US Fed: Two black swan crises
Not yet in the market are two crises which will confront the Fed shortly. These are left field black swan risks, i.e. they are subtle and just not obvious to the plain eye.
1. Cohn as Trump's Fed proxy. We all know that Janet Yellen's term ends this February. My hunch is that Kaiser Trump will dump her; in her stead, he will place Mr Cohn, the head of his Council on Economic Advisers. My guess is that Kaiser Trump will bully Cohn into doing what the Kaiser wants...this would be a disaster for global economic stability. Traders would love it: after all, the instability thus generated would cause the VIX to come back to life...
2. Liquidity mismatch
- 40% of the Fed’s $4.5 trn balance sheet assets are invested in mortgage-backed securities (MBS).
- Of late, we have been reading or risks to the bond market, namely that of a liquidity mismatch between bond funds and their underlying assets:
- whilst bond funds backed by property assets can be redeemed immediately by the bond fund holder, how is the bond issuer going to get the liquidity needed to pay the redeemer, the guy who has just sold units in his mortgage-backed bond fund?
- Thus, my hunch is that the Fed's balance sheet will be at risk, courtesy of this liquidity misma