Jamie Dimon Talks ‘Human Existence,’ ‘Explosive Situations’

JPMorgan is prepared for anything “in all times,” Jamie Dimon declared on Monday, in his annual letter to shareholders.

Dimon’s letters double as Dalio-esque tracts. Like most titans of industry, Dimon has a difficult time striking the right balance between delivering on the myriad obligations inherent in his position atop the proverbial pyramid and avoiding the temptation to wax philosophical at the expense of brevity.

To be sure, there’s no “right” balance. Warren Buffett incurred the ire of the financial universe last year with an annual letter widely described as “tone deaf.” The media mercilessly criticized Buffett’s missive for being devoid of insight into the human suffering caused by the pandemic. Market participants also decried Buffett’s letter for being similarly bereft regarding America’s reckoning with two centuries of racial injustice.

As I put it at the time, it probably seemed strange to people outside the financial universe that anyone would be particularly concerned with Buffett’s apparent lack of insight into the most vexing issues of our time. Buffett, I not-so-gently reminded readers, is no Marcus Aurelius. Rather, he’s just a guy who made some money. Yes, he made a lot of it, but that wasn’t a reason to expect him to deliver the definitive take on what, by many accounts, was the most trying year for humanity since the second world war.

Fast forward a year and humanity is now pondering the possibility of a third world war, and Dimon, not one to shy away from the issues, had a lot to say about geopolitics. He also addressed monetary policy, the economy and, of course, JPMorgan which, Dimon sought to make clear, will be fine come hell or high water.

“We normally don’t worry about — or even try to predict — normal fluctuations of the economy,” he wrote, noting that the bank isn’t just prepared for “difficult markets,” but also for “severe recessions, as well as for unpredictable events.”

Current events, though, demand special consideration, Dimon suggested. “Sometimes there are powerful underlying structural trends that we must try to understand since their impact can be so large, with widespread impact on many parts of human existence,” he said.

Dimon all but called the Fed’s task impossible. The challenges are unprecedented, the models are likely to be even more unreliable that usual, rates are likely to be much higher and markets much more volatile.

He lauded the fiscal-monetary response to the pandemic as necessary and effective, but suggested “the medicine was probably too much and lasted too long.” “I do not envy the Fed for what it must do next,” Dimon sighed, before delivering a stark take on the path forward:

The stronger the recovery, the higher the rates that follow (I believe that this could be significantly higher than the markets expect) and the stronger the quantitative tightening (QT). If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets. The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.

This is in no way traditional Fed tightening — and there are no models that can even remotely give us the answers. I have always been critical of people’s excessive reliance on models — since they don’t capture major catalysts, such as culture, character and technological advances. And in our current situation, the Fed needs to deal with things it has never dealt with before (and are impossible to model), including supply chain issues, sanctions, war and a reversal of QE in the face of unparalleled inflation. Obviously, the Fed always needs to be data-dependent, and this is true today more than ever before. However, the data will likely continue to be inconsistent and volatile — and hard to read. The Fed should strive for consistency but not when it’s impossible to achieve.

One thing the Fed should do, and seems to have done, is to exempt themselves — give themselves ultimate flexibility — from the pattern of raising rates by only 25 basis points and doing so on a regular schedule. And while they may announce how they intend to reduce the Fed balance sheet, they should be free to change this plan on a moment’s notice in order to deal with actual events in the economy and the markets. A Fed that reacts strongly to data and events in real time will ultimately create more confidence. In any case, rates will need to go up substantially. The Fed has a hard job to do so let’s all wish them the best.

The shift from QE to QT will cause a massive change in the flow of funds in and out of Treasury bonds and, therefore, all securities… In today’s economic environment, countries’ central banks do not need to increase their foreign exchange reserves as they did after the great financial crisis, and banks don’t need to buy Treasuries to improve their liquidity ratios. This time around, business investment will likely be higher, both because of higher growth and because the capital required to combat climate change is estimated to be more than $4 trillion annually. Finally, governments will also need to borrow more money — not less.

This massive change in the flow of funds triggered by Fed tightening is certain to have market and economic effects that will be studied for decades to come. Our bank is prepared for drastically higher rates and more volatile markets.

I’d note that not all of Dimon’s predictions and warnings have panned out over the years. At the end of the day he, like Buffett, is just a man. That said, he obviously has unique insight into the likely impact of shifting Treasury market dynamics. Dimon’s predictions about the level of rates are probably no better (or worse) than anyone else’s, but when it comes to banks’ intermediary role, his voice matters quite a bit.

