America’s biggest bank sounds the alarm bell

Jamie Dimon, the CEO of JP Morgan Chase, did not open his annual shareholder letter with rosy language about the state of the world, or even enthusiasm about his bank’s record profits.

Instead, he describes “yet another year of significant challenges” including the war in Ukraine, war in the Middle East, extreme tensions with China, higher food and energy prices, turmoil in the banking sector, outrageous government deficits, and even major risks with the Federal Reserve’s monetary policy.

Dimon writes that “America’s global leadership role is being challenged outside by other nations and inside by our polarized electorate,” and that this is a “time of great crises”.

He went on with a few charts and thoughts about the bank’s business and financial performance over the last year… and then dedicated most of the remaining 57 pages of his letter to the serious problems which face the world.

His observations are wide-reaching– from the decay of social cohesion to the prospect of war and higher inflation, to the serious potential for a reset of the Bretton Woods system (which made the US dollar the world’s reserve currency).

Frankly the letter almost reads as a manifesto written by someone who is completely fed up with government incompetence and positioning himself to run for office. I can’t agree with everything he says, but it’s obvious that his ideas are balanced and well thought out.

There are a few points in particular worth repeating.

1.Keep it in perspective; the world is not coming to an end

“If you read the newspaper from virtually any day of any year since World War II,” Dimon writes, “there is abundant coverage on wars — hot and cold — inflation, recession, polarized politics, terrorist attacks, migration and starvation. As appalling as these events have been, the world was generally on a path to becoming stronger and safer.”

This is absolutely a true statement. It’s easy to get caught up in the negativity while missing the abundance of growth and opportunity.

In the year 1918, most people probably thought that the world was coming to an end. The Great War was at its peak, economies were faltering, inflation was surging, rationing and shortages were everywhere… and then the Spanish flu popped up and killed tens of millions of people.

Bleak times indeed. And yet the next century was the most prosperous in human history… despite a very bumpy path along the way.

This is similar to where we are today. Yes, Inspired Idiots have caused a gigantic mess. But the general trajectory of the human species is still improving.

2.That said, long-term risks should not be underestimated. Especially for the West.

Dimon finds that there is “too much emphasis on short-term, monthly data and too little on long-term trends”, and he talks about inflation as a great example.

Economists and investors tend to be almost singularly focused on monthly inflation reports in an effort to divine if and when the Federal Reserve will cut interest rates.

They’re entirely missing the point, Dimon writes. Month by month, and even year by year, inflation numbers could vary wildly. But if you look at the big picture, you’ll see substantial evidence for future inflation.

We’ve been writing about this for a long time. In fact, since inception we’ve only been focused on long-term trends… and we see these as highly inflationary.

Similar to our view, Dimon understands how “ongoing fiscal [deficit] spending, remilitarization of the world, restructuring of global trade, capital needs of the new green economy, and possibly higher energy costs in the future” are all inflationary in the long run.

The inflation might not show up next month or next quarter, but he believes (as do we) that the coming years are full of “persistent inflationary pressures”.

There are also significant risks to the current US-led global order; America’s influence is waning, and Dimon writes that the “international rules-based order established by the Western world after World War II is clearly under attack by outside forces, somewhat weakened by its own failures [and] confusing and overlapping regime of policies.”

As part of this, he talks about the distinct possibility for a reset of the post-WW2  financial system (known as Bretton Woods) that anointed the US dollar as the global reserve currency. He puts it succinctly: “we may need a new Bretton Woods.”

We’ve been writing about this for years; the dollar’s decline is a long-term trend, but for us, it’s an obvious one. You cannot run multi-trillion dollar deficits each year and still expect to be the world’s economic superpower.

It’s notable that even someone like Dimon can see this coming.

3.These problems are still solvable.

We’ve written extensively that the problems facing the US and the West are still solvable. For now. But every year that the problems continue to be ignored brings the country closer to a point of no return… where there is no way out but default.

Dimon is not shy about offering up suggestions, many of which we have written about in the past. He talks about border security, streamlining sensible regulations, and economic policies which prioritize growth.

“Unfortunately,” Dimon writes, “the message America hears is that the federal government does not value business — that business is the problem and not part of the solution.”

“There are fewer individuals in government who have any significant experience in starting or running a company, which is apparent every day in the political rhetoric that demonizes businesses and free enterprise and that damages confidence in America’s institutions.”

He says he finds it “astounding that many in Congress know what to do and want to do it but are simply unable to pass legislation because of partisan politics”.

He goes on to list a multitude of government failures and the “staggering number of policies, systems, and operations that are underperforming”, including pitiful public schools, broken healthcare, infrastructure woes (especially the energy grid), terrible immigration policy, Social Security’s looming insolvency, and more.

Dimon states very clearly that the federal government “needs to earn back trust through competence and effective policymaking.”

True statement. But I’m not holding my breath. Because in related news, the White House just announced that Joe Biden is working on yet another way to forgive student debt for 30 million Americans.

He doesn’t seem to care that the Supreme Court already rejected his previous effort to forgive student debt, saying he did not have the legal authority.

It’s pathetic that the cost of university education is so high… especially given how many degrees in an AI-world are useless. Plus many universities these days are just hotbeds of radicalization. It hardly seems worth taking on $80,000 of debt for such a dubious outcome.

But nevertheless, taxpayers have footed the bill for college and loaned out over $1 trillion to students across the country.

This is a basic tenet of capitalism (which Mr. Biden claims to embrace): debts have to be paid.

But because this guy’s poll numbers are so pathetic– especially with young people– he’s trying to score points by canceling their debts.

Well, canceling student debt means that taxpayers will lose hundreds of billions in loans that they made. So rather than taking steps to strengthen America’s balance sheet, the President is once again violating the law to make the balance sheet worse… all to improve his image among young voters.

This is hardly a way to restore trust in government. So again, I’m not holding my breath.

Dimon’s letter is worth the read if you have the time. You might not agree with everything he says, but it is rather telling that the CEO of the country’s largest bank is speaking so plainly about obvious risks.

It’s another reminder of why it makes so much sense to have a Plan B.

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