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Seasonal Scaries

The market has lulled itself into thinking the tape is bulletproof, but September has a way of reminding traders that complacency is the most expensive position you can carry. We’ve strung together ninety-one sessions without a two-percent selloff, the longest such stretch since mid-2024. The VIX has been chained to the floor, pinned below its one-year average, and the S&P 500 just printed fresh highs—yet that glassy calm feels less like stability and more like a pressure cooker. It’s the eerie silence you hear before a squall, when the wind dies and the sails hang slack, but you can see the line of black water building on the horizon.

The calendar alone is enough to make even seasoned desks sweat. We’re walking into a minefield over the subsequent fourteen trading sessions: nonfarm payrolls, a CPI print distorted by shelter math, the Fed’s September meeting and projections, and then the chaos of triple witching to finish it off. Each event carries its own load of risk, but what matters is the sequencing. One misfire cascades into the next—weak jobs trigger talk of a harder slowdown, CPI muddies the inflation narrative, Powell is left trying to patch holes with platitudes, and option expiry amplifies whatever direction is already in motion. Dominoes don’t fall in isolation; once one tips, the rest accelerate.

And yet, positioning shows traders are leaning into the idea that nothing can go wrong. Hedge funds are shorting volatility in size, betting the calm will hold. Jobs day is priced with barely eighty-five basis points of implied swing, as if payrolls can’t possibly surprise in either direction. That’s dangerous thinking. We’ve been here before—February 2025, when tariff headlines blindsided the low-volatility crowd, or August 2024, when yen-carry unwinds turned serene positioning into a stampede. Shorting fear when seasonality is at its ugliest is like selling hurricane insurance because the sky looks clear today.

Equity valuations are skating on thin ice. At twenty-two times forward earnings, the S&P is priced like a market that expects nothing but blue skies. Cash allocations are at rock bottom, big tech remains the only horse traders seem willing to bet on, and even the bulls admit they’re sitting on dry powder waiting for a dip. That’s not caution—that’s hope dressed up as prudence. The higher the market rises, the thinner the oxygen becomes, and the easier it is for a small crack to widen into a crevasse.

The polite 25 basis point cut rubberstamped for September is the stuff of central bank orthodoxy, designed to telegraph patience and let the market speculate endlessly about the next one, keeping cross-asset traders on the swivel for the next month or two. But speculation itself is the problem: it anchors uncertainty and keeps the back end heavy.

The market’s chorus is predictable. Rate cuts at the front end mean the curve must steepen, the long end must blow out, and bond vigilantes will take their victory lap. It’s textbook, and maybe too textbook. Policy is never just about the Fed tugging on the front of the curve while the rest of the ship drifts where it will. This administration has already shown that it prefers to take the lead and steer the current, rather than leaving things to chance. If they want yields lower across the board, they have plenty of levers to pull—levers traders may be underestimating.

Then consider the balance sheet. The Fed is stuffed with short-dated paper: about $2 trillion maturing inside seven years, only $1 trillion beyond 15. That’s a loaded magazine for an aggressive Operation Twist. Selling the short stuff and gorging on 20-year plus bonds would swallow half the free float. Treasury, meanwhile, could tilt issuance toward bills and starve the long end. Supply shrinks where it matters, demand swells where it hurts the shorts, and suddenly the curve flattens in spite of every textbook. Add in a sprinkling of mortgage-backed buying and the political prize of softer mortgage rates is delivered straight to voters’ front doors.

Cue in 👇

BESSENT: WE MAY DECLARE A NATIONAL HOUSING EMERGENCY IN THE FALL

Inflation, too, is a battlefield where data itself is the weapon. The shelter component of CPI—Owners’ Equivalent Rent—isn’t just flawed, it’s an outright distortion. It lagged the rent surge during the “transitory” saga, and now it’s keeping inflation artificially sticky just as real-world rents ease. Cleveland Fed’s alternative series shows the truth: rent inflation is back near normal. If policymakers start hammering this point, the narrative of “inflation too high to cut” crumbles. Undermine the vigilantes’ favorite headline metric, and their arguments lose oxygen.

Yield curve control is no longer heresy—it’s just one more “unconventional” tool waiting its turn. Japan has done it, and this administration has no qualms about fixing prices elsewhere, from tariffs to energy. Pinning the long end would once have been laughed out of Washington, but we’ve been sliding toward this since the GFC and LTCM. Each crisis erodes the taboo, and the slope is steep.

There are accounting tricks too. Revalue the gold hoard at today’s prices and suddenly Treasury books hundreds of billions in “profits.” Sell a slice into a sovereign wealth fund or even the crypto space, and you’ve created a sideshow big enough to distract from the curve narrative entirely. Pair that with buying long bonds below par while offloading shorter ones closer to par, and the optics alone can be sold as savvy fiscal management. It’s smoke, mirrors, and accrual games—but it still shifts flows.

Stablecoins bring their own angle. If regulation channels trillions into dollar-based coins, that’s fresh demand for T-bills. Treasury can lean into that appetite, issuing more short paper while trimming long supply. New net demand is always good demand, and if it frees room to torque the long end with other programs, all the better. Tariffs, meanwhile, continue to ring the cash register, legal challenges or not. Between fresh demand for front-end paper and creative fiscal plumbing, the scaffolding for curve suppression is already there.

None of this is dollar-positive. But here’s the rub: for an administration bent on redirecting trade flows, a softer dollar is a feature, not a bug, even if they can’t say it aloud.

The rates street is positioned for a rerun of last September: trim the front, bleed the back, and call it consensus. But that assumes a passive Fed, acting alone and constrained to the standard playbook. If policy turns collaborative—Fed, Treasury, accounting gimmicks, and even statistical re-framing—the consensus steepener trade could prove the crowded side of the boat. The opportunity lies in the opposite direction. The flattener may not be today’s trade, but it’s tomorrow’s ambush.

So September isn’t just another month; it’s a gauntlet. The real question isn’t whether the rally can carry on but how the market will handle stress if the veneer of calm is ripped away. A five-to-ten percent air-pocket in equities is entirely plausible before year-end targets near 7,000 come back into view. The key is that markets don’t travel in straight lines, and the most painful moves are always the ones traders have convinced themselves can’t happen. Right now, the street has shorted fear, and convinced itself that the calm seas of August will stretch on indefinitely. That’s exactly the setup that history punishes.

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