Title: The Second Mouse Is About to Get the Cheese Show: PauloMacro's Substack (paulomacro.substack.com) — paid post Guest: Paulo (pseudonymous, aka Cloudbear) — author Date: 2026-09-12 URL: https://paulomacro.substack.com/p/the-second-mouse-is-about-to-get Length: written post (~2,000 words, ~20 charts) — no timestamps Note: Subtitle "Oil plus the Macro Soft Patch". Paid post read via Stephen's logged-in Chrome; byline SEP 12, 2026 (API post_date 2026-09-13T03:51Z UTC). Text saved verbatim. The ~20 charts (ISM Services Prices Paid, diesel average, median homebuyer age, jobs/PMI leads, large-employer openings, Fed pricing, managed money in WTI/Brent, BNO AUM/flows/shares outstanding/short interest/borrow, ARKK shares outstanding 2021-22, SCO flows/AUM, WTI vs implied/realized vol, managed money % of OI, Brent OI, spec notional exposure, WTI spec net longs) are images and are NOT reproduced; the text carries the argument. The title echoes his Jul-24 "The Second Mouse Gets the Cheese" post (../2026-jul-24/).
Still catching up from late summer travel so thank you for being patient. 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.
First on the macro…
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 — everything. Hard to believe the Fed will hike into the teeth of an energy shock, and hard to believe the Fed won't hike either if inflation is about to make them look stupid for waiting. Rock, meet hard place.
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 activity continues to spring a leak with mortgages at 7% (refi/cashouts to fund expenses not helping consumption either)…
And just as it feels like the housing market won't clear, the supply is growing. The oldest Boomers are 80 now. We know lack of affordability has resulted in a jump in age of the median first-time homebuyer, but here's Fortune:
[Quoted from Fortune:] One eye-popping stat summed just how bad things have gotten in the recent past: the average age of the first-time homebuyer was 40 years old in 2025, according to the National Association of Realtors (NAR). But Apollo chief economist Torsten Slok, one of Wall Street's most influential analysts, put it in perspective on Thursday: the average age of any homebuyer has skyrocketed in the U.S. as well. As observed in a note (and chart) shared with Fortune today, Slok calculated from the same NAR dataset that the median age of all U.S. homebuyers in 2025 is 59 years old. Just 15 years ago, it was 39 years old.
Once again the Boomers hold the cards, and as we barrel into the Event Horizon, their housing stock is coming onto the market at levels that the market is simply not clearing at 7% mortgage rates and current demographics.
Housing, OBBA, and lower-K consumption aside, leading jobs data suggests the soft patch may not stick for long…
Services may see a commensurate pop to catch up to manufacturing if jobs and income cycle higher as we get to the holidays…
Yet manufacturing is not obvious looking forward. It looks ok for now (thank you datacenters for carrying the whole economy), but new orders/inventories leads the PMI and has been drifting lower for a few months (albeit still suggesting weak expansion >50). At some point orders may start to fall… so it's messy.
And large employer job openings have suddenly hooked lower again, so perhaps the upcoming payroll data shows the Soft Patch (my expectation).
Given the latest confidence figures cratering even among Republican voters, there is a window here to suggest we may get just enough Soft Patch to engineer a brief Growth Scare. We will see.
As an aside on the Fed before readers ask — 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 with estimates like this:
Putting it simply, if Warsh in fact wants to hike in September less than two months to midterms, he is going to need total unanimity. The committee needs to be there standing shoulder to shoulder with him…but the committee is split. With a split committee and a bunch of dissents no matter whether you hike or hold, do you really think Warsh is going to pick a fight with Trump by hiking? 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 (yes, my bond calls will join so many other options trades in heaven — I didn't call it a Hard Trade for no reason)… and the equity market is going to have a very hard time ignoring a blowout in long bond yields…
OIL — The Second Mouse Gets the Cheese
On oil, 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.
