Coming just five weeks after Warren Buffett's annual letter to Berkshire shareholders, JP Morgan CEO Jamie Dimon has published what CNBC has described as the "second-most anticipated CEO missive of the year". In this year's letter to JP Morgan shareholders, Dimon followed a familiar format: First touting the banks record revenue and earnings in 2018 (noting that the bank's profits are at an all-time high, even without the boost from the Trump tax cuts), warned that the bout of market volatility in Q4 may be a "harbinger" of things to come, inveighed against the forces that are "fraying" the American dream, and articulated a passionate defense of capitalism as a "force for good."
After US stocks started the year with one of their best quarterly advances in years, shrugging off signs that global fundamentals are deteriorating amid an environment of looming political risks (the US-China trade war, Brexit, the looming US debt ceiling battle), Dimon commented that though everything is awesome right now, the volatility in Q4 might be a "harbinger of things to come" - though he of course remains "optimistic" about the long-term outlook for markets.
In the second section of this letter, I comment on important forward-looking issues. While we remain optimistic about the long-term growth of the United States and the world, the near-term economic and political backdrop is increasingly complex and fraught with risks — both known and unknown. And we face a future with less overall confidence in virtually all institutions, from corporations to governments to the media. The extremely volatile global markets in the fourth quarter of 2018 might be a harbinger of things to come — creating both risks for our company and opportunities to serve our clients.
Tapping into the political zeitgeist, where the debate about the growing popularity of so-called "Democratic socialism" has been raging since Democrats took back the House, Dimon offered a principled defense of capitalism as the most successful economic system in the history of the world, while condemning socialism as a road to authoritarianism and mass-poverty. That's not to say that the social democracies in the Nordic countries have a model that works for them, and that capitalism as the US practices it can't be improved - rather, socialism in its true form - that is government control over the economy - would be an unmitigated disaster, as history has repeatedly demonstrated.
There is no question that capitalism has been the most successful economic system the world has ever seen. It has helped lift billions of people out of poverty, and it has helped enhance the wealth, health and education of people around the world. Capitalism enables competition, innovation and choice. This is not to say that capitalism does not have flaws, that it isn’t leaving people behind and that it shouldn’t be improved. It’s essential to have a strong social safety net – and all countries should be striving for continuous improvement in regulations as well as social and welfare conditions.
Many countries are called social democracies, and they successfully combine market economies with strong social safety nets. This is completely different from traditional socialism. In a traditional socialist system, the government controls the means of production and decides what to produce and in what quantities, and, often, how and where the citizens work rather than leaving those decisions in the hands of the private sector. When governments control companies, economic assets (companies, lenders and so on) over time are used to further political interests – leading to inefficient companies and markets, enormous favoritism and corruption. As Margaret Thatcher said, “The problem with socialism is that eventually you run out of other people’s money.”
Socialism inevitably produces stagnation, corruption and often worse – such as authoritarian government officials who often have an increasing ability to interfere with both the economy and individual lives – which they frequently do to maintain power. This would be as much a disaster for our country as it has been in the other places it’s been tried. I am not an advocate for unregulated, unvarnished, free-for-all capitalism. (Few people I know are.) But we shouldn’t forget that true freedom and free enterprise (capitalism) are, at some point, inexorably linked.
I am not an advocate for unregulated, unvarnished, free-for-all capitalism. (Few people I know are.) But we shouldn’t forget that true freedom and free enterprise (capitalism) are, at some point, inexorably linked.
Though it has been unduly vilified by some on the left (with one freshman Congresswoman leading the charge), private enterprise remains the true engine of growth and prosperity in any successful country.
Private enterprise is the true engine of growth in any country. Approximately 150 million people work in the United States: 130 million work in private enterprise and only 20 million people in government. As I pointed out earlier in this letter, large, successful companies generally provide good wages, even at the starting level, as well as insurance for employees and their families, retirement plans, training and other benefits. Companies in a free enterprise system drive innovation through capital investments and R&D; they are huge supporters of communities; and they often are at the forefront of social policy. Are they the reason for all of society’s ills? Absolutely not
There's no question that the US is the most prosperous country that has ever existed, but that doesn't mean the economic anxieties that have so dramatically altered the political landscape in recent years should simply be dismissed out of hand. Rising inequality, stagnating middle-class incomes, an unlivable minimum wage and lack of access to health-care are systemic challenges that must be overcome. The American dream is alive, Dimon says, but it is "fraying" as "the societal needs of far too many are not being met." And in Dimon's view, corporate CEOs have a responsibility to do what they can to push for societal change, instead of accepting that the new paradigm of "secular stagnation" is inevitable.
