World War Wednesday – Brent Hits $100, Bessent says “I am the House” in Yen Trading

Madness!!!  

It’s hard to know where to begin:

Usually there are one or two major concerns each day but, as you can see, they are multiplying like rabbits. These are all news items from this morning and, frankly, there aren’t any good ones to balance things out. Also, this morning, I feel like I’d be doing you a disservice by tying this up into a neat little bow because you need to get a sense of the CHAOS!!! that is brewing beneath the kind-of-calm surface of the markets – it may be time to abandon ship! 

Rather than dig into each article, let’s get the vibe of the articles in general: 

The physical inflation reset

• • Brent $100 on US-Iran shooting war

  • US strikes on Iranian tankers (escalation, not de-escalation)

  • El Niño hitting Amazon → Brazilian Ag exports

  • UK food inflation heading to 6% on drought

  • China PPI reviving on oil and AI power draw

This is the physical world overwhelming the financial world’s ability to price it. Oil, food and industrial power costs are all rising for reasons that have nothing to do with monetary policy and everything to do with war, climate and capex demand. The Fed cannot cut its way out of this and cannot hike its way out either. Warsh gets to choose which policy failure he will wear but he’s screwed and we are screwed – no matter what.

The sovereign credibility crack

• • Bessent “I am the house now” on the Yen

  • Dollar eyeing seven-month low

  • Wall Street split on the yen

  • “Every bond trader should be worried about Medicare” (this is our Treasury Time Bomb landing in Bloomberg opinion less than a week after we published it!)

  • Fed’s three choices as Warsh’s honeymoon ends (meeting next week)

  • ECB climate collateral question

Every major central bank is simultaneously losing the plot as we’ve reached the breaking point on Global Debt – led over the cliff by the US topping the $40Tn mark. Bessent is trying to talk his way through what the auction cycle is going to force him to do anyway. The bond market is voting before the policymakers admit the vote is happening.

The system-brittleness cluster

• • UK NATS outage day two (single point of failure in national air traffic)

  • $320M crypto hack exposing the dangers of a currency that’s being shoved down our throats by a President that made $1Bn in crypto last year 

  • US-Canada trade war escalating with product bans

  • US cruise missile mass production in Germany (industrial policy being weaponized)

  • AI hitting legal system from every side – overwhelming its ability to cope (unless it resorts to AI!) 

The infrastructure of the global order – technical, financial, diplomatic, legal – is cracking in multiple places at once. Not big collapses. Just constant small failures that add up. This is what late-cycle systemic stress looks like before THE BIG BREAK!

The AI narrative crack

• • Bessent: “Nothing would matter if China wins the AI race“

  • Anthropic researcher quits over out-of-control AI fears

  • China lithium producers pushing back on data (chip supply chain implications)

Treasury Secretary framing AI as existential national security pushing AI development while Anthropic researchers are literally quitting because they think it’s already out of control. Both of those things trying to be true simultaneously breaks the “AI will save productivity and pay off the debt” narrative that half the market is priced on.

I thought we could use a pallet cleanser…  

Seriously though, we’re getting to the point where there are more and more negatives and the positives are mostly BS and spin so maybe it is time to cash out our portfolios, rather than trying to ride out the coming correction?  

When four independent regime-cracking stories cluster on the same morning — physical inflation, sovereign credibility, system brittleness, AI narrative – you are not looking at four unrelated news items. You are looking at four symptoms of the same underlying condition: the post-2008 monetary regime is dying, the post-1945 geopolitical regime is dying and the post-2020 AI investment thesis is being asked to carry weight it can no longer carry.

Usually we take the lemons and make lemonade but I don’t see a good trade out of this mess at the moment. There’s plenty of things to short but this interventionist Government makes that too dangerous a play and we have our SQQQ hedges so we COULD ride this out – but why lose money on our longs when we don’t have to?

We are doing our portfolio reviews next week and I’ll decide by then but, for now, I have a strong preference for shortening our duration in every dimension: closer stops on longs, tighter timeframes on positions, more CASH!!! than usual heading into the September FOMC.

This is NOT because I can call the top of any specific market, but because when the volume of regime-change news quadruples in a single morning, the correlation between assets we thought were unrelated are about to spike and our hedges may stop working exactly when we need them to – so let’s not do a live test to see how they hold up in a catastrophe!  

This is not a permabear post. It’s a ‘pay attention to your position sizing THIS week‘ post. Let’s trim what we can trim. Let the leveraged trades expire without rolling them. Add to gold if you haven’t yet and watch tomorrow’s PPI and Thursday’s CPI because, if it prints hot into THIS tape, we’re not talking about a Fed hike, we’re talking about a credibility event!

Consumer credit expanded $18.1Bn in July against a $11.9Bn consensus – a 52% overshoot! Non-revolving credit (auto loans and student loans) grew at a 4.8% annualized pace, the largest monthly gain in three years.

On its own, a hot credit number is just a data point. In context, it’s a distress signal.

Consumer credit accelerates for one of two reasons. Either households feel confident about the future and want to pull consumption forward OR households can’t cover current consumption out of current income and are borrowing to bridge the gap. Which one do you think it is?

We can look at the Q2 2026 Household Debt and Credit report from the New York Fed for the answer. Credit card balances 90+ days delinquent hit 12.8%, up 68% from 7.6% in mid-2022. That’s a level not seen since the Great Recession. Serious auto delinquency hit its highest quarterly level in 15 years. Subprime auto 60-day delinquency reached 1.49%, surpassing 2009 peaks per FICO data. More Americans went 30+ days late on mortgage payments in Q2 than in any quarter since 2015.

So we have households borrowing faster, delinquencies at 2009-era levels for the vulnerable tiers and total household debt at $18.8 TRILLION!!! (and rich people AREN’T in debt – they are the ones collecting the interest!) This is NOT confidence borrowing! This is the K-shaped consumer – bottom-80% Americans reaching for credit because wages aren’t keeping up with the oil, food and healthcare inflation that the top of this article just went through…

The market read: Consumer discretionary earnings estimates for Q4 are wildly optimistic if this trajectory holds. Auto lenders (ALLY, COF’s auto book, credit union subprime paper) are already pricing in stress – but not this level of stress.

Retailers whose customer base skews to the bottom half of the income distribution (DG, DLTR, WMT’s grocery-only shoppers) will report a demand cliff before Q4 earnings. And the “resilient consumer” narrative that has held equity multiples up all year is arithmetically running on borrowed time, LITERALLY!

The consumer is telling you what the bond market is telling you, what the oil market is telling you, and what Bessent is telling you when he says “I am the house now.” The regime is stressed. The credit expansion is a symptom, not a sign of health.

IN PROGRESS