Dimon, one of the world’s most influential business leaders, warned in his annual shareholder letter Monday that the conflict poses a significant threat to the economic recovery that began less than two years ago.
The conflict has already caused severe turbulence in energy, agricultural and other commodity markets.
JPMorgan, like other big banks, has downgraded its growth forecasts for the United States, Europe and, of course, Russia. Dimon recalled how the 1973 oil embargo sent oil prices skyrocketing and plunged the world into recession.
“Many more sanctions could be added – which could dramatically and unpredictably increase their impact,” he wrote.
Dimon said the stimulus-driven recovery from Covid-19, the need to raise interest rates quickly to fight inflation and the war in Ukraine present a unique set of challenges.
“They represent completely different circumstances than what we have experienced in the past – and their combination can dramatically increase the risks ahead,” he said. “While it is possible and hopeful that all of these events will be resolved peacefully, we should prepare for the possible negative consequences.”
Together against “all forms of evil”
The war in Ukraine is testing America’s role on the world stage as well as Western ideals.
“America must be prepared for the possibility of an extended war in Ukraine with unpredictable outcomes,” Dimon said. “We should prepare for the worst and hope for the best. We must take this as a wake-up call.”
The JPMorgan boss hailed the “merging” of the western world, across Europe, NATO countries, Australia, Japan and Korea, in support of Ukraine and called for even closer ties.
“We need to make this a permanent, enduring stand for democratic ideals against all forms of evil,” Dimon said.
The economic challenge is compounded by the fact that war is putting additional pressure on stressed supply chains and driving up food and energy costs at a time when inflation is already very high.
The Fed needs to do it “just right”.
To fight inflation, the Federal Reserve is raising interest rates, maybe quickly. And that will make it difficult for both the economy and the markets.
“I don’t envy the Fed what it needs to do next: the stronger the recovery, the higher interest rates that follow (I think this could be significantly higher than markets are expecting),” Dimon said, adding that interest rates would have to rise “significantly” and that would be a “tough job”.
But the harder the Fed slams on the brakes by raising interest rates, the greater the risk of an accident in the economy, in the markets — or both.
“Very volatile markets” are coming
Dimon struck a cautious note on whether the Fed can achieve a so-called soft landing: taming inflation without weakening the recovery. He said if the Fed gets it “just right,” the economy can enjoy years of growth and inflation will “eventually start to come down.”
Anyway, Dimon said investors should buckle up.
“In any case, this process will create much consternation and very volatile markets,” he wrote.
Markets have already seen wild swings, highlighted by the Nasdaq recently plummeting into a bear market.
But Dimon, Wall Street’s most powerful leader, urged the Fed not to overreact to what’s happening in the markets.
“The Fed shouldn’t worry about volatile markets unless they impact the actual economy,” he said. “A strong economy trumps market volatility.”
In other words, do what you think is right, even if it means a bear market for US stocks.
Did Washington overdo the stimulus?
Recession worries come as a bit of a surprise as the US economy is enjoying such a robust recovery from Covid.
Dimon hailed the “strong US economy that we hope has Covid-19 in its rearview mirror.”
On the other hand, the concern is more that the economy is so hot that it is overheating. And Washington’s unprecedented response to Covid-19 under both the Trump and Biden administrations played a role in the strength of the recovery.
Dimon said the Fed and government “did the right thing” by resorting to bold measures in response to the pandemic, including the central bank buying trillions of dollars in bonds through a program called quantitative easing, or QE.
“But even with hindsight, the medicine (tax spending and QE) was probably too much and took too long,” Dimon said, adding that it’s easy to second-guess complex decisions.
A Marshall Plan for Energy
Dimon said the plan envisages securing the necessary energy supply now for the next few years while reducing emissions and combating climate change.
The war in Ukraine, combined with Covid-19, has exposed glaring weaknesses in the supply chains that support the global economy.
Dimon said there was “no question” that supply chains needed to be restructured, in part to ensure America’s enemies couldn’t exploit them in a crisis.
“For any product or material essential to national security (think rare earths, 5G and semiconductors), the US supply chain must be either domestic or open only to outright friendly allies,” Dimon wrote.
“We cannot and should never rely on processes that can and will be used against us,” Dimon said, “especially when we are most vulnerable.”
https://www.cnn.com/2022/04/04/business/jamie-dimon-annual-letter-economy/index.html Jamie Dimon: War in Ukraine will slow economy and it could ‘get slightly worse’