Jamie Dimon warns of economic hurricane
Only a highest-paid bank CEO and long-time leader of best-positioned fortress, practically a "private central bank", coming up with ever worse descriptions of what to expect
In the latest interview Jamie Dimon, CEO of the largest bank in the developed world (JP Morgan), in his usual open style thought-provokingly touched upon several topics. How now it could make sense to originate more loans, as it’s harder to function like a fund (due to less private origination) – by just buying similar yielding loans in private markets. He underlined the unknowns vis-à-vis high oil price, return of geopolitics, record raising of rates and first ever QT (quantitative tightening), especially when the U.S. government continues to borrow.
He issued warning on housing (with mortgages having no place on commercial banks’ balance sheets) and that possible sacrifices are coming in Private Equity and Credit space (part of shadow-banking, which grew significantly after 2008 and as less regulated area is therefore now more prone to create negative spillovers for broader economy).
We will get back to housing in our later publication although it will be critical even in immediate next.
Mr. Dimon also briefly summed up his view of stakeholder capitalism, now more relevant than ever: [JP] needs to care about clients and employees, to survive and be successful in business, especially now when there is wage inflation (and harder to get and keep the best talents) and differentiation in provided services (some caused by divergence in monetary policies, some more due to contrasts in competitive environment with other more cost-pressured banks that were unable to achieve as high of RoE, not investing in necessary technology, not having good margins to offer the same e.g. rates on deposits as Chase).
We would return to this topic in some later posts to comment more on winners and losers in international banking sector, which were obvious even during record-low rates, let alone in these days.
Regulators aren't going to change anything on banks at this point.
No doubt, the existing regulation, came into effect during a different time. More restrictions on lending naturally counter-acted record low rates and other easing measures to prevent pre-2007 lending and securitization “free-for-all”. This may prove too challenging in today’s stricter environment, where bank credit may inadvertently evaporate, as there is no regulatory incentive to lend in a downturn. JP may act to take over pie from more risk-averse competitors with weaker balance sheets, but industry as a whole may lend less, suppress money creation, and further limit the economic growth.
Ironic how J.P. Morgan himself stepped up during panic of 1907 following the recommendations of Walter Bagehot in his Lombard Street (1873) to lend freely at punitive rates during a crisis. A back-stop like this is necessary now, especially if government will be slow to act feeling restrained by inflation, which private markets do no seem to believe in over long term (given yield curve inversion).
J. Dimon also noted a serious decline in number of listed companies. Indeed, there is a huge private equity market, perhaps soon bigger than public space. It is like it was more beneficial for great businesses to get PE attention, than to go through regulatory burden of listing on local/regional exchange, where liquidity might even be worse than in PE. A listing might have looked as adverse/negative selection, a sign of company not being able to raise money from experienced PE professionals.
Given all these warnings, and that today’s volatility may serve as an additional catalyst to a perfect storm in PE, real estate, we are thinking carefully about “buying the dip” – more on this to follow immediately.