JP Morgan's Warnings for the Market [Just Released]

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hey everyone me kevin here this morning

jamie dimon the ceo of jpmorgan and

chase put out a 66 page a letter about

his opinions on what the heck is going

on in the world and these

presumably all are also the opinions of

jp morgan and chase not just jamie

diamond

but i want to start with our favorite

topic

inflation market issues the fed

so let's jump right into that section of

the letter and then i want to talk about

some specific

stocks that are really benefiting and

taking off today because of this letter

and hint it's not jpmorgan chase

so uh take a look at this so first of

all he touches on quantitative easing

here

and basically says look we really

haven't seen

the quantitative easing like what we've

had in the last

12 years ever before we haven't really

done this before and he complains a bit

about how there's a lot of regulation on

banks

that's potentially making more

quantitative easing necessary because

banks are now required to keep

a portion of their money of cash

deposits on hand rather than being able

to lend that out

and throughout the letter in multiple

different areas whether that's

individual banking or the discount

window at the fed

is essentially saying look because we

have to keep more money around

we can't lend when people need it stop

requiring banks to keep so much money

around he calls this

a three trillion dollar amount of

lost lending that helps us stagnate in

our economy he's very

very much slamming the regulations

imposed on banks

and when we here we this is a section

here where he says qe was never

effectively tried before prior to the

great recession but here's an

interesting argument he makes

so he says quantitative easing reduces

interest rates and

increases asset prices and creates

some spending so here he's essentially

saying look when the fed is printing

money

all you're really doing is creating the

effect of

lowering interest rates making asset

prices more expensive

because when interest rates are lower on

bonds more people invest in

stocks and then and people can borrow

more to invest in stocks or real estate

and you increase asset prices some of

that he says translates to people

spending more money because they're

richer they're wealthier

but he says most of what qe does

most of the money printing that happens

with quantitative easing this is like

bond rate

is selling and buying that has

mostly an inflationary effect on asset

prices

and so this is really important because

when we're worried about inflation we

really want to think about asset price

inflation

separately from consumer price inflation

so uh just a quick little detail there

on

on how that would work fed prints one

dollar or you know what let's say the

fed prints 120 billion dollars let's go

with that example

fed prints 120 billion dollars they use

that 120 billion dollars they created

out of thin air

to buy 120 billion dollars from let's

say jp morgan and chase they they don't

but let's just say it's from jp morgan

jp morgan now has 120 billion in cash

they have to keep

some of that as reserves because of

regulations

and then jp morgan has this choice do we

make more loans or just buy more bonds

and lately it kind of seems like a lot

of the money gets stuck

in the system where jp morgan just goes

and buys more bonds

so really it's taking printed money and

just

increasing the demand for bonds

increasing their price and lowering

rates

this is how rates stay low but little of

this money

actually finds its way into the economy

through quantitative easing

it just makes the rich richer basically

now he's going to contrast to stimulus

in just a moment but take a look at some

of the downsides he talks about

regarding quantitative easing

and i've never considered some of these

before some of these i have but some of

these other ones were very unique

take a listen to this on the other hand

quantitative easing easing may have some

deflationary effects this makes sense

lower interest rates

is deflationary and he says that's

because businesses have lower input

costs

but you also with lower yields lower

interest rates provide less

income to savers we've heard that before

but then he says

this could actually reduce consumption

so money printing and quantitative

easing which

we should separate that quantitative

easing is one type

quantitative easing could reduce

people's

spending because they're making less

money on their

savings you're not getting that two

percent yield anymore in your savings

account

like you used to be able to get

everywhere or that three or four percent

yield

that you got in previous days you know

that doesn't exist anymore

and this means people need to set aside

or save more money

to protect the required their retirement

income as he says here

and ultimately people potentially spend

less money even though rates go down and

we'd think

quantitative easing would lead people to

spend more money this is interesting

uh something i haven't considered before

is especially this retirement savings

going up and people not spending in a

low interest rate environment because

they're just not making as much money as

they used to

on their savings then uh when he talks

about

spending uh for specifically

like stimulus measures he mentions that

look

in recessionary environments with low

inflation you basically

should print money and spend it via

stimulus and he says that you can do

this

without causing overheating or excessive

inflation

in fact he says one of the downsides or

one of the reasons

we had slower growth over the last 10

years is because we didn't do

enough stimulus we just didn't do enough

in those first two years

of the obama era to do more stimulus

congress was too gridlocked

for too long and what he mentions as

well is look

when we spend money uh he talks this is

where he gets into inflation which is a

fascinating argument that he makes here

then he touches some more on

inflation and this is an interesting

note he says that

uh after or during world war ii

he mentions that this period of high

government debt

did not create lasting and that's the

key word here lasting inflation

as the circumstances were different then

were coming out of a deep depression and

money was spent financing a war

circumstances and starting points matter

he says

this is where he makes a difference

between what happened during the

recession and what's happening now

during the recession he says the entire

financial system was deemed

over leveraged and that consumers

individuals like you and me

were over leveraged as well for years

after the great recession there was a

massive deleveraging in the united

states by consumers

and financial institutions he says today

this is not the case

instead the consumer's leverage is lower

than it has been in 40

years on top of that before the stimulus

package of 1.9 trillion dollars

consumers had excess savings of two

trillion dollars he says

something that's different than the

prior recession right before the global

financial crisis

corporations also have an extraordinary

amount of cash he mentions

and so this is where he comes to a very

positive conclusion but it gets dark

right

after this so let's hit the positive

conclusion first he says

i have little doubt that with excess

savings new stimulus

savings huge deficit spending more qe a

potential

infrastructure bill a successful vaccine

and euphoria around the end of the

pandemic

the u.s economy will likely boom this

boom could easily run into 2023

because all the spending could extend

well into 2023.

