Jamie Dimon says inflation and Ukraine war may dramatically increase risks to the US

jamie dimondCEO and chairman of the largest US bank by assets outlined 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; high inflation that will usher in an era of rising rates, and Russia invasion of ukraine and the resulting humanitarian crisis now ongoing, according to Dimon.

“Each of these three factors listed above is unique in its own right: the dramatic stimulus-driven recovery from the COVID-19 pandemic, the likely need for rapid rate hikes and the required reversal of QE, and the war in Ukraine. and sanctions on Russia,” Dimon wrote.

“They present entirely different circumstances than we have experienced in the past, and their confluence can dramatically increase future risks,” he wrote. “While it is possible and hopeful that all of these events will have a peaceful resolution, we must prepare for possible negative outcomes.”

Dimon’s letter, widely read in business circles because of the JPMorgan The CEO’s status as the most prominent spokesperson for his industry took on a more dejected tone from his missive last year. While he wrote extensively about the challenges facing the country, including economic inequality and political dysfunction, that letter conveyed his belief that the United States was in the midst of a boom that could “easily” reach 2023.

Now, however, the outbreak of Europe’s biggest conflict since World War II has turned things around, roiling markets, realigning alliances and reshaping global trade patterns, he wrote. That presents both risks and opportunities for the United States and other democracies, according to Dimon.

“The war in Ukraine and sanctions on Russia will, at a minimum, slow the global economy, and it could easily get worse,” Dimon wrote. That is due to uncertainty about how the conflict will end and its impact on supply chains, especially those related to energy supply.

Dimon added that for JPMorgan, 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 lyrics.

“We expect the fallout from the war and resulting sanctions to reduce Russia’s GDP by 12.5% ​​by mid-year (a drop worse than the 10% drop after the 1998 default). Our economists currently think the The euro zone, highly dependent on Russia for oil and gas, will see GDP growth of about 2% in 2022, rather than the lofty 4.5% pace we expected just six weeks ago. the US economy. I caution that these estimates are based on a fairly static view of the war in Ukraine and the sanctions currently in place.”

“Many more sanctions could be added, potentially increasing their effect in dramatic and unpredictable ways. Coupled with the unpredictability of 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 world’s energy supply, but for now, that supply is simply easy to disrupt.”

“The United States must be prepared for the possibility of an extended war in Ukraine with unpredictable results… We must see this as a wake-up call. We need to look at short-term and long-term strategies with the goal of not only resolving the current crisis, but also to maintain the long-term unity of newly strengthened democratic alliances. We need to make this a permanent and lasting stand for democratic ideals and against all forms of evil.”

“Russian aggression is having another dramatic and important result: it is uniting the democratic Western world, through Europe and the North Atlantic Treaty Organization (NATO) countries to Australia, Japan and Korea. […] The result of these two problems will transcend Russia and will likely affect geopolitics for decades, potentially leading to both a realignment of alliances and a restructuring 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.”

“It is also clear that trade and supply chains, where national security issues affect, need to be restructured. Countries with different strategic interests simply cannot be trusted for critical goods and services. Such a reorganization need not be a disaster or decoupling. With careful analysis and execution, it should be rational and orderly. This is best for everyone.”

“For any product or material that is essential to national security (think rare earths, 5G, and semiconductors), the US supply chain must be domestic or open only to completely friendly allies. We cannot and never should 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, must be restrained”.

“This restructuring is likely to take place over time and need not be extraordinarily disruptive. There will be winners and losers: some of the main beneficiaries will be Brazil, Canada, Mexico and the friendly nations of Southeast Asia. Along with the reconfiguration of our supply chains, we must create new trade systems with our allies. As mentioned above, my preference would be to rejoin the TPP: it is the best possible geostrategic and commercial agreement with allied nations.”

“The Fed and the government did the right thing by taking bold and dramatic action after the disgrace unleashed by the pandemic. In hindsight, it worked. But also in hindsight, the medicine (fiscal spending and QE) was probably too much and lasted too long.” . length.”

“I don’t envy the Fed for what it needs to do next: the stronger the recovery, the higher the rates that follow (I think this could be significantly higher than markets are expecting) and the stronger the quantitative tightening (QT) If the Fed gets it right we can have years of growth and inflation will eventually start to recede In any case this process will cause a lot of consternation and very volatile markets The Fed shouldn’t worry about volatile markets unless affect the real economy. A strong economy trumps market volatility.”

“One thing the Fed should do, and appears to have done, is exempt itself (give itself maximum flexibility) from the pattern of raising rates only 25 basis points and do so on a regular schedule. And while they may announce how they intend to cut the Fed balance sheet, they should be free to change this plan at any time to deal with real events in the economy and markets.A Fed that reacts strongly to real-time data and events will ultimately create more confidence. In any case, rates will have to rise substantially. The Fed has a tough job to do, so let’s wish them well.”

“This year, we announced that the investment-related expenses would increase from $11.5 billion to $15 billion. I’m going to try to describe the ‘incremental investments’ of $3.5 billion, although I can’t review all of them (and for competitive reasons I wouldn’t). But we hope that some examples will reassure you in our decision-making process.

Some investments have a fairly predictable time to generate positive cash flow and a good, predictable return on investment (ROI), regardless of how you measure it. These investments include branches and bankers, all over the world, in all of our businesses. They also include certain marketing expenses, which have a known and quantifiable return. This combined category will add $1 billion to our spending in 2022.

“Over the last 18 months, we spent nearly $5 billion on acquisitions, which will increase ‘incremental investment’ spending by approximately $700 million in 2022. We expect most of these acquisitions to produce positive returns and strong earnings within a few years, which fully justifies their cost. In some cases, these acquisitions make money, plus, we believe, they help prevent erosion in other parts of our business.”

“Our international consumer expansion is an investment of a different nature. We believe that the digital world gives us the opportunity to build a consumer bank outside of the United States that, over time, can become very competitive, an option that does not exist in the physical world.” We started with several advantages that we believe will get stronger over time… We have the talent and knowledge to deliver them through cutting-edge technology, allowing us to leverage the full range of these capabilities across all of our businesses. We can apply what we’ve learned at our leading US franchise and vice versa. We may be wrong about this, but I like our hand.”

“Despite the pandemic and talent retention challenges, we continue to boost our representation among women and people of color. … More women were promoted to CEO in 2021 than ever before; Similarly, a record number of women were promoted to CEO. At the end of the year, according to self-identified employees, women represented 49% of the company’s total workforce. Hispanic representation overall was 20%, Asian representation grew to 17%, and Black representation increased to 14%.”