Getting Queasy

It's not 2008, but it feels a bit dodgy out there.

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A reader passed me this chart on the Federal Reserve’s balance sheet, and he noted that someone is beginning to borrow from the discount window. Not much, just a few billion dollars.

Now you might be asking, who cares? The Fed handles trillions, and you’re concerned about billions? The thing is, banks hate borrowing from the discount window, there’s a stigma attached and it can indicate no one else will lend to you. So while $2 billion doesn’t look like much, what matters is that someone is willing to risk the stigma to get it.

I don’t know who is borrowing it, but keep in mind this is happening at the same time as the blow-up of the London Metal Exchange because a large state-backed Chinese nickel producer couldn’t meet what looks to be a relatively small margin call. And JP Morgan is the largest counter-party to that trade. The story we’re being told, with relatively small amounts of money at stake, doesn’t make that much sense.

Meanwhile, according to American Banker magazine yesterday, “the volume of assets held by banks on the FDIC’s problem bank list — a tally of banks that received poor ratings from regulators — jumped by about $120 billion in the fourth quarter..”

In other words…

There is immense volatility in commodity markets because of Ukraine, and those markets are not regulated particularly well and have huge embedded leverage in metals and foodstuffs that are at historically stretched levels. Meanwhile, China is panicking now that Omicron seems to be exploding over there, and they are trying to deflate the largest property bubble in history.

I don’t cover financial markets very often, and I want to see what happens with the Fed balance sheet next week. But this makes me… queasy.