Jamie Dimon states inflation, Ukraine war might drastically increase dangers for U.S.

Jamie Dimon, CEO and chairman of the most significant U.S. bank by properties, indicated a possibly unmatched mix of dangers dealing with the nation in his yearly investor letter.

Three forces are most likely to form the world over the next a number of years: a U.S. economy rebounding from the Covid pandemic; high inflation that will introduce a period of increasing rates, and Russia’s intrusion of Ukraine and the resulting humanitarian crisis now underway, according to Dimon.

“Each of these three factors mentioned above is unique in its own right: The dramatic stimulus-fueled recovery from the COVID-19 pandemic, the likely need for rapidly raising rates and the required reversal of QE, and the war in Ukraine and the sanctions on Russia,” Dimon composed.

“They present completely different circumstances than what we’ve experienced in the past – and their confluence may dramatically increase the risks ahead,” he composed. “While it is possible, and hopeful, that all of these events will have peaceful resolutions, we should prepare for the potential negative outcomes.”

Dimon’s letter, checked out extensively in company circles since of the JPMorgan CEO’s status as his market’s most popular representative, took a more downcast tone from his missive simply in 2015. While he composed thoroughly about difficulties dealing with the nation, consisting of financial inequality and political dysfunction, that letter transmitted his belief that the U.S. remained in the middle of a boom that might “easily” face 2023.

Now, nevertheless, the break out of the most significant European dispute given that World War II has actually altered things, roiling markets, straightening alliances and reorganizing international trade patterns, he composed. That presents both dangers and chances for the U.S. and other democracies, according to Dimon.

“The war in Ukraine and the sanctions on Russia, at a minimum, will slow the global economy — and it could easily get worse,” Dimon composed. That’s since of the unpredictability about how the dispute will conclude and its effect on supply chains, specifically for those including energy materials.

Dimon included that for JPMorgan, management isn’t fretted about its direct exposure to Russia, though the bank might “still lose about $1 billion over time.”

Here are excerpts from Dimon’s letter.

“We expect the fallout from the war and resulting sanctions to reduce Russia’s GDP by 12.5% by midyear (a decline worse than the 10% drop after the 1998 default). Our economists currently think that the euro area, highly dependent on Russia for oil and gas, will see GDP growth of roughly 2% in 2022, instead of the elevated 4.5% pace we had expected just six weeks ago. By contrast, they expect the U.S. economy to advance roughly 2.5% versus a previously estimated 3%. But I caution that these estimates are based upon a fairly static view of the war in Ukraine and the sanctions now in place.”

“Many more sanctions could be added — which could dramatically, and unpredictably, increase their effect. Along with the unpredictability of war itself and the uncertainty surrounding global commodity supply chains, this makes for a potentially explosive situation. I speak later about the precarious nature of the global energy supply, but for now, simply, that supply is easy to disrupt.”

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

“Russian aggressiveness is having another remarkable and essential outcome: It is coalescing the democratic, Western world– throughout Europe and the North Atlantic Treaty Organization (NATO) nations to Australia, Japan andKorea […] The result of these 2 problems will go beyond Russia and likely will impact geopolitics for years, possibly causing both an adjustment of alliances and a restructuring of international trade.How the West comports itself, and whether the West can keep its unity, will likely identify the future international order and shape America’s (and its allies’) essential relationship with China.”

“It also is clear that trade and supply chains, where they affect matters of national security, need to be restructured. You simply cannot rely on countries with different strategic interests for critical goods and services. Such reorganization does not need to be a disaster or decoupling. With thoughtful analysis and execution, it should be rational and orderly. This is in everyone’s best interest.”

“For any products or materials that are essential for national security (think rare earths, 5G and semiconductors), the U.S. supply chain must either be domestic or open only to completely friendly allies. We cannot and should not ever be reliant 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 — should be restricted.”

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

“The Federal Reserve and the government did the right thing by taking bold dramatic actions following the misfortune 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.”

“I do not envy the Fed for what it must do next: The stronger the recovery, the higher the rates that follow (I believe that this could be significantly higher than the markets expect) and the stronger the quantitative tightening (QT). If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets. The Fed should not worry about volatile markets unless they affect the actual economy. A strong economy trumps market volatility.”

“One thing the Fed should do, and seems to have done, is to exempt themselves — give themselves ultimate flexibility — from the pattern of raising rates by only 25 basis points and doing so on a regular schedule. And while they may announce how they intend to reduce the Fed balance sheet, they should be free to change this plan on a moment’s notice in order to deal with actual events in the economy and the markets. A Fed that reacts strongly to data and events in real time will ultimately create more confidence. In any case, rates will need to go up substantially. The Fed has a hard job to do so let’s all wish them the best.”

“This year, we revealed that the expenditures associated with financial investments would increase from $115 billion to $15 billion. I am going to attempt to explain the ‘incremental financial investments’ of $3.5 billion, though I can’t evaluate them all (and for competitive factors I would not). But we hope a couple of examples will offer you comfort in our decision-making procedure.

Some financial investments have a relatively foreseeable time to capital favorable and an excellent and foreseeable roi (ROI) nevertheless you determine it. These financial investments consist of branches and lenders, worldwide, throughout all our services. They likewise consist of particular marketing expenditures, which have a recognized and measurable return. This classification integrated will include $1 billion to our expenditures in 2022.

“Over the last 18 months, we invested almost $5 billion on acquisitions, which will increase ‘incremental financial investment’ expenditures by around $700 million in2022 We anticipate the majority of these acquisitions to produce favorable returns and strong revenues within a couple of years, totally validating their expense. In a couple of cases, these acquisitions make money– plus, our company believe, assist ward off disintegration in other parts of our company.”

“Our global customer growth is a financial investment of a various nature. We think the digital world offers us a chance to construct a customer bank outside the United States that, in time, can end up being extremely competitive– an alternative that does not exist in the real world. We begin with a number of benefits that our company believe will get more powerful in time. … We have the skill and knowledge to provide these through advanced innovation, permitting us to harness the complete series of these abilities from all our services. We can use what we have actually discovered in our leading U.S. franchise and vice versa. We might be incorrect on this one, however I like our hand.”

“Despite the pandemic and skill retention difficulties, we continue to improve our representation amongst ladies and individuals of color. … More ladies were promoted to the position of handling director in 2021 than ever prior to; likewise, a record variety of ladies were promoted to executive director. By year’s end, based upon workers that self-identified, ladies represented 49% of the company’s overall labor force. Overall Hispanic representation was 20%, Asian representation grew to 17% and Black representation increased to 14%.”