Jamie Dimon, the CEO of JPMorgan Chase, issued a sober warning for the U.S. economy in his annual letter to investors this week.
Dimon pointed to wars breaking out in Europe, the Middle East, and growing tensions with China as major drivers to economic uncertainty which have helped fuel “higher energy and food prices, inflation rates and volatile markets.”
The crises on the foreign policy front are largely a reflection of President Joe Biden’s weakness on the world stage as America’s adversaries have felt that they have more latitude in what they are able to get away with under the current administration, critics say.
“It is important to note that the economy is being fueled by large amounts of government deficit spending and past stimulus,” Dimon said. “There is also a growing need for increased spending as we continue transitioning to a greener economy, restructuring global supply chains, boosting military expenditure and battling rising healthcare costs. This may lead to stickier inflation and higher rates than markets expect. Furthermore, there are downside risks to watch.”
Dimon warned that too many were focused on the short-term and not nearly enough people were focused on the long-term trends and what they could mean for the U.S. economy:
For example, today there is tremendous interest in monthly inflation data, although it seems to me that every long-term trend I see increases inflation relative to the last 20 years. Huge fiscal spending, the trillions needed each year for the green economy, the remilitarization of the world and the restructuring of global trade — all are inflationary. I’m not sure models could pick this up. And you must use judgment if you want to evaluate impacts like these.
Also, a block of time as short as one year is an artificial framework for judging the impact of long-term trends that could easily play out over years. A helpful exercise is to think “future back,” in which you imagine different future outcomes, including the ones you want, and then work backward to events that are happening today (or that might happen or that you cause to happen), closely examining the connections between those events and your projected or desired outcomes. Those connections inform your risk and R&D planning. Similarly, when companies compare the attributes of their products and services with their competitors, they usually only consider where they are versus their competitors. But nothing is static — they should consider where their competitors will be in the future. Conditions are always changing, crises are always emerging. When analyzing the playing field, it is better to assume that your competitors are strong and are already in the process of improving and innovating. This minimizes the chance of arrogance leading to complacency.
He said that markets believe there is a “70% to 80% chance of a soft landing” for the U.S. economy — meaning modest growth along with declining inflation and interest rates — but he believes that number is far too high.
“I believe the odds are a lot lower than that,” he said. “In the meantime, there seems to be an enormous focus, too much so, on monthly inflation data and modest changes to interest rates. But the die may be cast — interest rates looking out a year or two may be predetermined by all of the factors I mentioned above. Small changes in interest rates today may have less impact on inflation in the future than many people believe.”
He said that people need to be prepared for inflation rates to skyrocket again to potentially higher than 8%, “with equally wide-ranging economic outcomes — from strong economic growth with moderate inflation (in this case, higher interest rates would result from higher demand for capital) to a recession with inflation; i.e., stagflation.”