, a level not seen since 2007. Brent crude remains firmly above $100 per barrel. Despite growing warnings, stock market indices have remained close to all-time highs.

Especially the sharp rise in yields has sparked a heated debate in financial markets. Is now the time to go long bonds? Some argue that it is, while others — myself included — remain cautious. The question that will ultimately decide who is right is the trajectory of the economy through year-end.

Obviously, the Russia-Ukraine and US-Iran wars will have a strong say as well. But when it comes to war, taking statements from any of the parties involved at face value is rarely a good starting point. So far, the observable facts suggest that the probability of a quick resolution to either conflict remains low. .........


Oil, yields and the dollar climbed together in September, and the average stock quietly paid the bill. The S&P 500 barely flinched. From today, the calendar is on its side.

...................... IV. The six best months start today
Carson Investment Research cut every presidential cycle since 1950 into its sixteen quarters and averaged them. The two strongest sit next to each other, and together they cover the six months beginning today.

The fourth quarter of the mid-term year has averaged +6.6% and finished higher in 84% of cycles. The first quarter of year three has done even better, at +7.4% on average. ..............

V. The case against the calendar
A calendar has never paid anyone’s mortgage, and this year the case against it is serious.
  1. The monster is still awake. The seasonal averages were mostly built in years when the Fed could lean dovish into the election. This Fed is hiking into an oil shock with the 10-year above 5%. The last time it hiked into the fourth quarter of a mid-term year was 2018, and the S&P 500 lost around 14% that quarter.
  2. The banks are walking ahead again. Look back at Chart 1. Last winter the financials started falling in January while the S&P 500 drifted sideways, and in March the index finally gave out. Since August the same picture has formed: a sideways index and banks down about 9%. If the rhyme holds, the shop window is next.
  3. 1974. On paper the closest match to an oil shock with rising rates in a mid-term year is 1974, the worst mid-term on our chart at roughly −35%. Our own macro thesis says the 2030s will rhyme with the 1970s. Ignoring that rhyme in October would be convenient, and convenience is how investors get hurt.
  4. The short end of the calendar still points down. Nautilus’ composite measured from 20 August has negative average returns over the next ten days and the next month. October hosted 1929, 1987 and 2008, and since 1928 September and October have been the most volatile months of the year, particularly in mid-term years.
  5. Nineteen cycles is a small sample. Seasonal patterns are averages, and you can drown in a river that is one metre deep on average. The same goes for the breadth figures in Chart 2: a market where most members are already in a bear market can heal from below, or it can spread upwards into the leaders. ..............


Material Fare:

***** Conway: The Diesel Weapon
Why a rather unglamorous fuel is suddenly at the centre of a transatlantic power struggle, and why this matters for all of us

...................................... One of the reasons I wrote Trade World was that I needed a sort of user’s guide to geopolitics and economics over the coming decade. My suspicion was that, contrary to what many in Europe would like to believe, protectionism and geo-economics (of whatever you want to call it) would not go away after Donald Trump leaves office. Trade World is supposed to provide some answers, or at the very least some explanations or framing mechanisms, to help us all understand and interrogate why the world is the way it is today. If my suspicions are right, we will all have to think more deeply about all this stuff in the coming years, as energy policy and trade policy and politics collide on a frequent basis. This is the new world we inhabit.



A.I. Fare:

House Monopoly vs. House Speed Racer—and the citizen still not at the table

Winter is coming for the AI industry, and the great houses are already drawing swords

On one side sit OpenAI and Anthropic, wrapping themselves in the banner of “safety”…House Monopoly. On the other sit the accelerationists including David Sacks, President Trump, and a growing faction that wants the pathway cleared, not blocked…House Speed Racer. The fight is being sold as existential risk versus national destiny. This is a battle for power, money, and control. The average citizen is not at the table. .............



Charts:
1: .
2:



(not just) for the ESG crowd:


I’ve been thinking lately about whether it is possible to save humans from the hotter climate that is advancing so quickly now. I see it entering that corner of the “J” curve—sometimes called the hockey stick—and knowing what I do about exponents, it is a scary moment. One thing I do know: if we do nothing, the worst will arrive. Doing whatever we can is required. ...............