Before I talk about our problems, I think it’s important to put any negatives in context, so first a paean to our nation. America is still the most prosperous nation the world has ever seen. We are blessed with the natural gifts of land; all the food, water and energy we need; the Atlantic and Pacific oceans as natural borders; and wonderful neighbors in Canada and Mexico. And we are blessed with the extraordinary gifts from our Founding Fathers, which are still unequaled: freedom of speech, freedom of religion, freedom of enterprise, and the promise of equality and opportunity.
These gifts have led to the most dynamic economy the world has ever seen, nurturing vibrant businesses large and small, exceptional universities, and a welcoming environment for innovation, science and technology. America was an idea borne on principles, not based upon historical relationships and tribal politics. It has and will continue to be a beacon of hope for the world and a magnet for the world’s best and brightest. Of course, America has always had its flaws. Some of its more recent issues center on income inequality, stagnant wages, lack of equal opportunity, immigration and lack of access to healthcare. I make it a practice when hearing complaints to strive to understand where people might be right or partially right instead of rejecting or accepting their views reflexively.
Middle class incomes have been stagnant for years. Income inequality has gotten worse. Forty percent of American workers earn less than $15 an hour, and about 5% of full-time American workers earn the minimum wage or less, which is certainly not a living wage. In addition, 40% of Americans don’t have $400 to deal with unexpected expenses, such as medical bills or car repairs. More than 28 million Americans don’t have medical insurance at all. And, surprisingly, 25% of those eligible for various types of federal assistance programs don’t get any help. No one can claim that the promise of equal opportunity is being offered to all Americans through our education systems, nor are those who have run afoul of our justice system getting the second chance that many of them deserve. And we have been debating immigration reform for 30 years.
Simply put, the social needs of far too many of our citizens are not being met. Over the last 10 years, the U.S. economy has grown cumulatively about 20%. While this may sound impressive, it must be put into context: After a sharp downturn, economic growth would have been 40% over 10 years in a normal recovery. Twenty percent more growth would have added $4 trillion to GDP, which certainly would have driven wages higher and given us the wherewithal to broadly build a better country. Key questions that keep arising – and remain unanswered are: Why have productivity and economic growth been so anemic? And why have income inequality and so many other things gotten worse? Included among the common explanations is that “secular stagnation” is the new normal. I’ve also heard blame placed on institutional greed and “short-termism,” bad corporate governance, job displacement from new technologies, immigration or trade and a lack of new productivity-enhancing technology. Another common refrain is that capitalism and free enterprise have failed. As you’ll see, I think some of these arguments miss the mark.
And it wouldn't be a Dimon shareholder letter without an exhortation to set aside partisan conflict and come together to find policies that work "for the good of the country," in particular, improving our infrastructure and educational system should be part of a bipartisan consensus, even if it leads to higher taxes on the wealthy (something Dimon has said he would have "no problem" with). What we need, according to Dimon is a "Marshall plan for America," which sounds great - at least on paper.
Democrats should acknowledge Republicans’ legitimate concerns that sending money to Washington tends to be simply seen as waste, ultimately offering little value to local communities. Republicans need to acknowledge that America should and can afford to provide a proper safety net for our elderly, our sick and our poor, as well as help create an environment that generates more opportunities and more income for more Americans.
And if we can demonstrate that we are spending money wisely, we should spend more – think infrastructure and education funding. And that may very well mean taxing the wealthy more. If that happens, the wealthy should remember that if we improve our society and our economy, then they, in effect, are among the main winners. Our nation requires strong political leaders to develop good, thoughtful policies, use their political skills to determine what is doable and exercise their leadership skills to lead people toward commonsense solutions.
Continuing the trend from the last few years, Dimon seems to be spending more and more space in each letter on the need for technocratic solutions to America's societal ills. And though Dimon has said he has no plans to run for president ever, it's becoming more difficult to reconcile that with his evangelizing of a coherent political philosophy that one could call "Dimonism".
So, if Trump wins in 2020, is it really so far-fetched to question whether Dimon might throw his hat into the ring in 2024?
Read the full 51-page letter below: