Jamie Dimon: Oil prices, war in Ukraine, inflation are all storm clouds that can get worse: Jamie Dimon

JPMorgan Chase’s Jamie Dimon is the only CEO of a major Wall Street company to have led an institution through the global financial crisis, Taper Tantrum and Covid and now through a quantitative tightening cycle. In an interview with MC Govardhana Rangan, Bodhisatva Ganguli, and Saloni Shukla ahead of the Federal Reserve’s interest rate decision, Dimon discusses how corporations and nations face the biggest challenges that come with inflation, war, and other geopolitical challenges. Edited excerpts:

How dark are the dark hurricane clouds for the economy?

The storm clouds are there, you see – high oil prices, the war in Ukraine, high inflation – these are all storm clouds, it can get worse. I don’t think any of us know how bad it’s going to get because some of these things can easily get worse. I’m not that concerned about the Fed’s actions raising rates by 75 basis points or 100 basis points. That’s a drop in the bucket, as it makes virtually no difference other than a little psychological twist on how tough the Fed will be.

The market is obsessing over whether it’s going to be 75 or 100, but you don’t think that’s such a big deal?

The actual impact of the 25 basis point interest rate differential is not that relevant, apart from the psychological element that will have a short-term impact. If they raise interest rates by 100 basis points, you’ll have two questions. You’ll tell yourself they’re harder, that’s great. And then you will ask yourself, what are you worried about?

The question now is how severe or how likely is a recession?

The amount of monetary and fiscal stimulus was so great; how could it not lead to more inflation and thus higher interest rates? We’re now used to interest rates going up to 3% or 4%, but I think it’s just as possible that we’re getting used to the idea that interest rates will go up to 5%. I think it’s going to be harder for the market to absorb that because I think they had a 3.5% interest rate in mind and not 4.25% or 4.5%. With fiscal stimulus still being spent, inflation may fall somewhat, but parts like rents in most cities and the CPI equivalent or wages won’t fall. And so my guess is that maybe the Fed needs to go up a little bit more and then its curve goes up a bit again.

They warned of an impending economic hurricane. What trail of devastation is this likely to leave behind?

Serious storm clouds are gathering ahead of us, but we don’t know if this is a light storm dissipating or a more serious hurricane. Some think it could be a bad recession because the war itself is unpredictable, oil and natural energy and food are precarious, inflation is higher, and geopolitics with America and China are far tighter. So all these things are happening and creating this turbulence that could make things worse. You can watch any war, most of them have unpredictable results. They can cause far more problems for humanity than for the markets. I’m not worried about the market.

A generation of central bankers has not seen this kind of price pressure. It is reminiscent of the time of Paul Volcker. How do you expect central banks to react?

That’s complex. First of all I respect what they have done to recover from Covid. And I think we should acknowledge that. But in retrospect it is clear that they are too late. And that probably means they’ll hike rates more later than they might have done earlier. The other thing is that we’ve never had fiscal stimulus like this before. We have never had such QE (Quantitative Easing). So the Fed is literally in uncharted waters. There has never been a global QT (Quantitative Tightening). Consider the alternative: as long as this economy is rolling and inflation is at 7% or 8%, the Fed will hike rates. If the first 75 basis points aren’t enough, they make another 75, and if that’s not enough, they make another 75. At some point, when they first see inflation coming down, they might pause, or do a little rate increase. One of the lessons from Volcker is that he did it very aggressively. And Volker said he waited too long and then made it worse.

The US Federal Reserve and ECB are on the same path, while the Bank of Japan has not moved yet. What does this mean for the financial markets?

That was also part of my storm clouds. What we do know is that this will lead to extremely volatile markets. That is absolutely a given. It goes without saying because every day you wake up you need to ask the same questions. They use that day’s data to determine if it’s good, bad, wrong, too high, or too low. And that will cause episodes like this. And of course interest rate markets affect all markets. This churn I’m talking about will cause very volatile markets and shut down markets like the IPO market or the high yield market. This is expected to continue for a while. There was no capitulation or fear or panic in the markets.

