As his bank tries to offload big blocks of Manhattan real estate, JPMorgan CEO Jamie Dimon proclaimed in his latest annual letter to shareholders, published Wednesday morning, that the economic expansion in the US could run through 2023, which would justify lofty equity valuations which recently pushed the S&P 500 north of 4K.
And the CEO who once called for the US to raise taxes on the rich and adopt more explicitly socialist policies to expand access to higher education, housing and child care, praised the federal government's response to the economic crisis caused by the COVID pandemic. Consumers who are now flush with savings will help drive an economic boom, Dimon wrote in his 34K-word missive.
"I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the US economy will likely boom," Dimon said.
"This boom could easily run into 2023 because all the spending could extend well into 2023."
"Ascertaining the quality of the government's spending will take years, Dimon said, but he has little doubt that "spent wisely, it will create more economic opportunity for everyone," he said.
Although equity valuations are already "quite high", Dimon aid a multi-year boom may help to justify current levels, because markets are pricing in economic growth and excess savings that may soon be poured into the market.
Dimon, who built the biggest and most profitable bank in the US, warned shareholders in his industry that disruption by big tech had finally arrived, as shadow lenders have gained ground, having the benefit of being unconstrained by strict capital requirements that have forced big banks to hold more capital in reserve.
"Banks have enormous competitive threats - from virtually every angle," Dimon said.
"Fintech and Big Tech are here… big time!"
Echoing Jerome Powell and other senior Fed officials, Dimon offered an oblique reference to "froth and speculation" in the market, but didn't point to any specific areas he saw as threats. He also offered some thoughts on yields and the inflation outlook that, unlike comments from Jerome Powell, raised the possibility that the rise in inflation might be more than "transitory."
"Conversely, in this boom scenario it's hard to justify the price of US debt (most people consider the 10-year bond as the key reference point for US debt)," Dimon said.
"This is because of two factors: first, the huge supply of debt that needs to be absorbed, and second, the not-unreasonable possibility that an increase in inflation will not be just temporary."
Speaking of government spending, Dimon wrote about the need for more infrastructure spending roughly one week after President Biden laid out his sweeping infrastructure plan in Pittsburgh last week.
"We need to properly invest, on an ongoing basis, in modernizing infrastructure," Dimon wrote.
"Virtually everyone agrees that we have done a woefully inadequate job investing in our infrastructure – from highways, ports and water systems to airport modernization and other projects. One study examined the effect of poor infrastructure on efficiency (for example, poorly constructed highways, congested airports with antiquated air traffic control systems, aging electrical grids and old water pipes) and concluded this could all be costing us hundreds of billions of dollars per year."
However, while Dimon said he's bullish about the future of the US, some challenges remain, including our increasingly polarized society. In closing, he wrote: "While I have a deep and abiding faith in the United States of America and its extraordinary resiliency and capabilities, we do not have a divine right to success. Our challenges are significant, and we should not assume they will take care of themselves. Let us all do what we can to strengthen our exceptional union."
Political populism, a common lament for Dimon, was also criticized.
"Americans know that something has gone terribly wrong, and they blame this country’s leadership: the elite, the powerful, the decision makers - in government, in business and in civic society," he wrote.
"This is completely appropriate, for who else should take the blame?"
That fuels populism on the right and left, he said.
“But populism is not policy, and we cannot let it drive another round of poor planning and bad leadership that will simply make our country’s situation worse."
The lengthy letter touched on many perennial policy bugbears like the need for "proper immigration policies" - ie making it easier for tech companies and others to hire skilled labor from abroad - while the CEO also wrote that " affordable housing remains out of reach for too many Americans."
At one point, Dimon offered a defense of the dollar's status as the world's reserve currency, arguing that the Chinese yuan isn't "fully convertible" like its American counterpart, and warned of the possibility of capital controls and prohibitions against assets like gold and cyptocurrency.
But the CEO was very candid about China...
“China’s leaders believe America is in decline... The Chinese see an America that is losing ground in technology, infrastructure and education – a nation torn and crippled . . . and a country unable to coordinate government policies (fiscal, monetary, industrial, regulatory) in any coherent way to accomplish national goals.”
“Unfortunately,” Dimon writes, “there is a lot of truth to this.”
Warning of the real risks of stagflation, the banker warned
"...the United States could be perceived as a place that is inhospitable to capitalism and capitalists,” and he advised readers to think about “currency diversification, country diversification, and asset class diversification.”
And as SovereignMan's Simon Black notes, Dimon then lists goes on to provide a wide-ranging laundry list of problems that have been building for years in the United States– “I’ll give some examples, but if I tried to address them all this letter would become a book.”
Dimon cites “a litigation and regulatory system that is costly, crippling small businesses with red tape and bureaucracy”.
“terrible infrastructure planning and investment”
“huge waste and inefficiency at both the federal and state levels”
a lack of “effective immigration policies”
“we fail to properly fund pension obligations”
“income equality has gotten worse”
“social safety nets [are] poorly designed”
“30% of Americans don’t have enough savings to deal with unexpected expenses that total as little as $400”
“Veterans [hospitals] . . . are broken”
“Almost all institutions – governments, schools, media and businesses – have lost credibility in the eyes of the public. And perhaps for good reason: Many of our problems have been around for a long time and are not aging well.”
“Politics is increasingly divisive, and government is increasingly dysfunctional”
He also rails against the education and healthcare systems, saying:
“Our education and health issues come together in this alarming statistic: Seventy percent of today’s youth (ages 17-24) are not eligible for military service, essentially due to a lack of proper education (basic reading and writing skills) or health issues (commonly obesity or diabetes).”
Dimon goes on to explain that all of these problems “may explain why, over the last 10 years, the U.S. economy has grown cumulatively only about 18%.”
“Some think that this sounds satisfactory, but it must be put into context: In prior sharp downturns (1974, 1982 and 1990), economic growth was 40% over the ensuing 10 years.”
The country ultimately needs to "move beyond our differences and self-interest and act for the greater good," Dimon said. "The good news is that this is fixable."
Of course, a strong economic rebound is good for JP Morgan, and waxing about the threat posed by Big Tech could help the CEO push for less regulation even under a Democratic Administration. Is Dimon once again just talking his book?
Read Dimon's full letter to shareholders here...