In his annual letter to JPMorgan’s (NYSE:JPM) shareholders, the bank’s Chief Executive Officer Jamie Dimon, made several observations about macroeconomic and geopolitical trends. In general, I believe that the Jamie Dimon Annual Letter exaggerated the likely threats that the global economy and the U.S. stock market are facing going forward.
On a positive note, Dimon wrote that “The U.S. economy is strong.” He also identified an issue that is being largely overlooked. I’m referring to the fact that during the coronavirus crisis, the government “saved many small businesses.” In Dimon’s words, it helped to push unemployment way down. In an important and related statement, Dimon wrote: “In today’s economy, the consumer is in excellent financial shape (on average).”
Of course, Dimon noted that inflation had soared to 7%. He stated that “[p]ersistent inflation will require rising interest rates and a […] shift from quantitative easing to quantitative tightening.” In other words, the U.S. Federal Reserve (Fed) will have to keep raising rates and shift from buying bonds to reducing liquidity. Dimon asserted that the process will cause “lots of consternation and very volatile markets.”
Of course, the Fed is tightening. However, I think there is a good chance that Dimon, like most observers, may be exaggerating the extent to which it will do so. There are two reasons why I believe that.
First, I do not think that the central bank is as hawkish on inflation as most people believe. As evidence of that, look at how long it waited to act before raising interest rates. In other words, I think that, although the central bank’s official inflation target is 2%, it would not be upset if inflation ended the year between 3% and 4% and continued at that level in early 2023. And secondly, the return of more people to work, the end of coronavirus lockdowns and reduced fear of the virus are likely to push inflation down.
On the geopolitical front, Dimon thinks the war in Ukraine will lower the Euro zone’s gross domestic product (GDP) growth to 2% this year from 4.5%. He also cut America’s GDP increase to 2.5% from 3%. But he admits “that these estimates are based upon a fairly static view of the war in Ukraine and the sanctions now in place.”
But the war is not static. Actually, Russia is looking to concentrate on the eastern part of Ukraine and sources are implying that Valdimir Putin is looking to end the war by early May. Those developments should calm Europe and the U.S. and make new sanctions highly unlikely. And as part of a settlement that is likely to be reached next month or soon thereafter, there is a good chance that at least some sanctions on Russia will be removed. Perhaps reflecting on that outlook, commodity prices generally seem to have stabilized at relatively low levels.
So, when Dimon says we’re in a “potentially explosive situation,” I think that is technically true. However, the geopolitical and macroeconomic trends are much more likely to improve than deteriorate.
