Jamie Dimon, CEO of JPMorgan Chase, addresses the Economic Club of New York on January 16, 2019 in New York.
Carlo Allegri | Reuters
Jamie Dimon, CEO and chairman of the largest US bank by assets, pointed to a potentially unprecedented combination of risks facing the country in his annual letter to shareholders.
Three forces are likely to shape the world over the next few decades: a US economy recovering from the Covid pandemic; according to Dimon, the high inflation that will usher in an era of rising interest rates, and the Russian invasion of Ukraine and the resulting humanitarian crisis that is now underway.
“Each of these three factors above is unique in its own right: the dramatic stimulus-driven recovery from the COVID-19 pandemic, the likely need for a rapid rate hike and the required reversal of quantitative easing, and the war in Ukraine and sanctions on Russia,” Dimon wrote.
“They represent very different circumstances than what we have experienced in the past – and their combination can dramatically increase the risks ahead,” he wrote. “While it is possible and hopeful that all of these events will be resolved peacefully, we should prepare for the possible negative consequences.”
Dimon’s letter, widely read in business circles because of JPMorgan’s CEO’s status as the most prominent spokesman in his industry, took on a more dejected tone than his letter last year. While he wrote extensively about the challenges facing the country, including economic inequality and political dysfunction, this letter expressed his belief that the US is in the midst of a boom that could “easily” last into 2023.
Now, however, the outbreak of Europe’s biggest conflict since World War II has changed things, sending markets into turmoil, rebalancing alliances and restructuring global trade patterns, he wrote. According to Dimon, this poses both risks and opportunities for the United States and other democracies.
“The war in Ukraine and the sanctions against Russia will at least slow down the global economy – and it could easily get worse,” Dimon wrote. This is due to the uncertainty about the outcome of the conflict and its impact on supply chains, particularly in the energy sector.
Dimon added that JPMorgan’s management is not concerned about its direct exposure to Russia, although the bank “could still lose about $1 billion over time.”
Here are excerpts from Dimon’s letter.
About the economic effects of the war
“We expect the aftermath of the war and resulting sanctions to reduce Russia’s GDP by 12.5% by mid-year (a fall worse than the 10% fall after the 1998 default). and gas, are set to post GDP growth of around 2% in 2022, instead of the high 4.5% we were expecting just six weeks ago. In contrast, they expect the US economy to grow by around 2.5% % will grow from 3% previously estimated. I caution that these estimates are based on a rather static view of the war in Ukraine and the sanctions now in place.”
About Russian sanctions
“Many more sanctions could be added – which could dramatically and unpredictably increase their impact. Combined with the unpredictability of the war itself and the uncertainty surrounding global commodity supply chains, this makes for a potentially explosive situation. I’ll talk later about the precarious nature of the global energy supply, but right now that supply is just easy to disrupt.”
A wake-up call for democracies
“America must be prepared for the possibility of an extended war in Ukraine with unpredictable outcomes. … We must take this as a wake-up call. We must pursue short-term and long-term strategies aimed at not only resolving the current crisis, but also maintaining the long-term unity of the newly strengthened democratic alliances. We must make it a permanent and enduring sign of democratic ideals and against all forms of evil.”
Effects beyond Russia
“Russian aggression has another dramatic and important result: it is merging the democratic Western world – across Europe and the North Atlantic Treaty Organization (NATO) countries as far afield as Australia, Japan and Korea. […] The outcome of both of these issues will extend beyond Russia and will likely affect geopolitics for decades to come, potentially leading to both a realignment of alliances and a reorganization of world trade. How the West behaves and whether the West can maintain its unity will likely determine the future global order and shape America’s (and its allies’) important relationship with China.”
About the need to reorganize supply chains
“It is also clear that trade and supply chains, where they affect national security issues, need to be restructured. You simply cannot rely on countries with different strategic interests for critical goods and services. Such restructuring does not have to be a disaster or decoupling. With thoughtful analysis and execution, it should be rational and orderly. This is in everyone’s best interests.”
