Jamie Dimon: The Economic Hurricane and Stock Market Crash of 2022 (Quantitative Tightening Begins)

Look, I'm an optimist, you know. I said, there are storm clouds; they're big storm clouds. It's a hurricane. Right now, it's kind of sunny; things are doing fine. You know, everyone thinks that the Fed can handle this. That hurricane is right out there, down the road, coming our way. That right there is Jamie Dimon. He's not as well known as Warren Buffett or Charlie Munger or Ray Dalio, but he is a very important figure in the U.S. economy because he is the CEO of JP Morgan Chase, America's biggest bank, and he has been since 2005.

So when something happens in the economy, it's fair to say that he hears about it. Usually, you don't really hear Jamie Dimon making massive headlines in the news. You know, he pops up occasionally here and there. However, this time, he has definitely pricked investors' ears up. The reason for that, as you just heard, is because he's predicting an economic hurricane.

So in this video, I want to explore why Dimon, a man so close to the heart of the U.S. economy, is predicting such a dire situation. As we'll see, his prediction comes down to three key factors. So let's see what Jamie has to say, and then at the end, let's talk through some practical steps as to how you can sidestep this storm.

There are three things that we're going through which are, I hate the word "unprecedented," which are kind of unprecedented, and you got to put this in the back of your mind. When you haven't seen things that have never happened before, then you have to question your ability to predict.

Okay, one is huge growth in this country driven by fiscal and monetary stimulation. That isn't a normal recovery. And that fiscal stimulation is still in the pocketbooks of consumers. They're spending it; they're spending it at very strong levels. The data is completely distorted; it's distorted by inflation, it's distorted by the switch from goods back to services. It's distorted by all these things. But jobs are plentiful, wages are going up. Consumers are spending. The lower-income folks not quite as much as before, but everybody else looks like they have two trillion dollars more. Savings rate dropped; I don't think that's going to stop the spending for six or nine months.

So that's point number one. That's kind of the setup. You know, firstly, for a balloon to burst, you have to blow it up, and that's what Jamie is talking about here. Over the past year or two, we have seen truly massive stimulus by the Federal Reserve. The Fed's balance sheet has grown; it's ballooned from four trillion dollars up to almost nine trillion dollars over the space of like two years.

As we know, this put a lot of money in the hands of the government, and they decided to do big stimulus payments for their citizens. Now, I'm not trying to criticize or get political on whether that was the right or wrong thing to do, but what it meant is that all of a sudden you had this big spike in personal savings. So people had more money to spend, and spend it they did. Consumer spending is currently at all-time highs, and as Michael Barry pointed out recently, people's savings balances are dropping.

When you couple that with the low interest rates we've seen, consumers and businesses are able to load up on cheap debt. They're able to buy houses or build new factories or open new stores, etc. Well, all of that stuff is inflationary; it encourages spending, it encourages the demand side, and thus it encourages price rises. I'm not criticizing that; after all, this was a tactic by the government and the Federal Reserve to get the U.S. economy back into gear as soon as possible after it was locked down.

Have a look at this: in 2020, yes, U.S. GDP fell off a cliff, but it also rebounded equally as fast, thanks to the actions of the government and the Fed. Whereas on the flip side, if you look at something like 2008, it was a much more gradual recovery. So not criticizing, but of course, with all this printing and all this spending, plus a messed-up global supply chain, you have inflationary pressures on both sides of the equation; factors increasing demand and reducing supply.

And of course, what did we get? A whole lot of inflation. There you go; economics works. But now, with an annual inflation rate of 8.6, that's simply too high. So the Fed has to take money out of the system to try and cool the demand side as supply catches up. The Fed has to meet this now with raising rates and QT, and the new part of this isn't the raising rates; it's the QT.

The QT has— we've never had QE before like this; therefore, we've never had QT like this. So you're looking at something they're going to be writing history books on for 50 years: what was QE? What worked? What didn't work? I think a lot of parts of QE backfired. I think the negative rates was probably a huge mistake for a whole bunch of different reasons. I'm bored with that now, but they've got to raise rates, and they might be—they have to do QT. They do not have a choice because there's so much liquidity in the system; they have to remove some of the liquidity to stop the speculation, to reduce home prices, stuff like that.

And you've never been through QT. So all the major buyers—if you look, if you go back to 2010 and say, who are all the major buyers of treasuries all that time? It was central banks, foreign exchange managers, banks who were topping up the liquidity profiles because we had to for regulations. All three? It won't happen. The go-round banks are topped up; foreign exchange managers are topped up. The central bank will be selling, not buying, and governments have much more fiscal deficit to finance.

That's a huge change in the flow of funds around the world. I find this take really interesting from Jamie. His opinion is there's so much money in the system that the Fed basically has no choice but to do quantitative tightening, basically the exact opposite of what the Fed was doing last year. You know, last year they were printing money; the government was giving it to people; the Fed kept rates low, so that was easy to access for consumers and businesses, and that encouraged the spending to dig America out of the economic hole that it was in.

Now, they're taking money out of the system. So during the pandemic, the Fed purchased a lot of U.S. treasury bonds and mortgage-backed securities, but predominantly these government bonds, and now they're getting rid of them. So, two ways they can do that: they can either sell them on the open market, or the other thing they can do is simply let the bonds reach their maturity. The government pays back the Fed plus interest, and the bond is finished.