something he mentions throughout this

report is he does talk about how

hey look all of this spending that we're

doing

on stimulus is not going to be immediate

we're going to keep benefiting from this

for years after we spend the money

and so that's an important takeaway from

this as well now we get to some of the

negative from jamie dimon so jamie

dimon starts off by saying while equity

valuation stocks are quite high by

almost

all measures historically a multi-year

booming economy could justify

the current price of stocks so he's

being pretty clear here yo

stocks aren't cheap right now but maybe

if we have a

multi-year bull run in the markets or

just the economy

then these prices are going to be

justified now he does also say

accept against interest rates this right

here is a very cathy wood argument

that look markets have not priced in

the fact that we are going to have lower

interest rates for the long term even

after temporary inflation

even after the fed increases the fed

funds rate

which is currently at zero percent even

if that goes back to one and a half two

percent

we are still pricing in interest rates

around

five to six to seven percent on the s p

500

when in reality we should be pricing in

interest rates closer to two to three

percent

which leaves a lot more room for growth

stocks going

forward it's a very cathy woody an

argument uh many people obviously do not

agree with kathy wood

now clearly jamie dimon goes on to say

clearly there is some froth

and speculation in parts of the market

he refers to a line from

casablanca i'm shocked shocked to find

that gambling is going on in here

which is obviously sarcasm at least in

this context then he goes on to say that

the price

of u.s bonds is actually very

high right now like the 10-year the

price of the 10-year bond

is still too high is what he's saying he

thinks it should fall

more and that's because he thinks look

we've got to be real

there's going to be a lot more debt

coming out so the price of bonds

should be lower which would mean yields

or rates

go up and then he says

there's also the not unreasonable

possibility that an increase in

inflation will

not just be temporary and so he's

basically saying here look

we're going to have a huge supply of

more bonds so prices for bonds

should go down driving yields up we need

to consider the fact that

inflation could happen that should push

push prices for bonds

down more today because people don't

want today's bonds

which should price up yields so these

are two very important things

that he mentions here all right so uh

then

we're going to run over here we're going

to see again he reiterates

that the fed may be forced to raise

rates

sooner than people expect and this is

also an interesting segment here which

he we've talked about briefly before

but he mentions here much of the

stimulus may very well hit

when the economy is doing quite well

this is a way of saying

look stimulus takes time to be spent so

what happens if all the stimulus we just

spent actually starts kicking into high

gear in like 2022 or 23

when the economy is actually doing

better because hopefully covets under

control and gone then

and then guess what happens inflation

because now you're now it's literally

like imagine this

it's like oh the market's down now let's

pump money into the market and stimulate

the economy right

but what if that takes two years to get

fully realized that means a portion

let's call it 25 doesn't hit until 2023

well let's now fast forward to 23.

