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Tue, December 13 at 4:00PM ET

Don’t Buy into the Near-Term Noise for JPMorgan Chase

Despite the robust, auspicious start to the new year for JPMorgan Chase (NYSE:JPM), I remain unconvinced in JPM stock and the banking sector, in general. But setting aside my personal biases, I can understand the “paper” reasons why shares have done well.

A sign for JP Morgan Chase & Co (JPM).
Source: Bjorn Bakstad /

First, we have the incoming administration of President-elect Joe Biden. While I must say that Biden the man doesn’t inspire much confidence, many perceive him to be a calm, rational leader to outgoing President Donald Trump. Don’t get me wrong — the Trump administration has done many positive things for the economy. But contextually, the American people need a traditional leader, not a straight-shooting type like Trump.

Second, Democrats won the historic runoff races in Georgia, giving them control of the Senate. You have to appreciate what’s going on here. Again, Biden doesn’t naturally inspire confidence. Therefore, the American electorate may have been better served by having checks and balances in leadership. Instead, Georgians decided to go all-in, essentially allowing Biden to push through his agenda.

On principle, that might not be beneficial for JPM stock. However, the present context is that the U.S. economy has a gaping wound in its side. Until that gets resolved, we can’t have discussions about longer-term viability.

And that may have played into why Georgians decided to give Democrats full control. I think Americans just got tired of hearing Republicans like Sen. Rand Paul wax poetic about fiscal discipline. In my opinion, when the boat is sinking, you got to do what you can to plug the holes; how you plug them (within reason of course) is a secondary issue.

Therefore, JPM stock has the ingredients for a comeback: political stability, which in turn should lead to economic stability as the Biden administration will have a clear road to push its stimulus plan. But even then, investors need to be cautious.

Political Consensus vs. JPM Stock Consensus

From a broader view, I also understand why many Americans are eager for Joe Biden to take over. Following the first round of stimulus checks to the people, the electorate begged for another round. It’s here that some Republicans found the need to play the austerity game, contributing to the delay.

However, before the runoff races, Biden promised that $2,000 checks would go out the door if the Democrats won. That would imply the American people will receive a third stimulus check, which should help JPM stock. Ordinarily, it probably wouldn’t. However, desperate times call for desperate measures.

Still, I think these haphazard stimulus checks may not do anything for JPM stock nor the economy at large. That’s because this fiscal policy isn’t aggressive enough, while monetary policy is probably too aggressive. Until these two segments work together, the economy is doomed.

Americans spent their first coronavirus relief check predictably — primarily on essentials like food, rent and utilities, and if there was anything left, paying down debt and putting it into savings. You see the latter point reflected both in the crazy-high personal saving rate and record-low money velocity.

As an important side note, the fact that real interest rates (benchmark rate backing out inflation) are negative actually penalizes cash holders. Yet the desperation is so profound that millions of people are choosing to take the penalty, which indicates a culture of deflation.

Real interest rate vs. Money velocity
Click to Enlarge
Source: Chart by Josh Enomoto

As well, the driving down of interest rates has only had a barely perceptible increase in money velocity. For instance, the real interest rate dropped by a magnitude of nearly 49% between the second and third quarters of 2020, yet the velocity of money increased less than 4% during that period.

I’m not an economic wizard or anything but that clues you in that monetary policymakers are tapped out. Everything now depends on fiscal policy, and a mere third stimulus check is not going to cut it in the long run.

Biden Must Do the Unthinkable

I say the above with a reasonable degree of confidence because Americans are not sure what’s going to happen tomorrow. As the novel coronavirus rages, many Democratic governors have decided to save their constituents by killing their economies, if need be.

But that’s also a tough choice because small businesses, which represent the lifeblood of the American economy, are desperate. Basically, we’re going to live today by sacrificing tomorrow. Such a dire situation wouldn’t help anybody, even a bellwether like JPM stock.

There is an answer and many, if not most of you will not like it: the federal government must backstop the real economy by giving $2,000 checks every month until the crisis fades.

Please spare me the socialism arguments because I’m not actively encouraging this route. I just believe there is no other choice.

If we haphazardly provide more checks, Americans will naturally save that money because they won’t know when the next round will come. By giving the people assurances that Uncle Sam will support them throughout this crisis, it means that the injected money will be spent on discretionary purchases, which is the stimulus that we need to support the entire economy — not just grocery stores and landlords.

Obviously, we can’t do this forever. It will lead to untold consequences, one of which could be runaway inflation. But it would also mean that fiscal stimulus can efficiently advantage monetary stimulus.

However, I’m not sure if the political will exists to do this, even with full Democratic control. Many Americans are proud capitalists and hate anything to do with socialism — unless it’s Social Security, then everybody loves that ship for some reason.

Because of this, there are too many questions to be comfortable with buying JPM stock, even with (or because of) its strong start.

(Editor’s note: JPMorgan Chase is scheduled to report fourth-quarter earnings on Jan. 15, 2021.)

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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