And How He Is Preparing For The Storm As Head Of One Of The World’s Largest Banks
June 7, 2022—When Jamie Dimon, chairman and CEO of JP Morgan Chase, warned about an economic “hurricane” on the horizon, much of the world of news and finance took notice. It’s not just that Dimon heads up one of Wall Street’s largest and most successful firms, it’s that he is often right. Moreover, Dimon is normally an optimist.
“It’s a hurricane,” Dimon said. “Right now, it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy or Sandy or Andrew or something like that. And you got to brace yourself.”
“It’s a hurricane…. And you got to brace yourself.”
The Economic Storm Clouds
So what’s causing Dimon to batten down the hatches in preparation for the storm? He addressed some of his concerns in his April 2022 letter to shareholders. In fact, he got straight to the point in his first sentence.
“We are facing challenges at every turn: a pandemic, unprecedented government actions, a strong recovery after a sharp and deep global recession, a highly polarized U.S. election, mounting inflation, a war in Ukraine and dramatic economic sanctions against Russia,” he wrote in April.
Despite the lengthy list, Dimon remained moderately positive—at least in public—until last week. The list of risk factors is growing in size and intensity. At the top of that are the policy choices, past and present, of the U.S. Federal Reserve.
“The data is completely distorted.”
-Jamie Dimon said of the U.S. Economy
Governments’ Massive Stimulation Still Ongoing
A key difference between today’s economic recover and past recoveries is the expanding role of the government. Specifically, lawmakers in Congress (In Europe, parliaments and the European Commission) and policymakers in central banks have taken extraordinary steps since the 2008 financial crisis to boost economies.
In his conversation last week at the Bernstein’s Annual Strategic Decisions Conference, Dimon didn’t mince words. He made note of the “huge growth in this country driven by fiscal and monetary stimulation.”
He didn’t go as far as what others are saying—that the government is literally propping up the economy, converting what was a system on capitalism into something else. Instead, Dimon approached the abnormality gingerly. But if you listen carefully, the message is strong and clear.
“That isn’t a normal recovery,” Dimon said. “Fiscal stimulation is still in the pockets of consumers, and they’re spending it at very strong levels. And the data is completely distorted.”
Fed Unwinds Extraordinary Era Of Easing
Dimon said the Federal Reserve’s policy of providing quantitative easing—creating money by purchasing bonds and mortgage-backed securities from the open market—is unprecedented in U.S. history. He said parts of the policy “backfired.” Furthermore, Dimon added, the Fed’s policy of providing negative interest rates was “probably a huge mistake.” Now, he said, the Fed has “no choice” but to tighten its balance sheet.
“We’ll be prepared for Fed outcomes,” Dimon said.
Impact Of War On Prices
The other major risk factor is the impact of the Russia-Ukraine war. A key outcome—aside from the devastating cost of human life— is pressure on prices of commodities.
“Wars go bad, they go south, they have unintended consequences. And this happens to be roiling the commodity markets of the world, wheat, oil, gas and stuff like that, which, in my view, will continue.
Dimon predicted the price of oil could reach $150 to $175 a barrel in five years. (Today, it is hovering around $119 a barrel.) The impact, he said, would be a greater shift to coal, especially among poor countries, and in effect, greater risk of climate change.
Making Adjustments To Weather The Storm
So what is Dimon doing to prepare for the storm? As head of one of the world’s largest banks, he is adjusting the firm’s strategy.
1.) No More Cheap Money. That means shifting away from a reliance on cheap money. The firm is reducing its reliance on lending as a means of earning income and preparing for defaults on loans.”We acknowledge when we are over earning on credit,” Dimon said. “It’s very expensive when delinquencies hit 5 or 10 percent, which is guaranteed to happen in a downturn.”
2.) Change In Real Estate Portfolio. Dimon indicated that real estate investments are a concern, especially “Class A” type relating to high-end rental properties. (Note, growth in this sector has been on steroids during the government’s easy-money era.) He predicted that banks may lose in its lending.
“When all this liquidity gets run down, we’re going to hit a wall,” he said.
3.) Targeted Investments And Stock Buybacks. Dimon said the firm is focusing on “smart acquisition and stock buyback.”
4.) Getting Ready For The Unexpected. Overall, Dimon seemed to be bracing himself for uncertainty. He notoriously starts his day at 5:00 a.m. and brings reading “tons of stuff.”
So what does this all mean in terms of advice? For one, diversify your risk and investment. Furthermore, hold onto your hats!
“I don’t know what it’s going to be like by the end of the year,” Dimon said. “When you see things that have never happened before, then you have to question your ability to predict.”
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