no covid everything's booming here's

another 25

stimulus it's not a new package it's

just the delay in how long it took for

that money to actually go through the

system

and then all of a sudden hits and it's

like wait a minute this is a lot of

extra uh uh you know stimulus

kind of interesting so uh then we go on

let's see the government did the right

thing by moving extraordinarily quickly

to stop copyright blah blah blah okay

so let's get to some other conclusions

here so i highlighted the best parts

let's get over here

so uh how do we okay over here he spends

a lot of time

in his piece complaining about

regulation he says look

banks should be allowed to fail there

should be no such thing as too big to

fail

he also says the problem is there's too

much regulation

right now banks are capitalized markets

are good if there's a collapse of a bank

markets will be okay he says he's

actually very confident in the market

but he's very upset but by what he deems

as

unfair regulation he compares fintechs

to having lower capital requirements

less operational risk no liquidity

requirements no fdic

insurance less costly regulation no

social requirements higher debt

debit card income and so on so forth

whereas banks have basically

lower or more stringent issues on all

these fronts

and basically he spends a few pages in

here talking about how

non-banks neo banks and non-banks are

gaining shares

in consumer accounts that are creating

these effective

savings account kind of like or if

things that are like effectively like

savings account like robinhood savings

account

and he makes this analogy here or

actually gives us a stat here and says

look

you take a banking customer with twenty

thousand dollars or who spends twenty

thousand dollars on a debit card

annually

jp morgan might only make 120 off that

customer

whereas other banks like the non-banks

are making 240

because of the differences in regulation

uh and he really complains quite a bit

about regulation i mean look at this

onerous reporting requirements higher

litigation expenses for public companies

annual shareholder meetings that focus

on matters that most shareholders view

as frivolous

really jaded tone and he has a lot of

this jaded tone throughout a lot of this

and he talks about how well-positioned

fintech is with

social media or big tech is with data to

basically

white label banking relationships and

create huge competition for jp morgan

now jp morgan basically to this says

look the game's rigged

uh we're at the losing end of that but

we won't die yet so don't worry

uh yeah okay that might be a little bit

of a harsh conclusion but i think it's a

fair conclusion

uh talks a little bit more about how

look at this he says this system

is broken talks about how

heavy these requirements are for banks

to keep all this extra liquidity around

but wait a minute if there's so much

more like there's so much more cash

requirements on banks

what happens well the fed has to step in

more frequently

when there are issues or stresses in the

repo market or the treasury market

if you got rid of all of these extra

requirements banks would be able to

provide more lending

and essentially goes on this tangent

about complaining over regulations

uh which in fairness thanks to

dodd-frank and some other regulation

banks are way more regulated than like

the fintechs

any we see that time and time again like

i cannot get more than four mortgages at

jpmorgan

but i can get uh up to 10 in some cases

up to 19

at brokers or fintechs but jp morgan

can't because dodd-frank says the big

four banks

nope you can't do more than four

mortgages for kevin it's not jp morgan's

fault

sucks for them they're just too big

maybe they should create their own

fintech

uh you know a division of or maybe not a

division of just a totally separate

company led by jamie dimon i don't know

go compete you know can't beat him join

them kind of thing

anyway then he talks about how he

believes that china believes

that america is in decline and that

america is going to get

basically dominated by china and this is

something that biden is deathly afraid

of

and biden is really trying to fight this

jaime diamond here says that china sees

an america that is losing ground in

technology infrastructure and education

a nation torn and crippled by politics

as well as racial and income inequality

in a country

unable to coordinate government policies

in other words

our government is very slow also says uh

unfortunately recently there has been a

lot of truth to these arguments so he's

reiterating

uh what china's beliefs are about

