Lisa Cook to the Bulls: Wake Up

High P/Es, hidden losses, and a court fight over who gets to sit at the Fed.

On November 20, Governor Lisa Cook stood at Georgetown and delivered what amounted to a confession. The Federal Reserve, the institution designed to stabilize the global financial system, is operating under acute stress on three distinct fronts, and it cannot handle all of them simultaneously.

Cook warned of outsized asset price declines looming across equities, corporate bonds, and real estate. Something is about to break.

This is happening now, while the central bank is simultaneously fracturing from within and under constitutional assault from the White House. When these pressures collapse at once, you get an institution with reduced capacity, reduced legitimacy, and missing information at exactly the moment it matters most.

Price-to-earnings ratios sit at historical highs. The equity risk premium, what investors demand to hold stocks instead of safe Treasury bonds, has compressed to near 20-year lows.

Everyone has collectively decided bad things will never happen again.

When that changes (and it will), markets will be hypersensitive. The wealth effect will reverse. Households cut spending. Forced deleveraging cascades. Geopolitical escalation, persistent inflation, a policy mistake born of data starvation. Any of it could light the fuse.

Then there’s the shadow banking problem that nobody talks about enough.

Private credit has roughly doubled over five years to $1.34 trillion. Unlike bank loans or public corporate bonds, these assets are illiquid and valued using internal spreadsheets. That means when credit quality deteriorates, nobody knows until someone actually tries to sell. That’s when they discover the paper is worth 40 percent less than expected.

Life insurers and pension funds, desperate for yield, have become major allocators to these funds. The borrowers? Typically small, highly leveraged companies with floating-rate debt. As interest rates stayed elevated through 2025, their ability to service debt degraded. Lenders masked this rot using a time-honored trick: amend and extend. Relax the covenants. Avoid recognizing losses. Kick the can.

When the masking fails, the cascade could be severe.

The Treasury market is supposed to be the ultimate safe haven. It stopped being safe a while ago.

The Fed flagged specific instability in something called the basis trade. Hedge funds exploit microscopic price discrepancies between cash Treasuries and Treasury futures. To make these tiny spreads profitable, they employ substantial leverage, usually borrowed through the repo market.

During volatility spikes, repo lenders increase margin requirements. Hedge funds face forced liquidation. A large synchronized unwinding could overwhelm market intermediaries. Liquidity evaporates. Yields spike. The transmission mechanism for monetary policy breaks.

This is all terrifying enough on its own. It becomes something else entirely when paired with the rot inside the building.

In August 2025, Governor Adriana Kugler resigned following disclosures that her spouse had engaged in heavy trading during blackout periods. These are the sensitive weeks preceding FOMC meetings when policymakers hold material non-public information.

According to filings, her spouse traded Apple, Cava Group, and Southwest Airlines just days before policy meetings. These violated the Fed’s 2022 ethics code explicitly. The rules extend to spouses to prevent exactly this.

Kugler requested a waiver from Chair Powell in July to divest the impermissible holdings. Powell said no. Not here’s a path forward. Not let’s work this out.

Just no.

This forced Kugler into an impossible corner. She couldn’t come into compliance without further violating blackout rules or resigning. She resigned in August. The institutional response was cleanup. The board’s stability was treated as secondary to making the problem disappear.

Stephen Miran, a longtime Fed critic, got nominated to fill the vacancy. Trump’s team was already thinking about Board composition. Shifting the balance mattered more than institutional trust.

Then came the real blow.

In summer 2025, Trump announced his intention to remove Governor Lisa Cook for cause, citing allegations of mortgage fraud. This is the first time in American history a sitting President has attempted such a move.

The Federal Reserve Act says governors serve 14-year terms and can be removed only for cause. Legal precedent has always meant evidence of inefficiency, neglect, or malfeasance, not policy disagreement. It was designed as protection.

The Trump administration is arguing that criminal allegations satisfy the standard. This is the first real test.

The allegations center on mortgage applications for two properties filed weeks apart. Cook is alleged to have listed one property in Ann Arbor and another in Atlanta as her primary residence on respective documents. Her legal team characterizes the discrepancies as clerical errors, arguing the complete loan files contain correct documentation. They claim the Federal Housing Finance Agency cherry-picked isolated errors to construct a narrative.

Cook sued to block removal. The Appeals Court issued a temporary injunction, ruling that removing her before final determination would violate due process and cause irreparable harm to Fed independence. The Supreme Court granted certiorari. Oral arguments are scheduled for January 2026.

Here’s what this means.

If SCOTUS rules the President has broad discretion to define cause, Fed independence effectively ends. Presidents could scour governors’ personal records for minor infractions to justify removing dissenters. If Cook is removed and Miran is confirmed, Trump controls a majority of the Board. He controls the administrative agenda. He has significant influence over interest rate decisions.

The independence shield that took a century to build would be gone.

While the legal battles rage, something more immediate is happening. The lights have gone out on the dashboard.

The government shutdown severed the flow of vital economic statistics. The October Employment Situation report wasn’t delayed. It was cancelled. The Bureau of Labor Statistics confirmed it: data collection and processing did not happen. October 2025 will remain a permanent blank in the economic record.

November data got pushed to mid-December, after the Fed’s scheduled policy meeting. Inflation data is also suspended.

Cook was blunt about it: the Fed is flying blind. Without official employment and inflation data, the FOMC relies on imperfect proxies. ADP payroll estimates. Credit card spending. Online job postings.

These alternatives are diverging sharply. Some private signals scream recession. Others suggest expansion. Without the definitive benchmark of the official report, the FOMC faces a genuine dilemma. Rate cuts based on gloomy private data risk reigniting inflation if the economy is stronger than feared. Holding rates risks deepening a recession already underway.

Cook also flagged something that feels increasingly immediate: generative AI in trading.

If multiple major trading firms employ AI models trained on similar datasets, they may independently converge on identical trading signals. A synchronized sell signal across multiple AI systems could overwhelm market liquidity and create a flash crash without explicit human coordination. The Fed isn’t equipped to monitor this.

So here’s where we are.

The Federal Reserve faces late 2025 and 2026 in a position of constrained capacity. It monitors fragile markets while contending with ethics scandals, a constitutional battle over its independence, and missing economic data.

Private credit markets built on layered leverage eventually face forced deleveraging. Treasury basis trades funded with repo leverage eventually encounter margin calls. When such shocks occur, the central bank’s traditional response mechanisms remain technically robust. The banking system has capital. The Fed has tools.

But the Fed’s political capacity to use those tools without interference has been materially reduced. The Kugler scandal provided ammunition to critics. A Cook removal would establish precedent for purging governors based on political criteria dressed up as legal cause.

This is not how central banking is supposed to work. Independence wasn’t some abstract principle designed by academics. It was built because every time political pressure got inserted into monetary policy decisions, markets recognized it and priced it in. Confidence eroded. Volatility spiked.

By January, the Supreme Court will have ruled on whether presidents can fire Fed governors they dislike. By then, those asset prices will probably have cracked.