Not sure I follow your logic. Watts is essentially using deductive reasoning:

1. The set of beliefs that are true are not equivalent to the set of beliefs that promote fitness

2. The brain is designed to promote fitness

3. The brain may hold beliefs that are not true

You are saying that Watts' statement is undermining itself, that the conclusion undermines either of the premises. But neither 1 or 2 is in contradiction to 3.

Now he takes the conclusion a bit further and argues that not only may we hold untrue beliefs but that with time we will hold a substantial number of untrue beliefs. He does not justify this in this quote but again, this statement is not contradicted by 3.

Or are you saying that since he argues that the brain lies to us then we can't trust our brains which in turn invalidates any reasoning demonstrated by a brain?

In what way is the object in your first premise perceptible to the subject in Mr. Watts’ quote? It would require a faculty “higher” than the brain, which is restricted in access to only a subset of the object, no?

Ah, ok. So you are saying that we cannot know whether or not the first premise is true because the brain does not have full knowledge of its own beliefs.

I would argue that this is irrelevant. We would only need to demonstrate one belief that is useful for fitness but that is factually untrue in order to prove the first premise. The belief that bad spirits cause disease is untrue but useful as it compels you to avoid dead bodies which actually may cause disease. We have now (in an admittedly loose sense of the word) proven the first premise.

Unless we assume 3 implies a Pascal's demon scenario where all attempts to identify any set of beliefs and evaluate their truth value or usefulness for fitness will only provide illusory insights I believe that 3 does not contradict 1.

Did you write this with your “knows things” brain, or your “fitness maxing” brain? ;)

I think, from talking to you, that we both believe in a “knows things” brain: we can know things, including that there are limitations to our knowledge, and certain vulnerabilities that can lead us to know wrongly. The kinds of arguments you have been making are predicated on our thoughts having truth value, as such.

The “fitness machine” brain’s thoughts have no truth value, only fitness value. It does not experience “reality as it exists, at all.” As such it cannot even determine that there is truth value to its self-evaluation as a “fitness machine.” Even worse, it has no access to its objective function as a fitness maximizer, so it can’t even tell if its own thoughts are, indeed, fitness-enhancing! So yeah, fitness brain is susceptible to the “demon” scenario you described.

If we want to posit that the “fitness machine” brain can indeed “know things,” we need to specify how. This doesn’t seem obvious at all to me.

Peter Watts is an author of fiction and "Blindsight" is a scifi novel, so you better not take it as true!

That said, it's consistent that both the statement could be deceptive (in the sense it describes) but still assert something that could generally be true. It could even be deceptive in tone or some details, but the gist of what it says still be true.