america he also goes out of his way to

mention the horrific murder of george

floyd

this is taking a a position on that you

all know that i'm always 100 neutral on

this channel

but there are some people on one side

that say

george floyd wasn't murdered he you know

was following

department policies and then there are a

lot of folks on the other side who say

no way neon way too long uh

total murder abuse of power right again

everybody's got their own conclusions

here

i'm not even mentioning a side

uh that that i would remotely be on the

point is to say that jamie diamond is

the only thing i'm conveying here jamie

dimon

took his stand okay good so moving on

uh politics is increasingly divisive the

government is increasingly

dysfunctional these are harsh words the

enormous wealth our country is a clear

accruing to the very few

that k-shaped recovery he blames these

problems

on wealth inequality he suggests that

30 percent of americans earn less than

15 dollars an hour

says 85 percent of high schoolers in

inner cities do not graduate

says uh wait hold on hold on let's see

well i'm sorry i misread that while the

amer

average american high school graduates

approximately 85 percent of its students

many of our inner city schools don't

graduate half

that's the correct statistic half of

their students

our health care system is increasingly

costly now over 11

000 per person more than twice our

global competitors

now i'm not sure if he means per year

per person 11 000

i think that's what he means but the

bottom line there is really twice as

expensive of a healthcare system

than our global competitors uh he

complains

that uh 70 of today's youth are not

eligible

for military service due to a lack of

proper education or

health issues complains about

difficult litigation system and

regulatory system that is costly and

crippling to small business

with red tape and bureaucracy he does

not have a lot of good things to say

like jamie dimon

it just sounds like he is so frustrated

kept up by so many things at night

and feels almost powerless to change

some of these things

this is i think one of the reasons he

has this letter is to potentially try to

provide some solutions but he also goes

on to say that look

if we keep having this anemic growth

kind of like what we saw between 2018

and 2019

we could end up in secular stagnation

this is a way of what i've been talking

about on this channel

really throughout this entire pandemic

about possibly entering a frugal decade

where people are saving much more than

they previously have before

and that's bad because when people save

more you don't get some of the benefits

of faster growth

which here he says faster growth would

not only have spurred higher incomes

more jobs and increased opportunities

but would have also created far more

consumption and increased demand for

investment

eliminating any potential savings glut

or

secular stagnation but he says my view

is if you add it all up

this dysfunction of our government could

easily have been a one percent drag on

our growth rate

and this is something that he's

projecting not just from or looking at

from the past 10 years

but also going forward he complains

about society a bit too

and says look when we debate things we

often see things as binary it's either

you're with me or you're against me

and not looking into the nuance of

detail or

blaming scapegoats or unfairly assigning

jaded moment motives to people like oh

you know

that person's in it for this or whatever

uh and

he also complains that media hype and

people's willingness

to uh be weaponized derail thoughtful

strategy so in other words he's saying

media folks oftentimes come to quick

conclusions

because it makes for good click bait

look at this most media and individuals

barely have time to focus on the issues

and often default to overly simplistic

binary on or off and incorrect

conclusions

that neatly fit into false political

narratives

this is a massive slam on on america

i mean he even goes on here to say that

we're stemming by self-interest

selfishness and the buildup of

bureaucratic plaque and institutional

sclerosis geez man this is

harsh from jamie dimon i mean he is

going off on

many different parts of of our country

but he does provide some examples or of

ways to solve this

more acknowledgement by democrats that

spending money

you know is is potentially an issue you

can't just spend money like crazy

but republicans need to realize that

look it's okay to have a

proper safety net for the elderly are

sick and our poor and he points to

