[BUG] VS Code extension (Cursor): mid-turn assistant text renders as collapsed "Thought for Xs" stubs — regressed in 2.1.196, worse in 2.1.197 (2.1.195 OK)

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet

(related but distinct: #67071 desktop app + CLI, text persisted in JSONL;
#67470 CLI TUI — this report is the VS Code extension surface, text
misrendered AS thinking stubs, with an exact version boundary)

• [x] This is a single bug report
• [x] I am using the latest version of Claude Code (bug reproduced on extension

v2.1.197, latest at time of filing; currently pinned to 2.1.195 as workaround)

What's Wrong?

In the Claude Code VS Code extension (running inside Cursor), assistant text
emitted mid-turn is misrendered as collapsed "Thought for Xs" thinking stubs
(often "Thought for 0s") instead of prose. Tool cards and turn-final text render
normally. Bisected via extension rollback, same session, same model:

• 2.1.195 — correct: turn-initial AND between-tool text render as prose
• 2.1.196 — regressed: turn-initial renders; text AFTER a tool call collapses
• 2.1.197 — worse: ALL mid-turn text collapses; only turn-final text renders

Cross-check: the terminal CLI (v2.1.158) with the exact same model
(claude-fable-5[1m]) renders all mid-turn text correctly — extension-specific.

What Should Happen?

Assistant prose should render in reading order wherever the model emits it,
including before/between tool calls.

Error Messages/Logs

(none — silent rendering defect)

Steps to Reproduce

1. In the VS Code extension (Cursor), ask the model to produce one turn:

text paragraph (A) → run a Bash echo → text paragraph (B) → AskUserQuestion

1. On 2.1.197: A and B both display as "Thought for Xs" stubs
2. On 2.1.196: A renders, B collapses
3. On 2.1.195: both render correctly

Claude Model

Other: claude-fable-5[1m]

Is this a regression?

Yes, this worked in a previous version

Last Working Version

2.1.195 (VS Code extension)

Claude Code Version

VS Code extension 2.1.196 / 2.1.197 (broken), 2.1.195 (OK); CLI 2.1.158 used
for the cross-check

Platform

Anthropic API (Claude Max)

Operating System

macOS

Terminal/Shell

Cursor

Additional Information

Screenshots attached: 2.1.197 all-collapsed marker test; 2.1.196 partial;
2.1.195 correct; terminal CLI same model rendering fine.