Every year, JPMorgan Chase CEO Jamie Dimon writes an eagerly-anticipated public letter to shareholders with his thoughts on the banks performance over the previous year, the state of the economy and the challenges and outlook for the coming months.
This year, Dimon had a lot to unpackfrom high interest rates, to a robust job market and a banking crisis. He also had a few choice words for A.I. developments, the climate crisis, and the war in Ukraine. Dimons address to shareholders goes through the entire gamut of lessons from the past as well as opportunities and threats that lie ahead.
1. A banking crisis was hiding in plain sightand the Fed is to blame
Silicon Valley Bank collapsed last month, followed quickly by Signature Bank. Silvergate, a bank that was used primarily by crypto-linked companies, collapsed just a few days earlier. The government stepped in to protect all depositors of SVB, even those beyond the usual FDIC insurance limit of $250,000.
Dimon wrote that the risks within the banking system were hiding in plain sight because of high interest rates, their impact on held-to-maturity portfolios. In SVBs case, that was longer-term bonds that had lost value over the past year. The CEO also mentioned that regulators incentivized to own those types of products because they were considered safe by regulators, and stress testing never incorporated rates at higher levels. He added, though, that the unexpected risk was a handful of venture capital funds that worked in lockstep and had a sway on SVBs nearly 35,000 clients, which prompted a $42 billion bank run.
This is not to absolve bank management its just to make clear that this wasnt the finest hour for many players, Dimon wrote in the letter. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them.
Dimon foresees the ongoing banking troubles to last for a few years but maintains it isnt anything like the 2008 global financial crisis.
As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come, Dimon wrote.
2. Thoughts on artificial intelligence
Dimon is bullish about A.I. after the world was taken by storm with the introduction of OpenAIs chatbot, ChatGPT. The CEO said he has spent hundreds of millions of dollars on improving A.I. programs at the bank.
At JPMorgan alone, the CEO says there were hundreds of ways to use A.I., from marketing to fraud prevention. He said that individual teams of data scientists, managers and researchers are also working on aspects of A.I. development within the bank, and more than $2 billion has been spent on new cloud data centers.
Artificial intelligence (AI) is an extraordinary and groundbreaking technology, Dimon wrote. AI and the raw material that feeds it, data, will be critical to our companys future success the importance of implementing new technologies simply cannot be overstated.
3. The U.S. needs to fast track clean energy
Dimon acknowledged the urgency to act on climate change-related goals, and suggested a massive global investment in clean energy to achieve this.
To expedite progress, governments, businesses and non-governmental organizations need to align across a series of practical policy changes that comprehensively address fundamental issues that are holding us back, Dimon wrote.
As steady energy and food supply remains under threat with the ongoing war in Ukraine, Dimon says policies like the CHIPS Act signed last August should be implemented effectively to make a real difference in boosting clean technology in the U.S.
Polarization, paralysis and basic lack of analysis cannot keep us from addressing one of the most complex challenges of our time, Dimon wrote.
4. Dimon is looking at Apple and Walmart as competition
Aside from other major banks, Dimon says he sees Walmart and Apple as competitors.
Walmart uses digital technology tools to provide banking services to its customers, while the iPhone-maker is already a big player in the banking and payments space though Apple Card and Apple Pay. These companies are also big enough that they could dwarf the role of the banks in the financial system.
Large tech companies, already 100% digital, have hundreds of millions of customers, as well as enormous resources, in data and proprietary systems all of which give them an extraordinary competitive advantage, Dimon wrote.
5. There are storm clouds ahead because consumer savings are dwindling
The U.S. economy has been grappling with stubborn inflation, which hit a 40-year high last June. The Fed has increased interest rates in response, to cool down prices, which have been on a downward trajectory for seven months.
Dimon says that while 2022s storm cloud challenges have been tamed, they are not completely out of sight, including high inflation, soaring interest rates and the Ukraine war.
There has been a lot of market volatility over the past year, partially, in my opinion, as people over-extrapolate monthly data, which is highly distorted by inflation, supply chain adjustments, consumer substitution, basically poor assumptions about housing costs and other factors, wrote Dimon.
This year, he says there are new challenges in the form of shrinking consumer savings. Dimon noted that consumers are shelling out 23% more now compared to pre-pandemic times, making them spend a larger portion of their income on daily life. But he says there is a silver-lining.
Weve had 10 years of home and stock price appreciation, and even if we go into a recession, consumers would enter it in far better shape than during the great financial crisis, Dimon said.
6. Dimon is worried about the U.S. skills gap and says lower paid workers need to get more pay
Even though unemployment is still very low, Dimon thinks the labor in the U.S. has been impacted by a skills gap, and says hes concerned that its making it harder for some people to land jobs. The CEO added that the gap between skilled and unskilled people will create further income inequalities.
The gap between skilled and unskilled workers has been growing dramatically so much so that unskilled labor has become less and less a living wage, he wrote.
He thinks its of top priority to have more people educated and skilled for the real world, adding that living wages bring dignity and pave the way for future opportunities in housing, health and well-being at large. Dimon suggests expanding existing tax credit programs to support those in need or who earn low wages.
