The U.S. Faces its "Most Dangerous Time" in Decades (Jamie Dimon Explains)

You said this may be the most dangerous time the world has seen in decades. Why do you think it's the most dangerous time?

Jamie Dimon, the CEO of JP Morgan Chase, is widely regarded as one of the most esteemed bankers in history. While I typically look into the minds of the great value investors of the world, there's no doubt when it comes to the global economy. Dimon's unique position often gives him amazing insight into the current state of affairs around the world. He's got his hand in everything going on here and abroad. They have more than 60 million customers; he employs more than 300,000 people around the world. He has business in the Middle East and China and is heavily involved, of course, in policy in Washington.

So it's fair to say Jamie, as CEO of JP Morgan, has pretty good insight into the economy, which is why it's a little concerning when he releases his annual letter and he basically says he's super worried about everything. But in this video, let's go a little bit further than your standard fear-mongering YouTube video and let's properly break down his recent letter to understand exactly why Dimon believes this may be the most dangerous time the world has seen in decades.

It starts with Jamie's overview of the situation within U.S. borders. It is important to note that the economy is being fueled by large amounts of government deficit spending and past stimulus. There is also a growing need for increased spending as we continue transitioning to a greener economy, restructuring global supply chains, boosting military expenditure, and battling rising healthcare costs. This may lead to stickier inflation and higher rates than markets expect. As I've spoken about on the channel before, the United States government has run a deficit every single year since 2002.

Now on a basic level, this means the government spends more than it earns, which is okay in the short term because the U.S. Central Bank, the Federal Reserve, has the ability to print money and buy government bonds to effectively loan that new money to the government. The problem is that action is inflationary. Increasing money supply is an inflationary force, and the thing is over the past 20 years, the U.S. government has fallen deeper and deeper into deficit, which makes them now need to borrow more and more money each year just to try and fund their lifestyle.

Now, the Federal Reserve is not the only player that loans money to the government; for example, investors and even foreign nations do as well. But there is concern at the moment that if these buyers start to fall back, the U.S. will have no other option but for the Federal Reserve to print more and more money to satiate the government's appetite for spending money, which would likely cause further inflation.

The other alternative is that the U.S. cuts back on spending so much money, but Dimon notes that this is pretty unlikely. Mentioning that on top of their day-to-day spending, they also need to put money towards the new green economy, infrastructure, restructuring global supply chains through things like the Chips Act, boosting their military power, and funding their healthcare system. Many key economic indicators today continue to be good and possibly improving, including inflation.

But when looking ahead to tomorrow, conditions that will affect the future should be considered. For example, there seems to be a large number of persistent inflationary pressures that may likely continue. All of the following factors appear to be inflationary: ongoing fiscal spending, remilitarization of the world, restructuring of global trade, capital needs of the new green economy, and possibly higher energy costs in the future due to a lack of needed investment in the energy infrastructure.

So before we even look outside of U.S. borders, there are some really tricky situations forming. The biggest probably being this need to spend money on top of an already painful deficit, but inflation not yet fully being under control and in fact being at risk of firing up once again. And this leads Jamie to sound the alarm, particularly to the investors out there who, for the most part, are getting a little bit over-optimistic with the S&P 500 up a whopping 22% the last year alone.

Equity values by most measures are at the high end of the valuation range, and credit spreads are extremely tight. The markets seem to be pricing in a 70 to 80% chance of a soft landing—modest growth along with declining inflation and interest rates. I believe the odds are a lot lower than that. A soft landing is simply the idea that after the big bout of inflation the U.S. experienced in 2021 and the first half of 2022, the raising of interest rates will be able to slow the economy, pull inflation back down, but will not cause a recession.

And so far as Dimon notes, the market is really betting on this situation occurring, and there are some indicators of that scenario coming true. Interest rates have been raised and inflation has dropped significantly, yet the unemployment rate remains low and consumers are still spending. But Jamie gives this idea that the economy will experience a soft landing a much lower probability than the 70 to 80% that investors are landing on.

This is him explaining exactly that issue in a recent interview:

Jamie Dimon: “I do think there are things out there which are kind of concerning. We got an eye on, and so, and why are we doing so well? A lot of it is fiscal spending, and fiscal spending has a multiplier too. So I just think it may not come down that quick, and people may be surprised. So when people talk about, you know, the market is kind of pricing in a soft landing, that may very well happen. But, you know, the odds at 70 or 80%, I would give them half of that, that's all.”

And while there are many factors within U.S. borders that give Dimon a reason to believe a soft landing has a much lower chance than the 70 to 80% probability being expected by the market, when reading his annual letter, it became apparent that the main reason he gives us a much lower chance of a soft landing, inflation, and being able to ease interest rates is actually because of what's happening when you step outside of U.S. borders.

Sure, maybe the data coming out of the U.S. hints at everyone being okay, but Dimon is particularly concerned that the geopolitical landscape of the world, as we see it today, might yet have a decent impact on the economy of the U.S. Across the globe, 2023 was yet another year of significant challenges, from the terrible ongoing wars and violence in the Middle East and Ukraine to mounting terrorist activity and growing geopolitical tensions—importantly with China.

The ongoing wars in Ukraine and the Middle East continue to have the potential to disrupt energy and food markets, migration, and military and economic relationships, in addition to their dreadful human cost. These significant and somewhat unprecedented forces cause us to remain cautious. And this is Jamie very eloquently saying that the fighting between other nations, both militaristic and economic, could very well play a big role in inflation moving forward, which may actually dictate what the U.S. needs to do with its interest rates.

