JPMorgan Chase CEO Jamie Dimon warned of a looming economic “hurricane” caused by an increasingly hawkish Federal Reserve, rising inflationary pressures and the Russian invasion of Ukraine. Dimon – who said at the beginning of May there were storm clouds forming on the economic horizon – ratcheted up his warning on Wednesday, citing fresh challenges facing the Fed as it seeks to tame the hottest inflation in a generation.
“I said there were storm clouds. But I’m going to change it. It’s a hurricane,” he said during a conference hosted by AllianceBernstein Holdings. “Right now it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle it. That hurricane is right out there down the road coming our way. We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.”
There are two main issues that Dimon said are worrying him: The Federal Reserve moving to unwind its $8.9 trillion balance sheet, deploying a less-known tool known as quantitative tightening that will further tighten credit for U.S. households as officials try to tame red-hot inflation.
The rundown of the Fed’s portfolio is poised to begin on Wednesday at an initial combined monthly pace of $47.5 billion. The Fed will increase the runoff rate to $95 billion by September, putting the central bank on track to reduce its balance sheet by about $3 trillion over the next three years. We’ve never had QT like this, so you’re looking at something you could be writing history books on for 50 years,” Dimon said.
The second matter weighing on Dimon is the Russian-Ukraine war and its effect on the price of commodities like food and oil. The bank CEO said that oil could hit $150 or $175 a barrel as a result of the conflict, which began in late February. Brent crude, the benchmark, is currently selling for $116 a barrel. “Wars go bad. They go south. They have unintended consequences,” he said.
Dimon’s comment comes amid growing fears on Wall Street that the Fed may drag the economy into a recession as it seeks to tame inflation, which climbed by 8.3% in April, near a 40-year high. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street firms forecasting a downturn in the next two years, along with former Fed Chairman Ben Bernanke.
Policymakers raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and have signaled that more, similarly sized rate hikes are on the table at coming meetings as they rush to catch up with inflation. Fed Chairman Jerome Powell has acknowledged there could be some “pain associated” with reducing inflation and curbing demand but pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he has warned that a soft landing is not assured.
Source: Jamie Dimon warns of an economic ‘hurricane’ coming: ‘Brace yourself’ | Fox Business
Critics by : J.P. Morgan
October data showed that consumer prices in the United States rose at a 6.2% pace relative to last year, the fastest pace in 30 years. Food prices are 5% higher than they were last year. Used car prices are up 26%. Energy prices are up 30%. Shelter, one of the most critical sub-categories, has rapidly recovered to its pre-COVID 3.5% pace. The gains are broad based, and seem to be accelerating. Compared to last month, the median component is up almost 60 basis points, the highest reading back to 1983.
Rising prices pressure all spenders, especially those with low disposable incomes. However, only focusing on rising prices ignores important context. Over the last year, the economy has added almost 5.5 million private sector jobs. Aggregate earnings are up 4% annualized over the last two years versus prices up 3.7%. Retail sales are 15% higher than they were a year ago.
Yes, gasoline prices have soared to $3.40 per gallon relative to just $2.10 one year ago. But gas was also $3.40 per gallon in 2014, when incomes were 25% lower than they are now. The only sector that is seeing any demand destruction because of soaring prices and shortages is automobiles.
Economy wide corporate profits (before tax) are 16% higher. S&P 500 profit margins actually expanded in the third quarter despite expectations for a decline. Input and labor costs are surging, but so are sales. For now, inflation just comes with the territory of a booming economy, and a lower inflation environment would likely also be characterized by a weaker labor market and a more tepid jobs recovery.
There are compelling reasons why stock markets are still close to all-time highs. Third quarter earnings surprised to the upside, global supply chain pressures seem to be getting better, not worse (Vietnamese factory operations are normalizing and shipping costs are falling), and onerous corporate tax hikes seem increasingly unlikely.
Bond markets are a little more stressed, but given the circumstances, they have been relatively tame. Two-year bond yields have moved up by about 30 basis points since the start of October because investors are starting to think that the Federal Reserve will start raising rates soon in an effort to deal with inflation. Meanwhile, 10-year Treasury bonds are yielding just over 1.5%. Why so low? Simply, because bond markets think that this surge in inflation will be temporary. Longer run inflation expectations are still well below where they were from 2000-2014.
Inflation has been strong all year and risk assets have hardly blinked. The mega cap tech sector was often cited as the one that was most at risk during an inflationary environment. The Nasdaq 100 is up over 25% this year.
What could change the picture is if the Federal Reserve makes an abrupt turn toward hawkish policy. And we don’t mean something like accelerating the pace of tapering asset purchases. We mean something like what happened in 1994, when the Fed raised rates by 300 basis points cumulatively because they thought they needed to act quickly to snuff out inflation. Even though corporate earnings grew around 20% that year, equity markets ended flat because cash got more and more attractive.
Another longer term risk is that the discourse around inflation is inherently political. Surging inflation now could make it less likely that policymakers opt for powerful fiscal stimulus during future downturns, which could delay economic recovery and be harmful for stocks.
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