Dimon weighed in on Ukraine, noting that the Russian economy is likely to suffer a contraction worse than the collapse triggered by the 1998 default. “Many more sanctions could be added — which could dramatically, and unpredictably, increase their effect,” he said, adding that in addition to the ambiguity associated with the war itself and accompanying supply chain disruptions, the world faces what he called “a potentially explosive situation.”

As he’s wont to do, Dimon set out a series of policy recommendations that were very specific, not to mention presumptuously prescriptive, emanating as they did from an unelected “official.” Below find Dimon’s “bold solutions” for confronting Russia (verbatim):

  • Demonstrate leadership and commitment to a long-term military strategy by meaningfully increasing our military budget and troop deployment on NATO’s borders, as appropriate. To both sides, these steps make our resolve clear and reflect our recognition of the grave new geopolitical realities.

  • Direct billions of dollars in aid to Ukraine, announced now, to support the country currently and to help rebuild in the future. We should also help the Europeans with the enormous migration issues they are facing. The United States could take the lead in humanitarian efforts and ask all nations, including China, to join us in this response.

  • Turn up sanctions — there are many more that could be imposed — in whatever way national security experts recommend to maximize the right outcomes.

  • We need a “Marshall Plan” to ensure energy security for us and our European allies. Our European allies, who are highly dependent on Russian energy, require our help. For such a plan to succeed, we need to secure proper energy supplies immediately for the next few years, which can be done while reducing CO2 emissions.

  • As we are seeing — and know from past experience — oil and gas supply can be easily disrupted, either physically or by additional sanctions, significantly impacting energy prices. National security demands energy security for ourselves and for our allies overseas. Fortunately, we do not need to change our long-term objectives on climate change and greenhouse gases, and we should remind ourselves that using gas to diminish coal consumption is an actionable way to reduce CO2 emissions expeditiously. While the United States is fairly energy independent, we need to increase our energy production and get more gas (in the form of liquefied natural gas) to Europe immediately. Our work with all of our allies should include urging them to both increase their production and deliver some of it to Europe. To do this, we also need immediate approval for additional oil leases and gas pipelines, as well as permits for green energy projects; i.e., solar and wind. We cannot accomplish our goals with misguided and counterproductive policies.

Politicians will tell you all of that is (far) easier said than done. And that speaks to one of democracy’s many weaknesses — democracies are inefficient, and tend to become more so over time as idealism is subjugated first to practicality, then to expediency and then, later, to warring special interests and factionalism.

The war in Ukraine should underscore the absolute necessity of hastening the energy transition. Instead, it’s revived fossil fuels and bolstered bottom lines and bargaining power for the companies and countries that produce them, respectively. I’ve said it before and I’ll say it again: The odds of humanity successfully stabilizing the biome are very low. In all likelihood, we’ll be living the first hour of Interstellar within a few generations.

In addition to promoting energy security and advancing climate objectives, Dimon said his recommendations would “maximize the strength and the durable unity of the democratic world,” thereby bolstering America’s position as Washington seeks a viable strategic framework for competition with China, which he gently noted has “serious issues” of its own to confront. Specifically, Dimon wrote that,

For all of its strengths, China still needs more food, water and energy to support its population; pollution is rampant; corruption continues to be a problem; state-owned enterprises are often inefficient; corporate and government debt levels are growing rapidly; financial markets lack depth, transparency and adequate rule of law; income inequality remains highly prevalent; and its working age population has been declining since 2015.

He was generally optimistic on the prospects for “establish[ing] and maintain[ing] a relationship with China that will allow both countries and the world to thrive.”

Dimon stated the obvious about the war: It’ll echo for decades. He repeated a favorite Biden administration talking point. “Russian aggression… is coalescing the democratic, Western world across Europe and NATO countries to Australia, Japan and Korea.” The Kremlin, Dimon suggested, has reminded the West that there’s “no replacement for strong allies and strong militaries.”

And yet, just as Fed success in bringing down inflation without triggering a recession isn’t assured, neither is the maintenance of Western hegemony. Pressing questions related to security and commerce “will transcend Russia and likely affect geopolitics for decades, potentially leading to both a realignment of alliances and a restructuring of global trade,” Dimon said. “How the West comports itself, and whether the West can maintain its unity, will likely determine the future global order.”


Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

One thought on “Jamie Dimon Talks ‘Human Existence,’ ‘Explosive Situations’

  1. “Buffett, I not-so-gently reminded readers, is no Marcus Aurelius. Rather, he’s just a guy who made some money.”

    Reminds me of one of the salient points of the study “Talent vs Luck: The Role of Randomness in Success and Failure,” –The maximum success never coincides with the maximum talent, and vice-versa.

NEWSROOM crewneck & prints