The U.S. Economy Enters "The Most Dangerous Time" in History (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 Diamond, CEO of JP Morgan Chase, is one of the most revered bankers to have ever lived. And while you might say, "Well, come on, Brandon, what are we really going to learn from the head honcho of America's largest bank?" I think it's important to remember the insights that a person like Jamie gets that come along with the job. He's got his hand in virtually 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 he's heavily involved, of course, in policy in Washington.

While I don't tend to get caught up with the political side of Jamie Diamond, when he starts talking about the economy, I tend to tune in, especially when he sits down for 30 minutes to do a deep dive on why he believes we're in the most dangerous time period we've seen in decades. And it's usually at this point in the video, before I play your clip, that I'd like to take the time to remind everyone that, of course, nobody can predict the economy, and all of this is based on informed opinion. However, today we have a special guest delivering that message: Jamie Diamond himself.

So first, the most important things: the stuff we've already spoken about. I tell my own people at J.P. Morgan Chase that the economy is the weather, you know? People are always trying to guess what the weather's going to be. And you know what? You're making a mistake. It might snow, it might rain, it might be icy outside. It goes up, it goes down. As a company, we're prepared for all that.

So first things first, we have to remember that nobody can truly predict where the economy is headed. But I guess for Jamie, in his position as CEO of JP Morgan, he sees the pros, he sees the cons, and from that, he still sees many headwinds approaching. In this talk, he's trying to get some of those points across, particularly to the people who look at, say, spending and unemployment and scream from the rooftops that everything is looking fantastic.

When people look at the current economy and things are going well—stocks are up, and we've had a little bit of drugs injected directly into our system called fiscal stimulation, the largest we've ever had in peacetime, and cue the largest monetary stimulation—two different things, different effects, but they are drugs running through the system, and they create this kind of sugar high. And we're in a sugar high. This is an extremely important point to remember.

We have to take a step back and ask what has caused the economy to run hot ever since March of 2020. The answer is because the government and the central bank have intervened in a massive way to assist Americans and somewhat kick the can down the road. The staggering statistic that I always reference is that the Federal Reserve has printed around $4 trillion since 2020, and that's money that, for the most part, has simply fallen into the lap of U.S. citizens and businesses.

Now, don't get me wrong: COVID was a major economic crisis. But because the government and the central bank wounded itself in order to help the average Joe, what this means is that it's only now, years down the track, where we're finally starting to see all of that catch up. It's only now that consumers have whittled down their savings boost and that their household balance sheets are coming under pressure.

I don't know if it's going to end in a soft landing or something like that, but when people say, "Well, corporate profits are up, this is up," yeah, corporate profits are up because people are spending a lot of money. Where do they get the money? The government gave it to them. Well, of course profits are up! When they stop spending money, corporate profits will go down.

So I'm a little worried that we're in that little bit of a sugar high and we don't understand it. In Jamie's opinion, we really need to be cautious. We need to understand that the consumer will now start to struggle. Look at the personal savings rate during 2020 and 2021. Americans were able to save a lot, around 15 to 30% of their income. But now, savings rates look pretty dire. We're seeing the lowest savings rate since 2008. People are only able to tuck away around 2 to 4% of their income.

And why is that happening? It's because of interest rates going up. This makes debts like mortgages more expensive, so more of your income gets confiscated via interest payments. This means less disposable income. People thus buy less, and businesses suffer. So not quite as sugary sweet as what many may think, which was exactly Jamie's point.

Now, this squeeze on consumers can be eased if interest rates start to fall. And with inflation falling to more comfortable levels, many are starting to predict this action from the Federal Reserve. However, the tough bit that Jamie is seeing—and this is something that Ray Dalio is seeing too—is that there probably isn't going to be a major reprieve in interest rates anytime soon.

You think that J. Powell may still raise rates? You don't think he's finished?

"Yeah, and maybe we'll actually go the opposite way. The prevailing view is he's done," Jamie says. "And take a chart of the prevailing view before every major inflection point, and it’s always been wrong. I don't look at the prevailing view, nor am I trying to guess. My view about the economy is I think there's a higher chance than other people that rates have to go up.

"Think of short rates and 10-year rates. The Federal Reserve sets short rates. They simply dictate it through and can manage it through a bunch of means. They do not set the 10-year rate; that is set by supply, demand, inventory, sentiment, capital requirements around the world. And those capital requirements are huge. Governments have the biggest deficits ever, and they have the biggest debt ever."

As Ray has been saying recently, because the U.S. government runs such a big deficit and thus it needs to sell a whole lot of bonds to foreign investors, whose appetite for U.S. treasuries is waning, it's highly likely that the U.S. will need to keep interest rates up higher so that they are still able to entice the buyers for the flood of bonds that will be sold by the treasury.

"When Volcker raised rates, you know, the deficit was small and the debt was small. And now it's far bigger than that. Governments need more money. The green economy is going to need more money. The European energy situation requires money. The restructuring of trade is going to be inflationary. The remilitarization is inflationary.

"So I look, there are a lot of things out there that are both dangerous and inflationary. So I just say, be prepared. It's rational, if you work on a risk rate, that the rates may go up, both the short rate and the 10-year rate, and be prepared that that might lead to a recession."