Take the case study of Russia's invasion of Ukraine. Both Russia and Ukraine are major global suppliers of agricultural products such as wheat, corn, barley, and sunflower oil. When the conflict began, it restricted access to these commodities, leading to shortages and higher prices globally. Russia is one of the world's largest producers of oil and natural gas. The invasion, coupled with subsequent sanctions imposed by Western countries and other geopolitical responses, severely disrupted the global energy markets.

We know that European countries, which are heavily dependent on Russian gas, faced huge challenges and it led to majorly increased energy prices. And that's just the start. You've got Red Sea attacks causing rerouting of cargo ships; the Middle East, which is a massive provider of oil globally, is obviously in conflict. China and the U.S. are fighting an economic battle.

Jamie's point is that these external factors can also have massive impacts on inflation in the United States. While messing with the money supply and raising and lowering interest rates might affect the demand side of the inflation equation, what's happening around the world can and does impact the supply side of the equation. Russia's invasion of Ukraine and the subsequent abhorrent attack on Israel and ongoing violence in the Middle East should have punctured many assumptions about the direction of future safety and security.

This brings us to this pivotal time in history: America and the free Western world can no longer maintain a false sense of security based on the illusion that dictatorships and oppressive nations won't use their economic and military powers to advance their aims, particularly against what they perceive as weak, incompetent, and disorganized Western democracies. In a troubled world, we are reminded that national security is, and always will be, paramount, even if its importance seems to recede in tranquil times.

The impacts of these geopolitical and economic forces are large and somewhat unprecedented; they may not be fully understood until they have completely played out over multiple years. Jamie definitely isn't someone to make specific economic predictions, but his overarching point is just that we might very well be subject to economic forces that go well beyond the U.S. government's control.

So while we can get excited at inflation coming down and the unemployment data looking rosy, at the end of the day, all that might be trumped by what's going on in the global economy. In the meantime, there seems to be an enormous focus—too much so—on monthly inflation data and modest changes to interest rates. But the die may be cast. Interest rates looking out a year or two may be predetermined by all of the factors I mentioned above.

Small changes in interest rates today may have less impact on inflation in the future than many people believe. Listen to that: the die may be cast. Small changes to interest rates today might have less impact on inflation in the future than many people believe. I.E., all those investors getting super excited about the numbers reported from within U.S. borders should probably be a little more cautious and look at the potential impacts of the geopolitical issues around the world.

And again, I will say, no, Jamie is not at all making an economic prediction with his words. He's more just presenting the idea that a miraculous landing, where there's no recession and interest rates get lowered and everyone is just happy, might not be the only potential outcome for the U.S. economy. And for that reason, Jamie is preparing JP Morgan for all outcomes.

Jamie Dimon: “We are prepared for a very broad range of interest rates, from 2% to 8% or even more, with equally wide-ranging economic outcomes from strong economic growth with moderate inflation to a recession with inflation, i.e., stagflation.”

We should also consider that rates have been extremely low for a long time. It's hard to know how many investors and companies are truly prepared for a higher rate environment. And this circles back perfectly to what Howard Marks was talking about in my recent video. Everybody I know is calling right now a high-interest rate environment, but if you look to history, right now is actually a normal rate environment.

Society has just got so used to how low interest rates have been over the past 20 odd years that now a normal rate environment actually feels like something rather painful. And as Jamie says, it's hard to know if everyone really will be able to handle these more normal interest rate conditions over the medium term.

So overall, that was Jamie Dimon's warning for everyone getting a little too excited in current economic conditions. But there was one more topic Dimon discussed at length in his shareholder letter, and it's a topic being discussed a lot at the moment—that of course being AI.

So what is the JP Morgan CEO's opinion of AI and its relevance to the economy moving forward?

Jamie Dimon: “Each year, I try to update you on some of the most important issues facing our company. First and foremost may well be the impact of artificial intelligence. While we do not know the full effect or the precise rate at which AI will change our business or how it will affect society at large, we are completely convinced the consequences will be extraordinary and possibly as transformational as some of the major technological inventions of the past several hundred years—think the printing press, the steam engine, electricity, computing, and the internet, among others.”

So actually, a pretty glowing review of AI from Jamie there, comparing it to things like the internet or the printing press. He sure sounds pretty convinced that AI will be a predominant technology of the future. And I think this is where a lot of value investors get confused because I think there can definitely be a difference between believing in the significance and future of artificial intelligence while also having the rational investing cap on and sidestepping the rampant speculation that's occurring in financial markets because of this new technology.

And if I were to hazard a guess, I'd say this is probably Jamie Dimon's angle as well. The markets might be frothy, but the tech itself will still be revolutionary. And Jamie is already finding the tech to be helpful within JP Morgan's own walls.

Jamie Dimon: “We have been actively using predictive AI and ML for years and now have over 400 use cases in production in areas such as marketing, fraud and risk, and they are increasingly driving real business value across our businesses and functions. We're also exploring the potential that generative AI can unlock across a range of domains, most notably in software engineering, customer service and operations, as well as in general employee productivity.”

And I'm definitely in agreement with Dimon there. I think AI will have a pretty profound impact on a lot of businesses. It's one of those technologies that basically touches everything. It can be applicable in some regard to almost everyone. Heck, in this video, we used AI to bring Jamie's words to life.

But overall, they were the three big takeaways from Jamie Dimon's annual letter to shareholders: we need to be cautious of the current economic situation within U.S. borders; we definitely need to consider the external conflicts and their impact on the global economy; and then lastly, Jamie is very bullish on AI, which I guess technically will be a deflationary force over the long run.

But anyway, guys, that will do us for this video. Thanks very much for watching. If you do want to learn to invest the right ways and support the channel in the process, please check out New Money Education linked in the description below. Use the code SA50 as well to make sure you get $50 off.

But guys, apart from that, please leave a like if you did enjoy it, subscribe to see future videos, and with that said, I'll see you guys in the next one.

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