Special…
“For any product or material essential to national security (think rare earths, 5G and semiconductors), the US supply chain must either be domestic or open only to completely friendly allies. We can never and should never rely on processes that can and will be used against us, especially when we are most vulnerable. For similar national security reasons, activities (including investment activities) that help create a national security risk – i.e. sharing critical technology with potential adversaries – should be restricted.”
Brazil, Canada and Mexico will benefit from this
“This restructuring will likely occur over time and need not be exceptionally disruptive. There will be winners and losers – some of the main beneficiaries will be Brazil, Canada, Mexico and friendly Southeast Asian nations. In addition to reconfiguring our supply chains, we must create new trading systems with our allies. As mentioned above, I would prefer to rejoin the TPP – it is the best geostrategic and trade arrangement possible with allied nations.”
on the fed
“The Federal Reserve and the government did the right thing by taking bold, dramatic action in the wake of the pandemic-induced calamity. In hindsight it worked. But even with hindsight, the medicine (tax spending and QE) was probably too much and also took a long time.”
“Very volatile markets”
“I don’t envy the Fed what it needs to do next: the stronger the rebound, the higher subsequent interest rates (I think this could be significantly higher than markets are expecting) and the more quantitative tightening ( QT). If the Fed gets things right, we can have years of growth, and inflation will eventually come down. In any case, this process will cause a lot of consternation and very volatile markets. The Fed shouldn’t worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.”
Padded flexibility
“One thing the Fed should be doing, and appears to have done, is to exempt itself from the pattern of hikes by just 25 basis points – give itself ultimate flexibility – and do it regularly. And while they may announce how they intend to reduce the Fed’s balance sheet, they should be free to change that plan in the short term to cope with actual events in the economy and markets. A Fed that’s strong Reacting to data and events in real time will ultimately create more trust. In any case, interest rates must rise significantly. The Fed has a tough job, so let’s all wish it the best.”
On JPMorgan’s rising spending
“This year we announced that capital expenditure-related spend would increase to $15 billion from $11.5 billion. I’ll try to describe the $3.5 billion ‘incremental investments’, although I can’t verify them all (and for competitive reasons). I wouldn’t.) But we hope some examples will give you some comfort in our decision-making process.
Some investments have a fairly predictable time to positive cash flow and a good and predictable return on investment (ROI), however you measure it. These investments include offices and bankers around the world in all of our businesses. They also include specific marketing spend that has a known and quantifiable return. This category combined will add $1 billion to our spend in 2022.
For acquisitions
“Over the past 18 months, we have spent nearly $5 billion on acquisitions, which will add approximately $700 million to “additional investment” spending in 2022. We expect most of these acquisitions to deliver positive returns and strong profits within a few years, fully justifying their cost. In some cases, these acquisitions bring in money – and we believe they help prevent erosion in other parts of our business.”
Global spread
“Our international consumer expansion is an investment of a different nature. We believe the digital world offers us an opportunity to build a consumer bank outside of the United States that can become very competitive over time – an option that doesn’t exist in the physical world We start with several benefits that we believe will only grow stronger over time… We have the talent and know-how to deliver these through cutting-edge technology, allowing us to leverage the full breadth of these capabilities from all of our business areas can use . We can apply what we have learned to our leading US franchise and vice versa. We may be wrong on this one, but I like our hand.”
About JPMorgan’s Diversity Push
“Despite the challenges of the pandemic and the retention of talent, we continue to increase our representation of women and people of color. … In 2021, more women than ever have been promoted to CEO positions; likewise, a record number of women were promoted to senior positions Director. By the end of the year, based on employees who self-identified, women represented 49% of the company’s total workforce. Overall, Hispanic representation was 20%, Asian representation grew to 17%, and Black representation increased to 14%. “