Then, once the Fed receives the money back, then they basically just do a donation off from The Wolf of Wall Street and just delete it all, thus reducing the amount of money in the system. Now, what's interesting at this point in time is that we're just starting to see the beginning of the balance sheet reduction, as Vanguard notes, "The Fed plans to reduce its 8.5 trillion dollar balance sheet beginning June the first."

So just a few weeks ago, it will no longer reinvest proceeds of up to 30 billion in maturing treasury securities and up to 17.5 billion in maturing agency mortgage-backed securities per month. Beginning September 1st, those caps will rise to 60 billion and 35 billion respectively, for a maximum potential monthly balance sheet roll-off of 95 billion. So it's happening right now and will scale up over the coming months.

The thing that Jamie Dimon is so nervous about is that QT hasn't been done at this scale before. So who knows what's going to happen in the markets? We don't really know what the right amount is to help get inflation back under control, and we also don't know how bad the market reaction will be. In fact, the last time the Fed tried to do just a little bit of QT from October 2017 to July 2019, the market performance was terrible—so much so that the Fed actually decided to stop doing the tightening altogether.

So it's not a great case study, considering this time around, the QT plans are much bigger, and we've already seen the market lose 20% this year. So that's Dimon's second concern. The third thing is Ukraine. You've not had a European land war since 1945, and the complexity of Ukraine is we don't know the outcome. I always make a list, you know. If you predict the outcome, well, you couldn't predict the outcome of Vietnam, Korea, Afghanistan, Iraq, and ten other conflagrations—all wrong. Wars go bad; they go south; they have unintended consequences.

This happens to be whirling the commodity markets of the world: wheat, oil, gas, and stuff like that, which in my view will continue. We're not taking the proper actions to protect Europe from what's going to happen in oil in the short run, and we're not taking the proper actions to protect Europe. Capital oil in the next five years, which means it almost has to go up in price.

So, third point, just to add fuel to the fire—we have Russia's invasion of Ukraine, which, as Jaime noted, is playing havoc with commodity markets around the world and causing a lot of price rises. We've seen energy costs soaring; western sanctions against Russian energy giants have resulted in a major gap on world energy markets. Fuel prices rising—gasoline prices hit all-time highs in March 2022.

Halted shipments of grain out of Russia and Ukraine. Russia's naval blockade of Ukrainian ports has bottled up 20 million tons of grain destined for global markets, threatening to worsen current food shortages. Here's a stat: nearly one-third of the world's wheat and one-fifth of the world's corn comes from Russia and Ukraine.

Think about the ripple effects into food products. If we lose literally 30% of the world's wheat and 20% of the world's corn, already the conflicts in Ukraine and the disruption to exports have led to food prices skyrocketing in Africa and Asia. And the frustrating thing is that it doesn't look like it's going to end anytime soon. In fact, Jamie Dimon can see a world where oil rises to 150 to 175 dollars per barrel over the medium term—roughly 50% higher than where it is today.

Families are already feeling the pinch at the pump. What if things got 50% worse over the next three to five years? Now, I'm certainly no expert on these commodities, but I do think it's interesting hearing the CEO of JPMorgan Chase speaking with such conviction about these topics—three big factors that are stacking on top of one another to cause an economic hurricane in the eyes of Jamie Dimon.

We're not dealing with these challenges, so those three things: fiscally induced growth, QT, Ukraine war. So I'm going to change the storm clouds out there because I look, I'm an optimist. You know I said, there are storm clouds; they're big storm clouds. We just don't know if it's a minor one or superstorm Sandy or—yeah, Sandy or Andrew or something like that. You better brace yourself. So JP Morgan is bracing ourselves, and we're going to be very conservative with our balance sheet.

With all this capital uncertainty, we're going to have to take actions, and you know, I kind of want to shed non-operating deposits again, which we can do in size, you know, to protect ourselves so we could serve clients in bad times. And so that's the environment we're dealing with. And you know, I'm—I think it's okay to hope it'll end up okay. I hope it; that's my Goldilocks. I hope—who the hell knows?

So, fair to say, Jamie paints a pretty bleak picture of where he sees the world heading. So to try and cheer things up at the end of the video, I just wanted to take a minute to just discuss what we can do about this situation. You know, how can we stop Jamie's economic hurricane from wiping us out? Well, I think the main way you can protect yourself is just to make sure that you've got your debts under control.

So yes, things are getting more expensive—groceries, petrol, etc.—but the main thing that will properly screw you over is big interest rate rises on big chunks of debt like car loans and mortgages. So the number one thing you can do is make sure you've got your debts under control and assess whether you could still service your debts if rates went up literally two, three, or four percent from here because honestly, it is on the cards.

So, keep those debts under control—that's the first thing. But secondly, you know, also do everything you can to make sure your income is secured and not at risk of stopping over the next few years. On top of that, make sure you have an emergency fund. So if anything bad were to happen over the next little while, you get laid off from your job, or something like that happens, then you'll still be able to cover your expenses for like three to six months. If you can do that, I think that puts you a good chunk of the way from sidestepping this storm.

And if you're interested in learning how to sidestep the current macro environment in terms of your stock portfolio, I will leave a link to a video up on the screen right now because I literally just made a video about that last week. So definitely check that out. But with that said, guys, they are Jamie Dimon's thoughts on the economic hurricane headed our way. Let me know what you think. You know, do you agree with Jamie and think the economy is looking pretty dire? Do you disagree with him and think his rationale is a little bit overblown? Definitely let me know what you think down in the comment section below.

But apart from that, guys, leave a like on the video if you did enjoy it. Subscribe if you'd like to see more, and I'll see you guys in the next video.

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