We are not going to solve our way out of climate chaos one nation at a time, or one virtuous vegan at a time. Following the same primate behavioral programming that got us into this, our species is on track to bequeath to Earth a Hothouse Epoch that could last a million years. The “carbon budget” concept is a comforting fiction. We blew through that before most of the people reading this were born. Our remaining time is the only currency that matters now, and we are spending it like a drunk sailor at a titty bar.

It took two world wars and an atomic bomb to convince fifty-one proud, battered, well-armed, deeply suspicious nations that surrendering a sliver of their sovereignty might, on balance, beat vaporizing each other. That’s the UN’s origin story — not a triumph of idealism, but the diplomatic equivalent of two guys agreeing to stop fighting only after both have already lost an eye but are holding pistols to the other’s forehead. For seventy-five-plus years, this awkward arrangement has nudged the world toward settling some, not all, disputes with words instead of violence, which is, historically, not nothing. A quarter million souls with blue badges deliver vaccine jabs and food to starving, displaced people, every day.

I know it’s fashionable, especially among people who’ve never stood in a UNGA credentials line, to declare the whole enterprise ridiculous — a glorified debate club with some very old and decaying rules. And sure, it can look that way. Diplomacy is imperfect. I adore Kim Stanley Robinson’s Ministry for the Future, in which a plucky new UN body basically saves civilization through sheer competence and the occasional act of eco-terrorism. It’s a wonderful novel. It is also, notably, fiction.
We still have a chance to turn towards a safer, sustainable future. The impacts of breached Planetary Boundaries are already all around us, and they will continue to become more severe. But today, we still have a narrow window of opportunity. If we manage to bend the curves within this decade, we can put our societies on a course towards a safer, more just future. We have the tools, and we have taken steps in this direction, but our current efforts are far from sufficient. Only by pursuing urgent, ambitious, and decisive action across all sectors of our societies can we return to living within the Safe Operating Space on a healthy Planet.
—Planetary Health Check 2026
About those design flaws. Take the Security Council veto — one permanent member, one “no,” and the whole resolution goes up in smoke, no matter how the other fourteen voted. The Council’s actual job is to spot trouble somewhere on the planet and defuse it with mediation, sanctions, or — failing that — armed “peacekeepers.” Instead, five countries—the permanent members— hold a key that lets any one of them lock out the other 192.

This isn’t theoretical. Between late 2023 and mid-2025, the Joe Biden and Donald Trump delegations vetoed six separate resolutions calling for an immediate ceasefire in Gaza, then vetoed a resolution — backed by 143 member states and every other seat on the Council — that would have opened a path to UN membership for Palestine. One nation, one thumb, one downward gesture, and 143 votes evaporate. Russia has done the same trick for Ukraine, single-handedly blocking every resolution that dared use the word “condemn.” Russia and China have tag-teamed to shield North Korea’s missile program from international monitoring. And in a personal favorite bit of villain-monologue material, Russia vetoed a 2021 resolution that simply proposed formally classifying climate change as a threat to peace and security — as if naming the fire were the dangerous part.

Because amending the UN Charter itself requires the consent of all five permanent members, abolishing the veto is not just politically unlikely — it is insurmountable. It’s like giving the arsonist control of the fire exits.  ...................



Sci Fare:

There is growing concern that AI can blunt memory and reasoning. But science shows ways to keep the brain sharp.



U.S. B.S.:


Sanctions come with a cost. When the US, in Trump’s first term, put chip sanctions on China and particularly sanctioned Huawei (the leader in 5g networks), it galvanized China. They pivoted hard to supporting internal chip companies, and over time moved their government computers off US software. Huawei survived, prospered and created its own operating system. In the past couple years China has actually forbid import of US chips, though some still come in thru the gray market.

This isn’t an isolated issue. One of the reasons, ironically, that Iran is so strong in many ways is because of sanctions: they were forced to create their own industrial base, not just in weapons, but in things like railroads, engines, boilers, etc, etc… ..............

Every source of American power, for about 35 years, has been subject to systematic dismantling. Industry was offshored, they stopped refining and mining many key resources, sanctions were abused, dollar privilege was abused, and so on. Generally the external actions didn’t hit allies/vassals–until recently, but Trump has been on a tear: .............



