While his friend and fellow Democrat Larry Fink used his latest annual letter to cheer for an accelerating transition to ESG while simultaneously warning about the fallout from "de-globalization" spurred by Russia's incursion into Ukraine, JPMorgan CEO Jamie Dimon warned Monday in his own annual letter to investors that the US economy faces "unprecedented" risks from the confluence of COVID pandemic, high inflation and, of course, the situation in Ukraine.
"They present completely different circumstances than what we’ve experienced in the past – and their confluence may dramatically increase the risks ahead," Dimon said.
Dimon, who has repeatedly advocated for a 'Marshall Plan for energy' to help the Europeans wean themselves off of Russia's influence, also called on the US to turn up the sanctions pressure on Russia.
"Turn up sanctions - there are many more that could be imposed - in whatever way national security experts recommend to maximize the right outcomes."
As far as JPM's own book is concerned, Dimon suggested that the bank could ultimately lose more than $1 billion from its exposure to Russia. Dimon said he wouldn't be surprised to see the conflict drag on, and said "America must be ready for the possibility of an extended war in Ukraine with unpredictable outcomes. We should prepare for the worst and hope for the best."
But Russia wasn't the only foreign power to face skepticism from Dimon. Expounding on the "de-globalization" theme, Dimon warned that US firms must diversify their supply chains away from China and instead rely only upon "completely friendly allies". He also urged the US to rejoin the Trans-Pacific Partnership (or TPP), the Obama-era trade deal that President Trump cancelled immediately after taking office.
In keeping with his previous comments about the pace of Fed rate hikes (remember, Dimon helped to instigate the trend of Wall Street banks one-upping one another with forecasts for five, six, seven - even eight rate hikes), the JPM CEO predicted that the Fed could still surprise Wall Street with a number of rate hikes that are "significantly higher than the market expects."
As for the bank's potential losses, Dimon said JPM's "fortress balance sheet" is robust enough that JPM could withstand losses of $10 billion or more and "still be in very good shape."
In other news, JPMorgan will hold its first investor day since the pandemic began on May 23. The bank revealed in its annual report that it had a record $3.7 trillion in assets and $294.1 billion in stockholders’ equity as of Dec. 31.
Perhaps unsurprisingly given the cautious tone of Dimon's comments, JPM's shares tumbled more than 1% during premarket trading.
Here's a rundown of major points from Reuters:
US Economy Is Still Strong
Dimon has long been bullish on the U.S. economy and repeated that message in his letter, noting the average American consumer is "in excellent financial shape" with leverage among the lowest on record, excellent mortgage underwriting, plentiful jobs with wage increases and more than $2 trillion in excess savings.
Inflation Will Require Aggressive Hikes
The Federal Reserve and the government were right to take bold actions amid the pandemic, but stimulus probably lasted too long, said Dimon. He believes the rate rises needed to rein in inflation would be "significantly higher than the markets expect."
Dimon also had some advice for the Fed: it shouldn't worry about the market volatility rate rises will cause unless that volatility affects the economy. It should be flexible in its plan and be prepared to respond quickly to events on the ground.
Ukraine War Will Slow Global Economy
"The hostilities in Ukraine and the sanctions on Russia are already having a substantial economic impact," Dimon wrote.
JPMorgan economists 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 4.5% pace expected just before the invasion began. By contrast, they expect the U.S. economy to advance roughly 2.5% versus a previously estimated 3%, Dimon wrote.
"These estimates are based upon a fairly static view of the war in Ukraine and the sanctions now in place," Dimon wrote. More Russia sanctions are possible, he noted.
"Along with the unpredictability of war itself and the uncertainty surrounding global commodity supply chains, this makes for a potentially explosive situation," he wrote.
World Economy Faces "Unprecedented" Moment
The confluence of the dramatic stimulus-fueled recovery from the pandemic, the likely need for rapid rate rises, the war in Ukraine and the sanctions on Russia may be unprecedented.
"They present completely different circumstances than what we’ve experienced in the past – and their confluence may dramatically increase the risks ahead," Dimon wrote, adding the war will also affect geopolitics for decades.
Without Strong Leadership, America Will Descend Into "Chaos"
"American global leadership is the best course for the world and for America," Dimon wrote. Since nature abhors a power vacuum, it is increasingly clear that without strong American leadership "chaos likely will prevail," he added.
However, he noted the world does not want an "arrogant" America bossing everyone around, but an America that works with allies, collaborating and compromising.
"We can organize military and economic frameworks that make the world safe and prosperous for democracy and freedom only if we work with our allies," he added.
Any interested parties can read the complete letter here.