The U.S. economy is “fairly healthy,” just not as healthy as last year and the risks of recession might be increasing, JPMorgan Chase Chief Executive Jamie Dimon said in his annual letter to investors on Thursday.
While he is not predicting a downturn is imminent, Dimon listed a number of concerns and uncertainties that will hurt growth and progress for investors and America, in both the short- and long-term.
At times, the letter read more like an announcement that he was running for office than a state of the bank address, as he commented on the current administration’s foreign policy, the use of slogans by politicians and public policy issues, as well as the bank’s strategies and the outlook for the stock.
“We do not worry about the stock price in the short run,” Dimon wrote. “If you continue to build a great company, the stock price will take care of itself.”
The stock JPM, +0.97% rose 0.8% in midday trade. It has gained 8.1% year to date, but has lost 4.9% over the past 12 months. In comparison, the SPDR Financial Select Sector exchange-traded fund XLF, +0.61% has slipped 3.9% over the past year while the Dow Jones Industrial Average JPM, +0.97% has advanced 8.7%.
Here are 5 other things in Dimon’s letter that are worth highlighting:
There are economic risks on the horizon that will demand our attention
The good news about the U.S. economy is that employment and wages are rising; consumer and business confidence is still strong, albeit less strong that they were; inflation is moderate and financial markets and consumer balance sheets are healthy; and the housing market isn’t particularly strong, but short supply should eventually boost growth.
The bad news, however, is Dimon is concerned that the excessive disruption in the financial markets at the end of 2018 might be “a harbinger of things to come,” as investor sentiment remains precarious. Read more about the ‘crazy’ stock market in the last week of 2018.
Among some “legitimate concerns” for investors is the trade dispute with China, but Dimon has reason for some optimism.
“We should only expect China to do what is in its own self interest, but we believe that it should and will agree to some of the United States’ trade demands because, ultimately, the changes will create a stronger Chinese economy,” Dimon wrote. “We believe the odds are high that a fair trade deal will eventually be worked out--but if not, there could be serious repercussions.”
Also read: Trump Today: President says China talks are going ‘nicely’ at sticking points said to remain.
See related: World Trade Organization slashed forecast for trade growth over U.S., China spat.
Dimon is also concerned about rising debt levels around the world, the increase in leveraged lending, growing geopolitical tensions, the growing risk of bad policymaking and uncertainty surrounding market liquidity.
Another major issue is cybersecurity, which Dimon feels may be the biggest threat to the financial system.
“It’s hard to look at all the issues facing the world and not think that the range of possible is broader and that the odds of bad outcomes might be increasing,” Dimon wrote.
He said the next recession might not resemble prior recessions, which had specific identifiable causes, because the cause could be the cumulative effect of negative factors, “the proverbial last straw on the camel’s back.”
Because of divisive politics, America is unable to keep pace in a new world
The federal government is becoming less relevant to what is going on in people’s lives, Dimon said. As a result, people are losing faith in their politicians’ ability to deliver on their promises and meet societal needs.
“Politics is increasingly divisive, and a number of policies are not working,” Dimon wrote.
Don’t miss: ‘Totally outrageous’ and ‘great job’: What lawmakers are saying about Trump’s State of the Union address.
While boasting that America is still the “most prosperous nation the world has ever seen,” a focus on “historical relationships and tribal politics” is keeping the government from addressing its “flaws,” which include income inequality, racial and gender issues, stagnant wages, lack of equal opportunity, immigration and lack of access to health care.
“None of these issues is exclusively owned by Democrats or Republicans,” Dimon said. “To the contrary, it is clear that partisan politics is stopping collaborative policy from being implemented, particularly at the federal level.”
For Democrats, Dimon said they need to acknowledge that many things the government has done “in the name of good” have sometimes not worked and need to be modified. Democrats should understand Republicans’ concerns that “throwing money” to Washington to fix problems tends to be seen as a waste, as it often leads to little value to local communities.
Meanwhile, Republicans have to acknowledge that “America should and can afford to provide a proper safety net to our elderly, our sick and our poor,” as well as help generate more opportunities for more Americans.
“Slogans are not policy, and, though simple and sometimes virtuous-sounding, they often lead to policies that fail,” Dimon said.
“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 common-sense solutions.”
American leadership and engagement on the world stage is “indispensable”
Dimon said one of the biggest uncertainties in the world is what role America is currently playing.
He said that while there are many problems with international organizations, such as the North Atlantic Treaty Organization (NATO), the World Trade Organization (WTO) and the United Nations (UN), the world is better off with these institutions, and the U.S. should engage and exercise its power and influence “cautiously and judiciously.”
Also read: NATO chief tells U.S. Congress that serious divisions exist within alliance.
