JPMorgan CEO warns: Prepare for economic hurricane

JPMorgan Chase Chief Executive Officer (CEO) Dimon (Jamie Dimon) warned investors on Wednesday (June 2) that they need to prepare for an economic hurricane caused by the Fed's tightening policy and the situation in Ukraine.

"It looks like the weather is fine, everything is fine, and everyone thinks the Fed can handle the current problems," Dimon said at a financial conference in New York on Wednesday (June 2), "but a hurricane can On the way, attack us."

"No one knows if it's a minor hurricane or Super Hurricane Sandy. You have to be prepared," he added.

At JPMorgan's investor conference last week, Dimon described his worries about the economy as a "dark cloud" that could dissipate. Obviously, his concerns have deepened at present.

Dimon's concerns mainly come from two aspects.

One is the tightening monetary policy of the Federal Reserve. For now, the Fed has signaled that it will cancel its emergency bond-buying program and shrink its balance sheet at a much faster pace than before.

"We've never had a quantitative tightening like this," Dimon said. "It's an event that could keep going down the history books for the next 50 years."

According to the information released by the Federal Reserve's interest rate decision in May, a new round of quantitative tightening will begin on June 1, with a monthly reduction of US$47.5 billion (US$30 billion in treasuries, US$17.5 billion in mortgage-backed securities MBS), and Gradually raise the balance sheet cap to US$95 billion (US$60 billion in treasury bonds, US$35 billion in MBS) within three months.

In contrast, in the last round of balance sheet reduction cycle led by the former chairman of the Federal Reserve and current US Treasury Secretary Yellen, the Federal Reserve began to tighten liquidity from $10 billion per month ($6 billion in treasuries, $4 billion in MBS). Since then, it has been increasing at a rate of $10 billion per quarter, until the fall of 2018 to reach the $50 billion cap.

Dimon believes that quantitative easing has caused some "counterproductive" effects, such as negative interest rates, which are "big mistakes". Today, given the excess liquidity in the system, the Fed has no choice but to “remove some liquidity in order to deter speculation and lower house prices.”

Second, the situation in Ukraine could significantly intensify the price action for commodities, including food and fuel. Dimon believes that Europe is going through its worst geopolitical crisis since the Second World Congress, and oil prices are "almost impossible not to continue to rise" and could reach $150 or $175 a barrel.

Overnight, Brent crude futures were at around $113 a barrel.

Dimon said central banks, commercial banks and foreign exchange firms were the top three buyers of U.S. Treasuries during the 2008 financial crisis. This time, these players will not have the ability or willingness to absorb such a large amount of US Treasuries. "It's going to be a huge change in the flow of money around the world. I don't know what the impact will be, but I'm ready for at least huge volatility," he said.

Dimon believes the pandemic-era fiscal stimulus is still working, and U.S. consumers still have about six to nine months of spending power in their bank accounts.

Data released by the U.S. Department of Commerce on the 27th of last month showed that U.S. personal consumption expenditures rose 0.9% in April from the previous month, the fourth consecutive monthly increase, led by growth in spending on services and goods. At the same time, in April, the US personal savings rate fell to 4.4%, a 14-year low, showing that more and more Americans are spending their savings to offset rising prices.

Dimon warned that high inflation and a shift in consumer patterns from goods to services have severely distorted the data, and low-income households are not as healthy.

Last month, JPMorgan lowered its forecast for the U.S. economy, from 3% to 2.4% in the second half of this year, from 2.1% to 1.5% in the first half of 2023, and from 1.4% to 1% in the second half of 2023.

Article source: First Financial