Carlo Allegri Reuters Jamie Damon, CEO and chairman of the largest US bank in terms of assets, pointed to a potentially unprecedented combination of risks facing the country in its annual shareholder letter. Three forces are likely to shape the world in the coming decades: an American economy recovering from the Covid pandemic. high inflation that will usher in an era of rising interest rates and the Russian invasion of Ukraine and the ensuing humanitarian crisis now under way, according to Dimon. “Each of the three factors listed above is unique in itself: The dramatic recovery fueled by the COVID-19 pandemic, the potential need for rapid rate hikes and the required reversal of QE, and the war in Ukraine “and sanctions on Russia,” Dimon wrote. “They have completely different conditions than we did in the past – and their confluence can dramatically increase the risks they run,” he wrote. “While it is possible and optimistic that all these events will be resolved peacefully, we must prepare for the possible negative consequences.” Dimon’s letter, widely read in business circles because of the position of JPMorgan CEO as the industry’s most prominent representative, took on a more disappointing tone than it did just last year. While writing extensively about the challenges facing the country, including economic inequality and political dysfunction, that letter conveyed his belief that the United States was in the midst of an explosion that could “easily” reach 2023. Now, however, the outbreak of the greatest European conflict since World War II has changed things, upsetting markets, re-aligning alliances and restructuring global trade standards, he wrote. This poses both risks and opportunities for the United States and other democracies, according to Dimon. “The war in Ukraine and the sanctions on Russia, at least, will slow down the world economy – and it could easily get worse,” Dimon wrote. This is due to the uncertainty about how the conflict will end and its impact on supply chains, especially those related to energy supply. Dimon added that for JPMorgan, management is not worried about its immediate exposure to Russia, although the bank could “still lose about $ 1 billion over time.” The following are excerpts from Dimon’s letter.
On the economic implications of the war
“We expect the effects of the war and the subsequent sanctions to reduce Russia’s GDP by 12.5% by mid-year (a decline worse than the 10% drop after the 1998 bankruptcy). Our economists now believe that the euro area is heavily dependent on Russia for oil and gas, will see GDP growth of around 2% in 2022, instead of the 4.5% increase we expected just six weeks ago. “The US economy will move about 2.5 percent from 3 percent previously estimated. I warn that these estimates are based on a fairly static view of the war in Ukraine and the sanctions that are now in place.”
For Russian sanctions
“Many more sanctions could be added – which could dramatically and unpredictably increase their impact. Together with the unpredictability of the war itself and the uncertainty surrounding the global supply chains, this creates a potentially explosive situation. “I will talk later about the precarious nature of global energy supply, but for now, it’s just that supply is easy to disrupt.”
A “wake-up call” for democracies
“America must be prepared for the possibility of a full-scale war in Ukraine with unpredictable consequences. … We must see this as a wake-up call. We must pursue short-term and long-term strategies aimed not only at resolving the current crisis but also “We must maintain the long-term unity of the newly strengthened democratic alliances. We must make this a permanent, long-term stand in favor of democratic ideals and against all forms of evil.”
Consequences beyond Russia
“Russian aggression has another dramatic and important effect: It is merging the democratic, Western world – all over Europe and the countries of the North Atlantic Treaty Organization (NATO) with Australia, Japan and Korea. […] The outcome of these two issues will transcend Russia and likely influence geopolitics for decades, potentially leading to both alliance restructuring and world trade restructuring. “How the West behaves and whether the West can maintain its unity is likely to determine the future world order and shape America (and its allies)’s important relationship with China.”
On the need to rearrange supply chains
“It’s also clear that trade and supply chains, where national security issues are at stake, need to be restructured. You just can not rely on countries with different strategic interests for critical goods and services. “Structural analysis and execution should be rational and tactical. That is in everyone’s interest.”
ESPECIALLY…
“For any products or materials necessary for national security (consider rare earths, 5G and semiconductors), the US supply chain must either be domestic or open only to completely friendly allies. We can and should never rely on procedures that can and will be used against us, especially when we are most vulnerable.For similar national security reasons, activities (including investment activities) that contribute to national security risk – e.g. potential opponents – they should be limited. “
Brazil, Canada and Mexico to benefit
“This restructuring is likely to take place over time and does not need to be extremely troublesome. There will be winners and losers – some of the main beneficiaries will be Brazil, Canada, Mexico and friendly Southeast Asian countries. “We have to build new trading systems with our allies. As mentioned above, my preference would be to return to the TPP – it is the best possible geostrategic and trade agreement with the allied nations.”
To the Fed
“The Fed and the government did the right thing by taking bold dramatic action after the pandemic of the disaster. “
“Very volatile markets”
“I do not envy the Fed for what it’s to do next: The stronger the recovery, the higher the interest rates that follow (I think this could be significantly higher than what the markets expect) and the stronger the quantitative tightening (QT). If the Fed does it right, we can have years of growth and inflation will eventually start to fall. In any case, this process will cause great concern and very volatile markets. The Fed should not worry about volatile markets unless they affect the real economy. A strong economy outweighs market volatility. “
Fed flexibility
“One thing the Fed should do, and it seems to have done, is to exclude themselves – to give themselves absolute flexibility – the pattern of raising interest rates by only 25 basis points and to do so on a regular basis. while they may announce how they intend to reduce the Fed’s balance sheet, they should be free to change that plan immediately in order to deal with real events in the economy and markets. “In each case, the people have, for the first time, been offered a chance to vote.
About the growing costs of JPMorgan
“This year, we announced that investment-related spending will increase from $ 11.5 billion to $ 15 billion. I will try to describe the $ 3.5 billion “elemental investments”, although I can not look at them all (and for competitive reasons. But hopefully some examples will comfort you in the decision-making process. Some investments have a fairly predictable time for positive cash flow and a good and predictable return on investment (ROI) no matter how you measure it. These investments include branches and bankers, all over the world, in all our businesses. They also include some marketing expenses, which have a known and measurable return. This category together will add $ 1 billion to our spending in 2022.
On acquisitions
“In the last 18 months, we have spent nearly $ 5 billion on acquisitions, which will increase ‘investment investment’ costs by about $ 700 million in 2022. We expect most of these acquisitions to generate positive returns and strong profits in a few years, fully justifying their cost. In some cases, these acquisitions make money – plus, we believe, they help prevent corrosion in other parts of our business. “
Global expansion
“The international expansion of our consumers is an investment of a different nature. We believe that the digital world gives us the opportunity to create a consumer bank outside the United States that, over time, can become very competitive – a choice that does not exist. We start with many advantages that we believe will become stronger over time … We have the talent and know-how to offer them through cutting-edge technology, allowing us to take advantage of the full range of these capabilities from all our businesses. “Apply what we learned in the top US franchise and vice versa. We may be wrong about that, but I like our hand.”
About Driving JPMorgan Diversity
“Despite the challenges of the pandemic and the retention of talent, we continue to strengthen our representation among women and people of color …. More women were promoted to CEO in 2021 than ever before. Similarly, a record number of women were promoted to executive By the end of the year, based on self-identifying employees, women accounted for 49% of the company’s total workforce.The total representation of Spaniards was 20%, the Asian representation increased to 17% and the Blacks .. .