Do you intend to surrender?

The likelihood of that happening is higher. I hope it doesn’t happen and I’m not predicting it either. I just think there’s a chance and we’re prepared for it. So, as a company serving Indian customers and the Indian government, I need to be as prepared as possible to serve my customers. I’m not that worried about the volatile markets, we’re used to that and we can handle that.

Which is a bigger threat: inflation or monetary tightening?

I think they’re equal threats, but one you’re used to and one you’re not. I don’t know what the full effects of QT are. And I think in hindsight they would be writing books on QE for 50 years. And I think people would eventually realize that negative rates were a bad idea. But I can be wrong. I don’t know – that’s for the history books to write. But I think there is a third one that is much more important. And this is the war in Ukraine. I mean, it’s a humanitarian crisis, it’s nuclear blackmail. People talk about possible starvation. Winter isn’t here yet. Oil supplies are inherently precarious. I see that as a much higher risk to humanity than bad markets.

How worrying is a China-Taiwan conflict?

It’s a black swan event. A war in Taiwan will be devastating to the world economy for many reasons. I think the world realized after the war in Ukraine that national security comes first. The nuclear issue is scary. And if you look at the energy supply, China and India are going to look at that and say what we need to do to make sure my country is safe. I think people will restructure trade to make sure they are safer rather than abolish trade. I think some of that around the world is good for India because as people diversify supply chains, India should take on some of that production.

Due to the sanctions, a parallel payment system has emerged between Russia and China and even between India and Russia. What does this mean for the international system dominated by the US dollar?

America should be very careful how it uses financial sanctions. They should only be used for serious reasons and probably in conjunction with allies. I will place Russia in this category. I think when we overdo it we give reasons not to trade with America or bank with America or keep your money in dollars. The dollar is strong because there is a rule of law. You can do whatever you want with it. In the back of your mind, don’t worry about the rule of law in America or the debasement of the currency because you know the Fed is trying to preserve the currency. The payment systems are slightly different because people can find alternative payment options. Many banks are connected in the Swift payment system. For certain things we don’t need the Swift payment system. So if America says, okay, you can’t use Swift to pay the oil company, maybe you can find a way to pay them. But if America says if you pay the oil company, we’re going to impose restrictions, that’s a much tougher thing.

India was an outperformer. How do you see this in a global context?

India should aim to be the world’s fastest growing economy over the next decade. Anything shorter than this goal is not high enough. And the question you should always ask yourself is: What are we doing to get there? We deserve it. Why aren’t we there?

India has done some brilliant things in the last 10 years. Biometric identification for bank transfers. They have a national infrastructure law that hasn’t started yet. Anything that reduces the regulatory burden – and I’m talking about bureaucratic regulatory burdens – is a good thing. Free competition, stronger financial markets, I hope GIFT City works for you and now of course you should be a big beneficiary of this huge opportunity for people to shift supply chains out of China. You look at the world trying to be a peaceful nation, you stand right next to Russia and China, but your best ally in the world in the next 20 years will be America.

If you look at this region – China and India – from America, how does it look in relative terms?
You did great. They’ve had 7% growth this year and 7% last year, which I think is very good. Obviously, China has many problems, but you shouldn’t be happy about them. That is not good for you. It’s not good for us. Some of these problems are solvable. The real estate problem is real, but they have the wherewithal to overcome it. You can tell the banks to extend the loan, finish the building, and let the people move in. And I think they will use smart macro policies to accelerate growth a bit. And sometime after President Xi elects a third term, I think they’ll be able to get past that. I don’t think they are in a static position. I do think that the autocratic management of financial markets over a long period of time will lead to misallocation of capital and corruption, and that will be the problem of the next decade.

https://economictimes.indiatimes.com/markets/expert-view/oil-prices-war-in-ukraine-inflation-are-all-storm-clouds-that-can-get-worse-jamie-dimon/articleshow/94361632.cms Jamie Dimon: Oil prices, war in Ukraine, inflation are all storm clouds that can get worse: Jamie Dimon

Russell Falcon

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