Chanticleer
Jamie Dimon reveals three risks – and his leadership secret
We extracted the big lessons for investors and leaders from the JPMorgan CEO’s 27,000-word letter to shareholders.
When JPMorgan chairman and chief executive Jamie Dimon spoke at The Australian Financial Review Business Summit last month, he was putting the final touches to his widely watched annual letter to shareholders. With the publication of the letter on Monday night, it’s clear we got a great preview of his views across a wide range of issues.
Three risks that Dimon highlighted at the event come across even more clearly in the letter, which runs to more than 27,000 words.
JPMorgan’s Jamie Dimon says investors are too obsessed with monthly inflation figures. David Rowe
The first is the economy. He remains wary of a market that has ascribed a 70 per cent to 80 per cent chance to a soft landing, and says JPMorgan has prepared for a wide variety of economic outcomes, from strong economic growth to the nightmare of stagflation.
Perhaps most notably, Dimon says the bank is braced for rates to land anywhere between 2 per cent and 8 per cent; he says the obsession with monthly inflation data risks ignoring the long-term outlook for inflation, whereby high fiscal spending, high defence spending, higher energy spending and the restructuring of supply chains combine to keep inflation and interest rates higher than expected.
Dimon warns we have little idea of how well economies are really prepared for a period of higher-for-longer inflation. “If long-end rates go up over 6 per cent and this increase is accompanied by a recession, there will be plenty of stress – not just in the banking system but with leveraged companies and others.
“Remember, a simple 2 percentage point increase in rates essentially reduced the value of most financial assets by 20 per cent.”
Connected to this is the second big risk Dimon highlights for finance: the shift to private markets.
He says the big reduction in publicly listed companies over the past two decades (from a peak of 7300 public US companies in 1996 to 4300), and the big jump in private equity-owned firms (from 1900 to 11,200 in the past 20 years) reflects the increasing pressure to go private.
That is to avoid a laundry list of issues, including “higher litigation expenses, costly regulations, cookie-cutter board governance, shareholder activism, less compensation flexibility, less capital flexibility, heightened public scrutiny, and the relentless pressure of quarterly earnings”.
‘Undue influence’
Dimon particularly savages proxy advisers for their “undue influence”, although Chanticleer suggests CEOs have a habit of overestimating the power of this group.
Connected to this is the rise and rise of private credit. Dimon sees benefits from smart players in this sector moving “quickly, discreetly and flexibly”. But he fears that “not all players are that good”, and when a mishap eventually occurs, the kind of regulation in public markets may be forced into private ones, too. That will include, inevitably, the way private credit values assets.
But the bigger worry for Dimon is that we haven’t seen how many private credit products will perform in a bad market. “When credit spreads gap out, when interest rates go up and when some leveraged companies suffer in the recession, we will find out how those loans survive stress testing.”
Dimon’s third big risk is geopolitics. He says we tend to overestimate the risks to the economy from events such as Russia’s invasion of Ukraine. But the conflagration of risks we are seeing from hot and cold conflicts could “very well be creating risks that could eclipse anything since World War II – we should not take them lightly”.
“The ongoing wars in Ukraine and the Middle East could become far worse and spread in unpredictable ways. Most important, the spectre of nuclear weapons – probably still the greatest threat to mankind – hovers as the ultimate decider, which should strike deep fear in all our hearts.”
Artificial intelligence risks
Dimon does talk about risks associated with artificial intelligence in his letter, noting it has “the potential to augment virtually every job”. But his most striking comment on AI is essentially a promise: that the bank “will aggressively retrain and redeploy our talent to make sure we are taking care of our employees if they are affected by this trend”.
It’s a lovely sentiment, but it will be fascinating to see how this actually plays out when Dimon (or a future JPMorgan boss) has the chance to deliver huge cost reductions by deploying AI at scale.
Maybe, given what he describes as the “secret sauce” of his leadership style, he will resist replacing his staff with robots.
Dimon is wary of the idea of vision (“often it is the basic BS of corporate speak”). But he says leading with heart – constantly earning the respect of staff by showing you’re in the trenches with them, owning up to and correcting mistakes, fighting bureaucracy and demonstrating consistency – is vital.
“Heart matters. And it makes a difference when people know and see that you actually care.”
Dimon recalls how JPMorgan sacked and then re-hired its security guards to save money on the guards’ healthcare costs, which are now worth about $US15,000 ($22,700) a year.
“This was a heartless thing to do – and the second I found out, I reversed the decision. JPMorgan Chase’s success will not be built off the backs of our guards – it will be the result of fair treatment of all of our employees.”
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