Over the last few years, I have written about Warren Buffett’s Shareholder Letter. While on holidays in Spain last week, MSNBC was the only English speaking tv channel in the hotel and they announced that Jamie Dimon, Chairman and CEO of JP Morgan Chase had published his Shareholder Letter, so I thought it would be a good idea to see what he has to say.
It is a longer document with a lot space taking up patting JP Morgan Chase on the back on their great achievements
We do not worry about some issues
Dimon lists a number of issues that don’t worry them on a daily basis. It gives us a bit of an insight into how taking a long term view on getting the correct structures in place will take care of the financials.
Stock price. If you run a great company, the share price will take care of itself.
Quarterly earnings. Build a company that will last in the long term and you will maximise earnings in the long run.
Fluctuating markets and short-term economic reports. They manage through them.
Missing revenue or expense budgets. They want their leaders to do the right thing for the long term.
Unpaid loans increasing during a recession. They expect it.
Regulation
Dimon goes over the causes of the last recession and what the outcome would be if it happened again today.
By late 2006, we already saw problems in subprime mortgages, leveraged lending and quantitative investing. With the onset of Basel II, leverage at investment banks (not commercial banks) more than doubled, as did shadow banking (think structured investment vehicles, collateralized debt obligations, money market funds and so on). This was often funded by unsecured, undependable short-term wholesale borrowing. Then the biggest problem of all presented itself: It was not just subprime mortgages that were flawed — but all mortgages. This happened, in hindsight, by bad underwriting, government policy that fueled and fostered inappropriate mortgage lending (higher and higher loan-to-values, less and less cash down, weaker appraisals and insufficient income certification), unscrupulous brokers and cavalier investors. The banks, though not the worst actors in mortgages, joined the party, too…
If Lehman’s happened again today, it is unlikely they would have failed. For a start, their equity capital would be $45 billion instead of $23 billion. The would also have far stronger liquidity and “bail-inable” debt and they would have been forced to raise capital a lot sooner.
While Dimon does not advocate the repeal of Dodd-Frank (the legislation brought in after the 2008 financial crash, he thinks there are too many layers of regulation that is expensive to satisfy, impedes the ability to do business and is often duplicated elsewhere.
Risks on the horizon
The fourth quarter of 2018 might be a harbinger of things to come – Investor sentiment can veer widely from optimism to pessimism based on little fundamental change. Market reactions do not always accurately reflect the real economy…but they do reflect market participants views of changing probabilities and possibilities of economic outcomes.
There are legitimate concerns around China’s economy – In the next 40 years, China will have to address serious issues such as having enough food and water, corruption, government and corporate debt, governance and transparency to name a few. Disruption of trade is another issue but Dimon believes that a trade deal will be struck with the US, otherwise there will be serious repercussions.
Debt levels are increasing around the world – A lot of this debt is sovereign debt which is different to corporate and consumer debt. However, US debt is currently at 80% of GDP rapidly increasing. With the current rate of increased debt, in the next 30 years, it could begin to cause concern on global markets.
Less certainty around American global leadership – This uncertainty over how American exercises global leadership is one of the biggest unknown factors that will affect critical geopolitical and economic issues.
There may be too much certainty that growth will be slow and inflation subdued – There is still global growth and employment and wages have gone up but the recovery has been very slow and inflation can still happen. Dimon dismissed the recent inversion of the yield curve as an indication of a recession (as it has done in the past) as there has been too much interference in the bond markets by central banks.
The American Dream is alive – but fraying for many
Dimon addresses what he (and those of JP Morgan Chase) see as problems that are holding back economic growth in the US. This can be applied to most nations.
Middle class incomes are stagnant – 40% of Americans earn less than $15 an hour and about 5% of full time workers earn minimum wage ($7.25 per hour) or less. 40% of Americans don’t have $400 to deal with emergencies and 28 million don’t have any medical insurance.
Out of touch education system that doesn’t prepare people for professional level, higher paid jobs.
Soaring healthcare costs, coupled with a more unhealthy nation (70% of 17-24 year olds are not eligible for military service due to poor academic skills or health issues!).
Excessive regulation – while there is a need for regulation, it shouldn’t be overly burdensome and expensive as it currently is.
Immigration System – 40% of foreign students who receive advance degrees in science, technology and maths have no legal way of staying in the US and working, so they have to leave.
He really has a go at the political system, with poorly designed, short-term policies that have long-term negative consequences. The partisan nature of the two party system in the US has resulted in both sides being unwilling to compromise as they are afraid of alienating their base. He believes that a Marshall Plan is needed for America!
Jamie Dimon’s letter is certainly a lot different to the one we are used to getting from Buffett, who takes a largely apolitical approach to matters.