So Jamie is still seeing a lot of government projects in the world that require a lot of money and thus require a lot of bonds to be sold. He's also seeing a lot of inflationary factors in the future that may dictate a higher interest rate environment to keep inflation under control. So his main message is to ensure that we don't go off into La La Land.

I like this talk from Jamie because he's not really being as alarmed as to say the economic hurricane incident, but he's instead taking more time to reason through the points. And yeah, just warning us that we need to be prepared for whatever the economy throws at us. And that's very much a theme of his management of JP Morgan: just being prepared for any eventuality.

So that's the broader economic stuff, but then on top of that, Jamie also sees additional complicating factors. This is really why he thinks we're facing the most dangerous economic time period in a few decades.

"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?"

"You know, if you look at history and you open a newspaper of any month of any year, and of course there's always tough stuff going on—wars, depressions, and recessions—but if you look at this time and what's happening in Ukraine: a 600-mile front, a free and democratic European nation, 600,000 casualties, huge humanitarian crisis, NATO on the border of NATO, nuclear blackmail, and it's affecting all oil and gas, migration, food costs, and all international military and economic relationships.

"That's pretty tough. And that was before the terrorist attack in Israel. So on top of that baseline economic condition of the world in the post-pandemic era, we've now also got many complicated geopolitical issues that stack on top."

Jamie's obvious example is the Russia-Ukraine conflict, as this has had a very large economic impact on the world. Of course, it's affected the energy commodities going to Europe, and particularly the UK, but it's also had a major impact on the flow of oil and oil prices around the world and also food, particularly grains.

So on top of the pandemic-induced inflation and high interest rates, you also get these supply shocks hitting different parts of the world. And on the political side, you also have much more trade-related blackmail than what we saw previously.

Now, there's also a lot of military relationships being negotiated and formed. So it's not that Jamie is saying the world is going to fall apart; it's just that right now there are a lot of potential economic trigger points, which naturally makes it a more dangerous environment because any one of them could escalate and cause that little chain reaction.

"But my view is when you have this kind of risk, you better deal with it very seriously because the chance of something going wrong is high. And if it goes wrong, the cost of that will be enormous. So that's just how I look at it. And so I look at those things as kind of dangerous. And you know we need to get through it.

"Now hopefully it'll all go away, but if you look at the history of battles like this, they're unpredictable. You don't know the full effect. And so this is really complex. And obviously it's affecting America and China."

That was the last topic that Jamie spoke about in this interview: the relationship between the U.S. and China. Of course, as Ray Dalio would say, at the present time we've got an established power being the United States butting heads with the rising power in China.

So does Jamie Diamond, who by the way conducts a lot of business in China, see a future conflict brewing with the U.S. and China?

"I'm not afraid of China," Jamie states. "Okay, we have all the food, war, energy. We have the Atlantic and the Pacific. We have not pissed off our neighbors. We have great relationships with Mexico and Canada. You know, they have a very complex neighborhood. They've done a pretty good job of angering all the people around them. And who are all remilitarizing? Japan, the Koreas, the Philippines, Indonesia, Vietnam, Afghanistan, Pakistan, and India.

"And whatever you think about Russia, they're not great friends. You know, like in mere 30 or 40 years ago, there were armies on both sides between Russia and China. They have to import 10 million barrels of oil a day; they've got terrible demographics. So I'm not afraid of China. I think we should engage exactly the way the administration's doing it today.

"The complexity of China will work; we want to be at the table. And I think it's good for an American bank to be there to help America, you know, multinationals around the world and China with their own development if it makes sense."

So Jamie definitely doesn't see a major conflict coming between the two great powers, as many people are predicting. At the end of the day, as he says, America wants a seat at China's table in the same way that China wants a seat at America's table.

This was always one of Charlie Munger's great points. He would say it makes absolutely no sense to go to war with China because then you destroy a mutually beneficial relationship. Now, of course, it's not saying there won't be hiccups; that's to be expected. But all the bumps in the road generally equate to the powers acting in a defensive manner, securing their own national security interests.

Every nation has national security interests, you know? Ours is semiconductors and maybe some data, but you know for Europe, it's energy. They are completely reliant on outside parties for their energy. You know, even for China, they import, I think, nine or ten million barrels of oil a day.

So every country is going to look at its own national security interests and close their own security risks. But he doesn't anticipate this to escalate into anything further than what we're seeing.

The one thing that Diamond does consider a potential problem, however, is what China does with Taiwan. If there's a war in Taiwan, you can take all bets off; that will be a major depression. America will be better off than China. It would be really tough. No one thinks that's going to happen; it may happen.

So as a risk manager, JP Morgan can handle that, but that would be really bad for the world and really bad for China, really bad for the people of China. So I don't think it's going to happen, but you know, you can't say it won't. So you have to be prepared for it.

But I think the best thing to do is to help the American government figure out what we need to do to protect our national security, protect our allies, keep the Western alliances together, and make it clear to people who are adversaries or potentially adversaries what the cost to them will be of bad actions. That's what we should do.

And with that, they are Jamie Diamond's updated thoughts on the global economic situation as it stands today. I'd love to hear your thoughts too. Do you agree? Do you disagree? Let me know that stuff down in the comments below.

Also, if you're interested in getting started investing, of course, check out new money education in the links below. But guys, apart from that, I'll see you all in the next video.