The beginning of April is always an exciting period in the world of finance. Not least because it’s when Jamie Dimon, the CEO of JPMorgan Chase and thought-leader of corporate America, traditionally releases his annual letter to shareholders.
A significant chunk of this year’s letter is centred on the war in Ukraine, its short-term impact on the global economy and its longer-term impact on the geopolitical landscape – with the JPMorgan boss also calling for a new “Marshall Plan” to secure energy independence. In terms of internal JPMorgan issues, Dimon has also used his annual letter to justify his increased investment spending, and to share his opinion on the future of remote work at JPMorgan.
Strong economy, scary inflation
Dimon outlines three factors that he believes will significantly shape the US and global economies in 2022: the war in Ukraine (and its unpredictable outcomes), a strong post-pandemic US economy, and high inflation.
He praises the US government’s timely actions – namely the enormous $5 trillion fiscal stimulus and $4.4 trillion in quantitative easing – that stabilised markets, allowed companies to raise capital, and helped the economy grow by 7% in 2021. This was despite the arrival of the Delta and Omicron variants and global supply chain shortages. The government also oversaw an 11% drop in unemployment to 4% in under two years.
Dimon also notes that banks “performed magnificently” during the Covid-19 crisis, citing that banks extended a huge amount of credit, waived fees and postponed debt repayment, and were at the forefront of delivering Paycheck Protection Program (PPP) loans to small businesses. Furthermore, a booming M&A market helped many banks, including JPMorgan, generate record revenues last year.
However, Dimon acknowledges that while fiscal stimulus and QE successfully stabilised the economy, such measures may also been excessive given their inflationary impact. However, the stronger the recovery, the higher the rates that follow and the stronger the Fed can taper to combat this. Inflation rose to 7% last year, which will certainly pose great challenges to policymakers.
“This massive change in the flow of funds triggered by Fed tightening is certain to have market and economic effects that will be studied for decades to come. Our bank is prepared for drastically higher rates and more volatile markets,” Dimon says. “The Fed has a hard job to do so let’s all wish them the best.”
With that in mind, Dimon warns the Fed that they should give themselves flexibility, by “exempting themselves from the pattern of raising rates by only 25 basis points, and doing so on a regular schedule.” While traders will have to brace themselves for market volatility, “significantly” increased interest rates could ultimately benefit JPMorgan: banks are one of the few types of business that (within reason) benefit from higher rates.
Much of Dimon’s letter focuses on the consequences of the war in Ukraine. “The hostilities in Ukraine and the sanctions on Russia are already having a substantial economic impact,” he notes. “They have roiled global oil, commodity and agricultural markets.” JPMorgan expects that the fallout from the war and subsequent sanctions will: reduce Russia’s GDP by 12.5% by midyear, reduce the Eurozone’s GDP growth rate to roughly 2% in 2022 (from a previously estimated elevated pace of 4.5%), and reduce US economic growth rate from a predicted 3% to 2.5%.
Nevertheless, Dimon mentions that the predictions are based upon a “fairly static view of the war in Ukraine and the sanctions now in place.” He also mentions that while JPMorgan is not worried about its direct exposure to Russia, they could still lose up to $1 billion over time as a result of the war in Ukraine.
An extraordinary need for strong American leadership
Russia’s decision to invade Ukraine has significantly reshaped international relations and perhaps permanently changed the course of globalisation. Although the long-term impacts of the current crisis are yet unknown, one demonstrable result of the Russian aggression has been the coalescence of the democratic, Western world and NATO member states. Dimon calls the war a “wake-up call” for the West and urges the US and the West to “realise there is no replacement for strong allies and strong militaries.”
“The war in Ukraine reminds us that in a troubled world, national security always becomes the paramount concern. We should never again forget that this is true even in peaceful times – and we should never again be lulled into a false sense of security […] it should be increasingly clear to all that without strong American leadership, chaos likely will prevail.”
Dimon stresses that this difficult time should provide a chance for Republicans and Democrats to unite to defend democracy, its essential freedoms, and the nation’s core values like the rule of law, individual liberties, freedom of speech and religion, and the concept of equal opportunity. “We need a renaissance of the American dream and American “can-do” exceptionalism,” he says.
Even though he focuses much of his letter on the Russia-Ukraine war, it is also clear that the US-China relationship will be more important in the next century, according to Dimon. Unsurprisingly, he treads carefully on the subject: last year, Dimon had to apologise for a joke he made that JPMorgan would outlast China’s Communist Party.
While China has come under pressure recently for failing to condemn Russia’s military actions, Dimon reminds his shareholders that both the US and China should be interested in fostering a fruitful economic relationship. Although China’s total trade with Russia almost reached $150 billion in 2021, that between China and the West and the United States totalled $3.6 trillion inthe same year.
“We need to think broadly because whatever we do will not only help determine the fate of the war in Ukraine but likely will determine the ability of the Western democratic world to address critical future challenges,” Dimon says. “We also need to ensure that the Western coalition remains economically competitive on the world stage. The better America performs as a country in dealing with Russia now, the easier it will be for us to engage with the rest of the world, including China, going forward.”
To ensure that the West remains competitive, Dimon suggests that trade and supply chains that concern national security need to be restructured. “You simply cannot rely on countries with different strategic interests for critical goods and services,” he says. This clearly resonates with the idea put forth in BlackRock CEO Larry Fink’s annual shareholder letter that globalisation – as we have known it in the past three decades – has ended.
Investment spending, the future of the office, and sustainability
Jamie Dimon made headlines earlier this year when announcing a staggering 8% increase, or around $6 billion, in JPMorgan’s annual expenses. In his shareholder letter, he specifies what exactly this amount is dedicated to:
- $2.5 billion will flow to people-related expenses, including talent retainment and travel and entertainment expenses as economies have reopened;
- $1 billion will flow to investments with predictable return on investments (ROI), including branches around the world and marketing expenses
- $700 million will flow to acquisitions
- Just under $2 billion will go to technology and operations, as well as related products and service.
As he has mentioned frequently, Dimon notes in his letter that the biggest asset of JPMorgan is its people. As part of this, he touches on the future of remote work. While Dimon acknowledges that “it’s clear that working from home will become more permanent in American business,” he stresses that “such arrangements also need to work for both the company and its clients.” He expects that 10% of JPMorgan employees will work full time from home, while another 40% might work under a hybrid model.
Finally, Dimon argues that there is a need for a new “Marshall Plan” to ensure energy security for the US and its European allies, who are highly dependent on Russian energy. “For such a plan to succeed, we need to secure proper energy supplies immediately for the next few years, which can be done while reducing CO2 emissions.”
“The world still needs oil and natural gas today, but not all hydrocarbons are equal when it comes to their carbon footprint. We should be directing more capital toward less carbon-intensive fuel sources and investing in innovations, such as carbon capture and sequestration, as we look to transition to green technologies delivered at scale for society,” Dimon says.
Dimon thinks that governments should play a leadership role by enacting thoughtful policies that spur long-term and large-scale capital deployment for low-carbon solutions that create jobs and benefit the global economy. One way of potentially doing this is by setting meaningful goals and identifying tangible, cost-effective solutions to reduce emissions.
The war in Russia has certainly reshaped geopolitics and drawn much attention to Europe’s energy dependence. Whether the US can play a leading role in mitigating the economic consequences for its allies will likely determine whether it can retain its status as the leader of the free world. This, in turn, will have profound consequences on the success of Western economies and the dominance of financial institutions like JPMorgan.
Author: Benjamin Jenei
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