Jamie Dimon Raises Concerns Regarding the Economic Outlook

Jamie Dimon is the CEO of J.P. Morgan, the biggest bank in the United States. He knows a lot about the economy and shared his thoughts in a letter to shareholders. In this letter, he warns investors about market values, future interest rates, and inflation. He seems careful about what investors think will happen compared to what might really happen.

Now, let’s see some important points from Jamie’s letter. He says that even though there are problems, the U.S. economy is still strong because people keep spending money. The economy is helped by the government spending a lot and using past stimulus. ‘But we also need more spending as we change to a greener economy, fix global supply chains, increase military spending, and deal with higher health care costs. This might make inflation last longer and rates go up more than people think.’

There are also risks to watch-out for which makes Jamie Dimon to warn us and stay careful. ‘Taking away over $900 billion in money from the system every year is something we haven’t seen before. And ongoing wars in Ukraine and the Middle East can cause problems with energy and food markets, migration, and military-economic relationships, not to mention the terrible human cost.’

If inflation stays high, interest rates may also stay high or go higher in the next few years. This is because governments are spending a lot of money and borrowing a lot too. When they do this, there is more money going around, which can make inflation stay high. Jamie Dimon thinks that if governments keep spending and borrowing, inflation might not go down.

Navigating Global Uncertainty

Now, talking about how we be entering one of the most treacherous geopolitical eras, Jamie says, it is like the time after World War II. ‘There are many things to worry about, like debt, money from the government, and changes in how money works. These problems are big and new. We might not understand them until they happen over many years. JPMorgan Chase needs to be ready for what might happen to our company and our workers.’

Jamie says the world is in a tense time with many problems between countries. ‘This is one reason why we need to change how we make things and where we get our supplies from.‘ Before COVID, US depended on just a few countries for everything. When COVID happened and the world stopped working, the country learned that it’s better to spread out its supplies and make things at home or in different countries.

This leads to more spending by governments. With these problems and de-globalization between countries, Jamie thinks there may be more debt, more stimulus, and more uncertainty in the world economy.

‘We worry about prices going up all the time. We look at many possible things that could happen to be ready for risks in our business. Many important signs show that things are good now and might get better, like prices not going up too much. But we need to think about what could happen in the future.

There seem to be many reasons why prices might keep going up. All of the following factors appear to be inflationary. Ongoing fiscal spending, re-militarization of the world, restructuring of the global trade, and the needs of the new green economy. We might have higher energy costs in the future even though we have lots of gas and oil right now. This is because we need to invest in better energy systems.’

Economic Concerns and Inflation

‘In the past, when the government spent more money than it had, it didn’t always cause prices to go up. In the 1970s and 1980s, people thought that high spending and too much money caused high prices. This happened during the Vietnam War when prices went up by more than 10%. Today, the government is spending even more money, but it’s not because of a bad economy. They are also using “quantitative easing” as a new way to help the economy and this has never been done before, and it can cause both good and bad things to happen.’

Jamie says many things could cause more inflation for a longer time. In the 1970s and 1980s, there was a lot of inflation because of the Vietnam War and the money needed to fight it. Now, there is a lot of money being given out even when the economy is not bad.

Usually, government help comes during bad times to keep the economy going. But after 2008, we have seen help even though the economy was strong.

Remember that governments used to lower interest rates to help the economy. But when rates are near zero, you need another way, like making more money and doing quantitative easing.

Evaluating Long-Term Inflation Risks

‘Equity values are high and credit spreads are tight. The market thinks there’s a 70-80% chance of a soft landing with some growth, lower inflation, and interest rates.’

Jamie Dimon thinks that the value of stocks is high, and that’s actually true. The market is not in a bubble, but the S&P 500’s price to earnings ratio is higher than usual. This causes some stocks to be overvalued.

When we look at big companies like Apple, Microsoft, Nvidia, and Tesla, their stocks are very expensive. Jamie thinks the market believes everything will be perfect with the economy. But he doesn’t think we’ll have a perfect economy with low interest rates and low inflation. He warns people that if things aren’t perfect, stock prices might go down.

Jamie also says we shouldn’t focus on monthly changes in inflation. Instead, we should think about things that can make inflation go up over a long time. Small changes in interest rates might not be enough to fight inflation.

He believes we pay too much attention to short-term data and not enough to long-term trends. Inflation has been about 2% in the U.S. for the last 24 years. Jamie thinks the trends he sees could make inflation higher than before.

‘Inflation might be higher in the next 20 years. The levels we saw in the past 20 years might not happen again. This is because of things like fiscal spending, the trillions needed each year for the green economy, the remilitarization of the world, restructuring of global trade. Models might not show this, so we need to use our own thinking to see the effects.’

Inflation and Rate Cut Outlook

Now let’s look at what’s happening in the economy now. Last month, inflation was higher than we thought for March. Inflation is staying above 3%. Inflation has gone up a bit in recent months.

This means prices are staying higher than people thought. Investors now think there will be two rate cuts this year instead of six. Since inflation is staying high, the Federal Reserve might not lower interest rates as fast.

The US economy is growing at 2% a year. Inflation is still above the Fed’s target of 2%. Some people at the Fed think it’s better to wait before cutting interest rates. Investors now think rate cuts might start in 2025.

Higher inflation has made the 10-year bond go up. This means the Fed might not cut interest rates soon. When the 10-year bond goes up, stocks become less valuable because investors can get more money without taking risks.

When bond yields go up, other investments become less interesting. People can make more money without risk by buying bonds. This makes stocks less interesting because bonds give more money. If the 10-year bond stays at 5%, stocks might be too expensive.

Now, when we look at the US economy, its GDP growth is doing well, and inflation is starting to take back up again. So, lowering interest rates may lead to more inflation. If inflation is going up, why lower interest rates? It could make inflation worse.

In the past, we would lower interest rates during a recession or when the economy struggled. But right now, the economy seems okay.

Peter Lynch said the Fed’s job is to control the economy’s growth. If we lower interest rates when everything seems fine, it might cause more risk and inflation. This might not be good for the U.S. economy.

Right now, interest rates are about 5%, so we have a 5% buffer. We can use this buffer to help the economy if a recession happens before doing more quantitative easing.

If we lower interest rates to 3% and then a recession comes, we won’t have much of a buffer. The government will need to do more quantitative easing, which can cause inflation.

In short, having higher interest rates gives us a bigger buffer before needing quantitative easing. Higher interest rates give us a bigger safety net before the government has to step in like during COVID.

It’s better for the economy if we keep interest rates up while the U.S. is growing. If growth continues, maybe even raise interest rates more. This way, we have a cushion when things go wrong.

People like low interest rates because stocks go up and they make more money. But this can cause more inflation and a weaker economy. So, lowering interest rates too soon might be a mistake.