See related: Stock investors confront a the once unthinkable: a new world order.
“We should all understand that global laws, standards and norms will be established whether or not our nation participates in setting them,” Dimon wrote. “It is certain that we will be happier with the evolution of global standards if we help craft and implement them. “We should not abdicate this role.”
Regulation isn’t all bad, but too much of it isn’t good
Dimon said current “excessive” regulation has reduced growth and business formation for both large and small companies, without making the economy safer or better. “The ease of starting a business in the United States has worsened, and both small business formation and employment growth have dropped to the lowest rates in 30 years,” Dimon wrote.
For one, he said the number of licences required to open and run a business need to be reduced. Licences often “take precious months to get,” he added.
Regarding banking regulations, Dimon was clear in saying he doesn’t advocate for the repeal of Dodd-Frank, which was put in place in the wake of the financial crisis of 2008 to reduce systemic risk, but he believes it needs to be reworked. Read more about Janet Yellen’s take on Dodd-Frank.
“We believe the strength and resilience of the U.S. financial system have benefited from the law,” Dimon said. “Ten years out from the crisis, however, it is appropriate for policymakers to examine areas of our regulatory framework that are excessive, overlapping, inefficient or duplicative.”
Some areas where Dimon said he thinks there should be “recalibration” include the lightly regulated “shadow bank,” or non-bank financial sector, where leverage and risk is increasing.
“While we do not believe that the rise in non-banks and shadow banking has reached a point of systemic risk, the growth in non-bank mortgage lending, student lending, leverage lending and some consumer lending is accelerating and needs to be assiduously monitored,” Dimon stressed. “Growth in shadow banking has been possible because rules and regulations imposed upon banks are not necessarily imposed upon these non-bank lenders, which exemplifies the risk of not having the new rules properly calibrated.”
He said there is also no doubt that new regulations regarding bank liquidity requirements “dramatically reduce” the ability of the Federal Reserve to boost liquidity when the next downturn begins, because they are even more procyclical than in the past.
“Effectively, some new rules will force capital to the sidelines just when it might be needed most by clients and the markets,” Dimon wrote.
Another area where Dimon thinks there is too much regulation is in the origination and servicing of mortgages. He said opening up securitization markets for safe loans would improve the cost and availability of mortgages, particularly to the young, self-employed and those with prior defaults.
That said, some of the regulations have made the financial system a lot safer. For example, it is now “highly unlikely” that Lehman Brothers, which was the epicenter of the 2008 financial crisis, would collapse.
“In fact, regulators should take a victory lap because Lehman, Bear Stearns, AIG and multiple other failures effectively could not happen today because of the new rules and requirements,” Dimon said.
JPMorgan Chase is “all in” on the cloud and AI, but not on stock buybacks
In his letter, Dimon acknowledged he was “partially responsible” for the bank being slow to adopt the cloud, because his early thinking was that it was just another term for outsourcing.
“I held firm to the view, which is somewhat still true, that we can run our own data centers, networks and applications as efficiently as anyone,” Dimon wrote. “But here’s the critical point: Cloud capabilities are far more extensive, and we are now full speed ahead.”
He also said the power of artificial intelligence and machine learning is “real,” and are “rapidly being deployed” across virtually every aspect of the bank’s business. Since that makes some employees redundant, the bank is looking to retrain and deploy those employees for other roles inside and outside the company.
Regarding share repurchases, which have become a hot-button issue as companies have returned much of their savings from tax reform to shareholders through buybacks and dividends, Dimon said buybacks shouldn’t be done at the expense of growth.
See also: Stock buybacks among S&P 500 companies mark a record streak.
He said shares repurchases should only be considered when a clear use for excess capital over the short-term isn’t visible, and only if they are repurchased at a “reasonable” price.
“We much prefer to use our capital to grow than to buy back stock,” Dimon said. “Investing for the future should come first, and at JPMorgan Chase, it does,” Dimon said.
Separately, Dimon said that while transparency with shareholders is a good thing, he believes earnings guidance can be “damaging,” given the “cumulative corrosiveness” of trying to “make” its numbers. He said it was easy to boost earnings results in a quarter by doing “stupid things” that help in the short term but are bad in the long term.
“And this could spiral within a company, as loyal, well-meaning employees do what they can to help a company meets its ‘earnings goal.’”
See related: The questions every investor should ask about Trump’s proposal to radically change how companies report earnings.
His comment comes in the wake of the sales-practice scandal that rocked rival Wells Fargo & Co WFC, +0.63% and after JPMorgan Chase missed first-quarter profit expectations for the first time in 16 quarters.
“We do not worry about quarterly earnings,” Dimon said.
In closing, Dimon said:
“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.”