Yellen’s nightmare on Wall Street

So what is the biggest nightmare that keeps Fed chief Janet Yellen?

A strengthening dollar with low rates will give Yellen and company fits since both factors will be a contributing factor to the next leg down in the global economy.

The scenario should play out something like this in the bond pits:

Insurance companies and money market funds with huge annuity holdings and pension plans struggling to find yield are going out with more exotic investments in derivatives, such as interest rate swaps.

The stronger dollar will play havoc in derivatives as trillions in paper become illiquid since there are so few players to move in and  sop up this paper due to regulations coming out of the financial crisis such as Dodd/Frank.

So Yellen is startled awake as she realizes that the Fed has to back stop tens of trillions in illiquid paper derivatives bringing the system to grinding halt.

This is not Hank Paulson’s three-page game plan to stop funds from breaking the buck or taking control of AIG.

This is where the US is forced to cut the value of the dollar by 50% to free up illiquid markets.

I will have more on this in the coming weeks, as we move through the summer and perhaps get closer to the nightmare on Wall Street coming true.

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