germany and switzerland

switzerland who have impr impressive

excuse me work apprentice programs

singapore with great healthcare programs

hong kong with great infrastructure

but just copy those and don't copy what

argentina

cuba and venezuela have done he does

also give

suggestions for having this multi-year

national marshall plan where

where you solve these things like having

better training better education systems

uh goes into talking about creating more

opportunities for jobs and improving

wages

and he does give a lot of suggestions to

his problems so he doesn't

only suggest uh issues he doesn't only

rag

on america uh and in fairness he has

very good

suggestions and he gives suggestions

into exactly how we can change things

uh but folks this shareholder letter the

loudest arguments that come through this

because we know jamie dimon's not about

to change

congress the loudest arguments that are

coming through this

are that we've got massive problems uh

not

only and these are the sort of the big

bottom lines i take away from this

not only do we have big societal

problems where we're way too

divisive of a country which is leading

to slowness in congress

he gives this example of how more

soldiers died because it took

years for congress to improve on

personnel carriers in iraq and

afghanistan that weren't armored enough

to withstand ieds

and now you've got many many more people

who are dead or injured or maimed

because of ieds and he really complains

about how

dysfunctional our government is and then

look

as a market sure maybe if things keep

booming over the next few years

we're good like fine maybe these higher

valuations in the stock market are fine

but we've got to be real here inflation

could come

we've got a lot of government debt we've

got an extremely dysfunctional

government

we have in some sense i'm going a little

further here uh what what he

appears to be from allowed to summarize

in this way say

calling our society almost dysfunctional

and maybe

if he thinks society is dysfunctional

maybe he just thinks that society

or congress is just a representation of

society he's really bagging on a lot of

different things here and certainly

complaining about

fintech i mean he gave fintech a big old

boost today

we've got square square as a stock is

one of the few that's up it's up 5.14

percent

at 248 today jp morgan is up one percent

uh in fairness but definitely gave a big

boost to uh

a square when this letter came out and i

imagine other fintechs as well

but pretty scathing letter here very

interesting perspective on inflation as

well

something uh something to definitely pay

attention to and consider

that uh hey you know what we've got to

consider the fact that inflation

could actually come uh we'll see

i i uh personally what's my takeaway

well look my bottom line takeaway on

this is

jamie dimon's not going to change

society he's not going to change

congress he's not going to change the

government

there could be a lot of bureaucrats that

read this or congressmen and women who

read this or even watch this video maybe

who knows

yeah and and say yeah jamie dimon's got

a point those are all problems

back to normal back to work like this

there's

little uh you know these these changes

take decades

the systems that have been established

take decades to create and they'll take

decades to dismantle and to improve on

so yeah there are lots of problems and

the biggest takeaway i had from here is

look

yeah we might see stagnation through

higher savings rates we might see

that frugal decade this year maybe we

won't see that crazy growth that we're

expecting and maybe inflation will go up

and i think it would be very prudent for

us that even if we think

the economy is going to boom over this

next decade to at least

limit our debt limit our leverage and in

the event that we get more of these rk

goes is these hedge funds blowing up and

potentially leading to failures

in excuse me the financial system that

uh

we're we're prepared to withstand that

volatility that our portfolios

you know we're not going to go bankrupt

in our portfolios and we're not gonna

hand and paper hand by

uh by selling out just because stocks

went down a bit

uh and so we might have to get used to

this

roller coaster much more than what we

got used to in 2020 which was basically

stunks only go up anyway hopefully you

found this summary helpful

from the ceo of jpmorgan chase

i certainly found it very insightful i

appreciate you watching and folks

we'll see you in the next video

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you