The Second Mouse Is About to Get the Cheese

The chart sweep — "400+ charts" after late-summer travel

• "Every once in a while I will just sit down and go through 400+ charts to see if anything stands out as I look to find my footing. A few things really stood out in oil and macro that are highly actionable."

Inflation — CPI "about to pop," diesel above $6

• "ISM Services Prices Paid is telling us CPI is about to pop."
• "Gasoline may be the weekly expense every consumer sees, but the diesel national average just broke above $6 to all time highs. Diesel touches everything… shipping, retail, food prices at the supermarket."
• The Fed's bind: hard to hike "into the teeth of an energy shock," hard not to "if inflation is about to make them look stupid for waiting. Rock, meet hard place."

The soft patch — stimulus roll-off plus a housing leak

• "I have talked about stagflation coming back with a vengeance because of a soft patch that emerges right about now. OBBA tax stimulus is rolling off."
• Housing "continues to spring a leak with mortgages at 7%" — and refi/cash-outs to fund expenses are no longer helping consumption.

Housing supply — the Boomers hold the cards

• "The oldest Boomers are 80 now." Via Fortune/Torsten Slok: first-time buyers averaged 40 in 2025 and the median age of all buyers is 59, versus 39 fifteen years ago.
• "…their housing stock is coming onto the market at levels that the market is simply not clearing at 7% mortgage rates and current demographics."

Growth — a soft patch that may not stick, but a Growth Scare window

• Leading jobs data "suggests the soft patch may not stick for long"; services could "pop to catch up to manufacturing if jobs and income cycle higher as we get to the holidays."
• Manufacturing "looks ok for now (thank you datacenters for carrying the whole economy)," but new orders/inventories leads the PMI and has drifted lower for months — "so it's messy."
• Large-employer job openings "suddenly hooked lower again, so perhaps the upcoming payroll data shows the Soft Patch (my expectation)." With confidence "cratering even among Republican voters," there may be "just enough Soft Patch to engineer a brief Growth Scare."

The Fed — a split committee will not let Warsh hike before the midterms

• "I have no idea. The 2Y and inflation data suggests they should. But the curve is way overpricing a hike cycle here, and the Street is far ahead of itself."
• "If Warsh in fact wants to hike in September less than two months to midterms, he is going to need total unanimity… but the committee is split… do you really think Warsh is going to pick a fight with Trump by hiking?"

Rates positioning — receive the front end, worry about the long end

• "It actually makes me want to receive the 2Y and SOFR here, and also makes me uncomfortable in the long bond position."
• With "an 88% chance of a hike priced in this week (and 2 hikes priced by December's meeting), we could very well see a giant stop-out of flattener trades and the long end is going to feel it" — "my bond calls will join so many other options trades in heaven — I didn't call it a Hard Trade for no reason."
• Knock-on: "the equity market is going to have a very hard time ignoring a blowout in long bond yields."

Oil — the "CTAs max long" worry is no longer his

• "I keep hearing how CTAs are max long and positioning is back to 'beware TACO' levels. This may have been a concern for me briefly several weeks ago, but no longer."
• Managed money in WTI and Brent: "We are perhaps ~$20/bbl from new highs and positioning remains far less stretched than what we saw earlier this year. This is what 'The Second Mouse Gets the Cheese' looks like in positioning speak."

BNO flows — price +50%, AUM barely up, shares outstanding falling

• "The fund's assets at ~$600mn are maybe 20% above the July lows, and yet price has rallied over 50%." "Shares outstanding have been dropping since April."

The ARKK lesson — how ETF creations feed short sellers

• ARKK's share count fell in 2021 as longs liquidated, then rose in 2022 as price kept falling — "unit creations to accommodate institutional shortselling for size."
• The mechanism: rather than let borrow rates spike, an AP "can create new ETF shares on demand… Those brand-new shares are then lent out to short sellers, who sell them into the market."

The BNO glitch — falling share count and record short interest

• Falling shares into a rally would normally mean short covering — "But there is another glitch — short interest is at all time highs at 2mm shares of BNO," "over 20% of the outstanding share pool short."
• Caveat: SI of ~2.2mm is as of Aug-31 with BNO ~$52 (vs $61 now), and shares outstanding fell from ~11.8 to 10.1mm since — "we may have seen some short covering so far in September that we will only see in the SI data in a few weeks."
• His resolution: two processes at once — long side net redemptions (institutions selling into the rally) and short side new shorts sourced from existing lendable float, not fresh creation. "Rising price, rising short interest, shrinking share count — is the mechanical signature of 'the market is fading this rally'."

The squeeze case — less creation capacity as a release valve

• He sanity-checked the scenario with Claude: SI% rises on both sides of the ratio, and "if long-side outflows stabilize or reverse while shorts remain trapped in a shrinking, increasingly illiquid vehicle, the squeeze dynamics can be sharper… borrow costs and hard-to-borrow status tend to build faster."
• Checked it against the data: "locate availability and rates over the past week are starting to look…provocative."

SCO — retail still selling oil through the broken product

• "My old favorite broken retail product SCO" is "seeing inflows despite the horrendous roll yield and volatility drag," at fresh lows Thursday — "Sellers of oil are adding here." "SCO AUM is still almost 50% bigger than BNO."
• Summary: "hot money, retail, and non-dedicated institutions who use ETFs rather than futures are fading this rally. That is the consensus view right now: sell the rally."

Vol — no fear of an upside skid

• Oil implied and realized vols show "no fear here around a sudden skid higher" despite (1) the BNO squeeze risk, (2) "the geopolitics of Mandeb," and (3) "global oil/SPR storage buffers having been steadily depleted for six months."

Futures positioning — room to 2017-18, and a shrunken open interest

• "Managed money as a % of open interest has room to move much higher" — what if it went to 2017-18 levels?
• "After six months of Trump jawboning and suppression, open interest in Brent futures have dropped almost 25%, so if speculators were to plow back in, you would likely need higher prices to convince sellers/hedgers to take the other side."
• Including Other Reportables and Non-Reportables, "we are well off the March highs in notional exposure… speculators do not trust this rally." "Where I come from, we call that a Wall of Worry."

Anecdote and verdict — "worried I don't own enough"

• Several respected oil traders he knows "have recently lightened up significantly on their long crude holdings" — "anecdotal confirmation that long exits are in fact happening just as the second mouse has a shot at the cheese."
• "The sentiment and positioning is wrong here. Bears are visibly digging in their heels expecting yet another TACO Axios situation."
• "I think oil is about to scream higher and am worried I don't own enough, and I'd like to think I'm pretty long..."