KEY POINTS
There are two main factors that have Dimon worried: So-called
quantitative tightening, or QT, is scheduled to begin this month and
will ramp up to $95 billion a month in reduced bond holdings.
The other large factor worrying Dimon is the Ukraine war and its
impact on commodities, including food and fuel. Oil could hit $150 or
$175 a barrel, he said.
“You’d better brace yourself,” Dimon told the roomful of analysts and
investors. “JPMorgan is bracing ourselves and we’re going to be very
conservative with our balance sheet.”
JPMorgan Chase CEO Jamie Dimon says he is preparing the biggest U.S.
bank for an economic hurricane on the horizon and advised investors to
do the same.
“You know, I said there are storm clouds but I’m going to change it …
it’s a hurricane,” Dimon said Wednesday at a financial conference in
New York. While conditions seem “fine” at the moment, nobody knows if
the hurricane is “a minor one or Superstorm Sandy,” he added.
“You’d better brace yourself,” Dimon told the roomful of analysts and
investors. “JPMorgan is bracing ourselves and we’re going to be very
conservative with our balance sheet.”
Beginning late last year with high-flying tech names, stocks have been
hammered as investors prepare for the end of the Federal Reserve’s
cheap money era. Inflation at multidecade highs, exacerbated by supply
chain disruptions and the coronavirus pandemic, has sown fear that the
Fed will inadvertently tip the economy into recession as it combats
price increases.
While stocks bounced from a precipitous decline in recent weeks on
optimism that inflation may be easing, Dimon seemed to dash hopes that
the bottom is in.
“Right now, it’s kind of sunny, things are doing fine, everyone thinks
the Fed can handle this,” Dimon said. “That hurricane is right out
there, down the road, coming our way.”
There are two main factors that have Dimon worried: First, the Federal
Reserve has signaled it will reverse its emergency bond-buying
programs and shrink its balance sheet. The so-called quantitative
tightening, or QT, is scheduled to begin this month and will ramp up
to $95 billion a month in reduced bond holdings.
“We’ve never had QT like this, so you’re looking at something you
could be writing history books on for 50 years,” Dimon said. Several
aspects of quantitative easing programs “backfired,” including
negative rates, which he called a “huge mistake.”
Central banks “don’t have a choice because there’s too much liquidity
in the system,” Dimon said, referring to the tightening actions. “They
have to remove some of the liquidity to stop the speculation, reduce
home prices and stuff like that.”
The other large factor worrying Dimon is the Ukraine war and its
impact on commodities, including food and fuel. Oil “almost has to go
up in price” because of disruptions caused by the worst European
conflict since World War II, potentially hitting $150 or $175 a
barrel, Dimon said.
“Wars go bad, [they] go south in unintended consequences,” Dimon said.
“We’re not taking the proper actions to protect Europe from what’s
going to happen to oil in the short run.”
‘Huge volatility’
Last week, during an investor conference for his bank, Dimon referred
to his economic concerns as “storm clouds” that could dissipate.
Presentations from Dimon and his deputies at the all-day meeting have
bolstered JPMorgan shares by giving greater detail on investments and
updated figures on interest revenue.
But his concerns seem to have deepened since then.
During the response to the 2008 financial crisis, central banks,
commercial banks, and foreign exchange trading firms were the three
major buyers of U.S. Treasurys, Dimon said Wednesday. The players
won’t have the capacity or desire to soak up as many U.S. bonds this
time, he warned.
“That’s a huge change in the flow of funds around the world,” Dimon
said. “I don’t know what the effect of that is, but I’m prepared for,
at a minimum, huge volatility.”
One step the bank could take to gird itself for a coming hurricane is
to push clients to move a type of lower-quality deposit called
“non-operating deposits” into other places, such as money market
funds, for example. That would help the bank manage its capital
requirements under international rules, potentially helping it absorb
a surge in bad loans.
“With all this capital uncertainty, we’re going to have to take
action,” Dimon said. “I kind of want to shed nonoperating deposits
again, which we can do in size, to protect ourselves so we can serve
clients in bad times. That’s the environment we’re dealing with.”
Banks had a “fortress balance sheet” and conservative accounting are
the best protection for a downturn, Dimon said.
The bank has shied away from servicing a lot of federal FHA loans, he
said, because delinquencies could hit 5% or 10% there, “which is
guaranteed to happen in a downturn,” Dimon said.
‘Shame on you
Dimon went on a tear during the hourlong session, barreling through
topics like the “greatest hits” of his observations and gripes, often
letting loose with profanity.
He lambasted investors for voting along with proxy advisors like Glass
Lewis, which has disagreed with JPMorgan’s board on recent matters
including executive compensation and whether the bank should separate
the chairman and CEO roles in the future.
“Shame on you if that’s how you vote,” Dimon said. “Seriously, you
should be embarrassed. Do your own homework.”
Companies are being driven out of public markets “because of
litigation, regulation, press, cookie-cutter governance,” he added.
Meanwhile, other critics often conflate stakeholder capitalism with
being “woke,” Dimon said. “I am a red-blooded, free-market capitalist
and I’m not woke,” he said.
“All we’re saying is when we wake up in the morning, we give a s—
about serving customers, earning their respect, earning their repeat
business.”