Other Fare:


So, why are so many members of the elite pedophiles?

It starts with the fact that money or power gets you pretty much anything you want that’s legal. If you’ve wanted to do something, you can and you do. Hedonic adjustment sets in: if you can have all the boy toys and booze and fine homes and massages and trips and fine cuisine you want, after a while you get bored of it.

It comes second from “elite impunity”, the fact that in most countries a lot of laws aren’t enforced against rich or powerful people. Do crack, go to prison? Have a pricey cocaine habit, like half of American elites in the 80s, and you’re not touched. (Leaving aside immunities like being able to steal employees wages without usually being called on it, and when you are, not going to jail.)

The general observation is true: elites go to prison only when they prey on other elites. ..............

Wealth and power are deeply corrupting. They don’t corrupt everyone, but they can corrupt a plurality, and once the threshold where a plurality have been corrupted by evil acts, the system becomes self-sustaining: impossible to stop.

This is the sort of thing that Xi headed off. The Communist party and wealthy oligarchs were becoming corrupt, though as far as I know not yet to the level of pedophile rings. He headed it off with a savage crackdown.

Eventually some future leader will fail to do so, and China’s elites too will become corrupted: it’s a virtually universal experience.

And once you hit that point it generally requires revolution of one sort or another to clean up the mess.


Universe 25 and the Problem of Utopia

................... Universe 25 was taken to show (by Calhoun and others) that population growth was a significant danger to humans; that like mice, humans required not just the satisfaction of their physical needs, but also something more—something threatened by overpopulation. Calhoun recognized that human beings live not only in physical space, but also in what he called “conceptual space”: humans can use ideas to creatively engage in changes, mine natural resources, and manage social relations. But, he warned, this expansion of conceptual space might also have a “breaking point”: population density might limit human abilities to use conceptual space to overcome the disappearance of opportunities and physical space. And it might lead to humans who can perform all the normal functions of biological life, but who lack creativity and cannot endure challenges. ....................



More and more humans are suffering from empire psychosis.

People who can’t go ten minutes without checking their phones, losing hours a day to social media and mindless scrolling.

People talking to chatbots, learning about the world from them, learning about life from them, making friends with them, forming relationships with them.

Binging on podcasts, binging on streaming services, binging on video games, binging on apps, binging on vapes, binging on treats delivered to their door by underpaid workers from bombed-out countries.

The bread was designed in a lab to be furiously addictive, and the circuses track your preferences to serve you up all your favorite performances.

Empire psychosis keeps us in a constant state of distraction and escapism, always scrambling to avoid the here and now like we’re trying to climb out of our own skins.

It’s a frenzied discontentedness. A persistent delusion that satisfaction exists right around the corner after the next restless squirm. It’s an artificially manufactured mental disorder. And it’s worth trillions of dollars.

In the capitalist empire, there is no value to be generated by contented people. Our minds must be continually prodded and diddled to manipulate us out of our natural serenity so that we are in a constant state of toil and dissatisfaction, at all times reaching for the next fix of the next product. Clever manipulators have figured out how to generate vast fortunes by harnessing the restlessness they deliberately stir up within us.

We are psychologically hammered with advertisements and consumerist messaging from mainstream culture to convince us that we need more than we have and that we aren’t okay the way we are. That we’re not beautiful enough, not stylish enough, not successful enough, not abundant enough. The products are designed to be dependence-forming so we need to buy them, and they’re designed to quickly become obsolete so that we need to keep buying more.

They trick us out of our natural state of contentedness and then sell it back to us. They deceive us into leaving our home and then charge us an admission price to come visit.

Something went wrong. Humanity went off course. They enclosed the commons, colonized the new world, constructed a tiered society of haves and have-nots, and now we’re all living like space aliens on our own home planet.

We do not have to keep suffering from their man-made madness. We can do the inner work necessary to come back to our own contentedness, and we can do the outer work necessary to take back what the manipulators have stolen from us.

We don’t need to keep consenting to this abusive relationship any longer. A healthy world is our birthright. We will tear down the madness machine and stand at peace in the soil of the planet we were born on.




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