Energy, inflation and war: Jamie Dimon on the big risks ahead

April 4, 2022 4:47 PM

Jamie Dimon says the U.S. economy remains strong, but he also sees lots of warning signs, including sky-high energy prices, broad-based inflation and the fallout from sanctions on Russia.

JPMorgan Chase’s longtime chairman and CEO used much of his annual letter to shareholders, which was published Monday, to issue warnings about various risks ahead.

“While it is possible, and hopeful, that all of these events will have peaceful resolutions, we should prepare for the potential negative outcomes," Dimon wrote.

Dimon has been JPMorgan’s chief executive since late 2005 and its chairman since late 2006. The New York megabank said Monday that it plans to separate the two roles whenever the transition to its next CEO occurs. That means that Dimon could remain chairman after stepping down as CEO.

In his letter to shareholders, Dimon covered a wide range of topics, including JPMorgan’s big spending plans this year and the nation’s transition to a low-carbon economy. What follows is a summary of five key themes in Dimon’s letter.

A JPMorgan Chase Bank Branch Ahead Of Earnings Figures

David Paul Morris/Bloomberg

Answering critics of the company’s spending plans

Dimon responded to investors’ recent calls for more transparency about JPMorgan’s spending plans, the size of which has drawn criticism. The nation’s largest bank by assets has said that its expenses are projected to rise this year by $6 billion, or about 8%, to $77 billion.

The $6 billion total includes $3.5 billion in investments, and Dimon provided more detail Monday about that spending.

The company will spend a combined $1 billion this year on branches and bankers across its footprint and on certain marketing expenses, and rack up another $700 million in “incremental expenses” tied to recent acquisitions, he wrote. In the past 18 months, JPMorgan has spent nearly $5 billion on acquisitions, Dimon noted.

But the largest chunk of money — just shy of $2 billion — will be spent on technology and operations. The actual expense lines, he said, could be for people, hardware or software, or purchased services.

Dimon also reiterated that $2.5 billion of the $6 billion will go toward what the company spends on people-related costs, including talent attraction and retention.

Dimon declined to provide more detail about one line item: the cost of building out a global footprint. Last year, JPMorgan launched a digital consumer bank in the United Kingdom and acquired a 40% ownership stake in C6, a digital bank in Brazil.

In his letter, Dimon said the company has several advantages as it expands overseas, including a well-known brand, a global payments business and global asset-management products.

“We have the talent and know-how to deliver these through cutting-edge technology, allowing us to harness the full range of these capabilities from all our businesses,” he wrote. “We can apply what we have learned in our leading U.S. franchise and vice versa.”

“We may be wrong on this one, but I like our hand,” he added.

War’s economic drag ‘could easily get worse’

Russia’s war in Ukraine is not only causing a humanitarian crisis, it is already damaging the global economy, Dimon wrote. And he said that it “could easily get worse.”

JPMorgan expects Russia’s gross domestic product to sink by 12.5% by mid-year. The bank still expects Euro-area economies to grow, but to do so at a more modest pace, and it sees a slight negative impact on U.S. GDP growth this year.

“Along with the unpredictability of war itself and the uncertainty surrounding global commodity supply chains, this makes for a potentially explosive situation,” Dimon wrote.

Still, Dimon recommended that U.S. officials “turn up sanctions” pressure on Russia, noting that “many more” measures could be imposed. He recommended the U.S. commit to a long-term military strategy in the region, featuring increased military expenditures and troop deployments on NATO’s borders, and that the U.S. take the lead in providing humanitarian help.

For its own part, JPMorgan has been “working hand in hand with governments” to implement financial sanctions on certain Russian individuals and companies, as well as stopping billions of dollars in payments, he wrote.

“Managing this has been an enormous undertaking,” Dimon wrote. “It is completely different from navigating a financial crisis or a severe recession.”

Dimon wrote that JPMorgan is “not worried about our direct exposure to Russia,” though it may lose about $1 billion over time. He said that the bank is actively monitoring any knock-on effects on the global economy and any longer-term geopolitical impacts.

A ‘Marshall Plan’ for energy security

Dimon made a historical analogy he’s invoked before, calling for a “Marshall Plan,” this time to provide energy security to the U.S. and its European allies. His comments came against the backdrop of soaring energy prices and a potential energy disaster in Europe, which is highly dependent on Russia for oil and gas.

Dimon offered four potential near-term fixes to “bring diverse stakeholders together”: promoting energy security; investing more in clean technologies; enacting a series of policies that encourage investment in low-carbon solutions and create jobs; and setting “meaningful” goals while identifying “a few tangible, cost-effective solutions” to cut down on emissions today.

While many companies, including JPMorgan Chase, have pledged to cut their emissions to zero by 2050, there remains a long way to go, Dimon said.

Last year, the New York bank set targets for reducing carbon intensity in its oil and gas, electric power and automobile manufacturing portfolios by 2030.

There is “no silver bullet” for achieving the world’s energy and climate goals, Dimon wrote.

“But we can start by prioritizing emissions reductions, developing meaningful short- and long-term goals and crafting innovative policy solutions,” he added. “The curve toward net zero can still be bent before it’s too late.”

Dimon’s ideas do not go far enough for more than three dozen climate advocacy groups, which criticized his “Marshall Plan” proposal Monday.

The groups, which include the Sierra Club and the Rainforest Action Network, said they were writing in response to a recent meeting that Dimon had with the Biden administration regarding the idea.

“Your proposal is not only a bad idea for the climate, it is financially unsound and risks further expanding the market’s ‘carbon bubble,’” the advocacy groups wrote.

‘The Fed has a hard job to do’

The Federal Reserve faces a tricky path ahead as it unwinds its stimulus measures, Dimon wrote, arguing that persistent inflation requires a “massive but necessary shift” in monetary policy.

The central bank, which raised interest rates last month for the first time since the start of the COVID-19pandemic, is poised to hike rates several times this year, as well as to start unwinding its nearly $9 trillion balance sheet. But supply-chain disruptions, Russia sanctions, the war in Ukraine and elevated inflation mean this cycle will “in no way” follow the usual path of Fed tightening.

“If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede,” Dimon wrote.

The Fed should “give themselves ultimate flexibility” to change plans as needed, particularly given the “inconsistent and volatile” economic data the U.S. will likely see.

“In any event, this process will cause lots of consternation and very volatile markets,” Dimon wrote. But he added the Fed “should not worry about volatile markets unless” they lead to actual weakening in the economy.

“The Fed has a hard job to do so let’s all wish them the best,” he wrote.

Strong recovery continuing despite numerous challenges

Dimon said he expects the U.S. economy to continue its sharp rebound, though he listed rising interest rates, inflation that's at its highest level in decades and Russia’s war in Ukraine as risks that may throw the economy off course.

“They present completely different circumstances than what we’ve experienced in the past — and their confluence may dramatically increase the risks ahead,” Dimon wrote.

But right now, the U.S. economy is strong and the average consumer is “in excellent financial shape,” he said. Consumer debt levels are among the lowest on record, jobs are “plentiful” and workers’ wages are rising, Dimon wrote.

Though higher pay has led to some difficulties for businesses, Dimon wrote that “we should not be unhappy that wages are going up” and that workers have a wider choice of jobs.

Most consumers and companies “are still flush” with the savings they accumulated in 2020 and 2021, Dimon wrote. He also noted that lower-income households had less money saved and are seeing their reserves drop faster.

Inflation and the ongoing pandemic may be behind the recent drop in consumer confidence, Dimon wrote. But he said that consumer spending data, which has seen a “dramatic upswing,” is more important than consumer confidence data.