JP Morgan CEO releases his annual letter to shareholders today. He talks about various thing in the letter but what really caught my eye is the following:
Higher fiscal spending, higher debt to gross domestic product (GDP), higher investment spend in general (including climate spending), higher energy costs and the inflationary effect of trade adjustments all lead me to believe that we may have gone from a savings glut to scarce capital and may be headed to higher inflation and higher interest rates than in the immediate past.
Essentially, we may be moving, as I read somewhere, from a virtuous cycle to a vicious cycle.
Jamie Dimon is basically telling us that inflation will be high for a while and the Fed will keep the interest rates high as a result. Apparently, many investors are expecting rate cuts this year. But I think I will trust Jamie Dimon on this one.
Regarding the SVB blowup, he has the following comment:
Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known – both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits.
After the SVB crisis, many tech people suddenly become macroeconomists and blame the Fed for being clueless. Well, I actually think the Fed knows what they are doing but they don’t have other better options. The prolonged period of QE and ZIRP eventually led to inflation. They realized they made a big mistake to let the ZIRP/QE party last too long. They had to raise rates to fix the situation. They were well aware of the consequences. Some banks were going to fail and they did. But the Fed gotta do what they need to do to bring the interest rates and the Fed balance sheet to a more reasonable place. Look, our top monetary officials all studied macroeconomics and financial history and are old enough to experience the previous big inflation cycle in the 1970s. Many banks also failed during that time. Do people really think they are clueless? They knew what would happen and they will deal with it when s**t hits the fan but their priority is always to keep the inflation under control and the unemployment rate low. Some tech investors need to stop thinking they are the only people who have the clues. They already got their SVB deposits bailed out. Please just stop talking, start listening and don’t expect the interest rates to come down any time soon. The Fed knows what they are doing.