For starters, have a look at managed money in WTI and Brent (and set aside the obvious risks around the Middle East drama). 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:
Now look at the flow data for BNO (Brent front month ETF) over the past month. 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:
Now, this can actually be interpreted different ways. Remember in 2021-2022 when ARKK was imploding? The share count declined in 2021 as longs liquidated and share count fell, but then the share count rose in 2022 (once the S&P bear market got underway), despite the continued drop in ARKK. When this happens, it is safe to assume you are seeing unit creations to accommodate institutional shortselling for size. When an ETF becomes a popular short, rather than have borrow rates spike as institutions fight over a scarce pool of existing shares, an AP (Authorized Participant, or the stock loan desk it works with) can create new ETF shares on demand. They buy the underlying basket in the open market (or use inventory/cash), deliver it to the fund sponsor, and receive newly minted ETF shares. Those brand-new shares are then lent out to short sellers, who sell them into the market. And so in 2022 you see that ARKK continued to slide, but the shares outstanding exploded:
Going back to the BNO charts above, you see how the share count is declining while BNO is rising? This is the opposite of ARKK in 2022 where price fell and share count rose. So normally I would say this suggests shortcovering on the recent rally rather than fresh speculative interest coming in to drive price higher. If BNO and share counts were rising like we saw in Feb-March, we could safely say speculators were piling in on the long side, but since share count is falling, it must be short covering right? But there is another glitch — short interest is at all time highs at 2mm shares of BNO:
Which works out to over 20% of the outstanding share pool short:
But wait, how is this possible? Share count declines in a rising price suggests short covering, but short interest outstanding is rising? First, I should caveat that the short interest data of ~2.2mm SI is as of August 31st when BNO was trading at ~$52 vs $61 currently, and shares outstanding fell dramatically over the past two weeks since then (down from ~11.8 to 10.1mm shares), so we may have seen some short covering so far in September that we will only see in the SI data in a few weeks.
Still, the rally in price, rise in short interest through August, and decline in share counts is a rare condition for an ETF. How is it possible? Two things are happening at once, not one process:
Long side: net redemption / real outflows — large institutional holders are selling despite (or into) the rally, resulting in redemptions facilitated by APs;
Short side: net new short positions are being layered on, sourced from the existing pool outstanding that is still available lendable float (rather than forcing fresh creation).
In other words investors have indeed been net sellers of BNO. This combination — rising price, rising short interest, shrinking share count — is the mechanical signature of "the market is fading this rally," with bears increasing conviction (or size) even as some longs bail, with the float tightening at the same time.
To make sure I was thinking about this correctly, I put the scenario of price up / short interest up / share count down to our friend "Claude," and funny enough this is what he said:
[Quoted AI response:] This is arguably a more dangerous setup for the shorts than the first scenario we discussed. Short interest as a % of float is rising on both sides of the ratio — numerator (shares short) going up, denominator (shares outstanding) going down — so your reported SI% will overstate the trend even further than the raw share count suggests. If long-side outflows stabilize or reverse while shorts remain trapped in a shrinking, increasingly illiquid vehicle, the squeeze dynamics can be sharper than in the "shares outstanding rising" case, precisely because there's less fresh creation capacity acting as a release valve — borrow costs and hard-to-borrow status tend to build faster.
So I went and looked at borrow rates for this growing short interest in BNO, and sure enough, locate availability and rates over the past week are starting to look…provocative…
In the meantime, my old favorite broken retail product SCO (the 2x inverse short WTI ETF, spread over three different contracts) is seeing inflows despite the horrendous roll yield and volatility drag which compounding the bloodletting of a rallying crude price and driven the ETF price to fresh lows on Thursday. Sellers of oil are adding here, just as the rising BNO short interest implies:
And amazingly, SCO AUM is still almost 50% bigger than BNO.
To sum it up: 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. That is where the discretionary crowd's psychology is.
Let's look now at where WTI crude is (white line) in relation to the April highs, and then compare where oil implied and realized vols are… there is no fear here around a sudden skid higher despite 1) the short squeeze risk suggested by BNO above 2) the geopolitics of Mandeb, and 3) global oil/SPR storage buffers having been steadily depleted for six months.
Managed money as a % of open interest has room to move much higher:
What if managed money as a % of open interest were to go to 2017-18 levels above? Keep in mind 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 of the contract and expand open interest again:
For futures and options, besides managed money speculators, if we also include Other Reportables (prop shops and entities who don't run outside money) and Non-Reportables (small traders below the reporting threshold), we are well off the March highs in notional exposure terms — again, speculators do not trust this rally, and that is the consensus view:
Where I come from, we call that a Wall of Worry.
You can also see this in WTI futures and options outright contract net longs by speculators. This is what a bigger picture, longer-term positioning rinse looks like…
Lastly, I would add that I personally know several oil traders whom I greatly respect who have recently lightened up significantly on their long crude holdings. I don't say this to disparage them, but merely as 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 — both in the futures/options positioning and ETF data (never mind Twitter and the sudden visibility of a few bears on social).
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...
Not financial advice — please do your own homework and read the disclaimer.
Hope everyone is enjoying a nice weekend.
As always, kindly yours,
Paulo aka Cloudbear