“Markets Have Always Been Wrong” – Jamie Dimon Warns QE's End Will Cause Volatility To Spike
JP Morgan Chase & Co. CEO Jamie Dimon’s declaration that he would fire any JPM traders whom he knew were trading bitcoin unexpectedly ranked among the most popular stories on several respected financial media websites – despite stiff competition from Apple Inc.’s 10th anniversary product launch.
Given what’s transpired in the bitcoin market over the past few days (See “Chinese Bitcoin Trading Soars As Local Exchanges Deny Crackdown Reports”), its unsurprising that Dimon, who spoke publicly at an industry conference hosted by Barclays before sitting for an interview with Andrew Ross Sorkin at Institutional Investor’s Delivering Alpha conference, managed to break through the noise with his comments. During the earlier appearance, he warned investors that J.P. Morgan Chase & Co. trading revenue was on track to fall 20% year-over-year during the third quarter – echoing a similarly downbeat outlook delivered by Citigroup CFO John Gerspach the day before. Dimon’s revelation sent JPM stock tumbling off its highs of the day.
Perhaps it’s understandable, then, that reporters ignored some of the bank CEO’s more prosaic-sounding comments, writing them off as too boring to print. However, in both of his public remarks, Dimon reiterated his view that the coming unwind of the Federal Reserve’s $4.5 trillion balance sheet, and the subsequent “normalization” of interest rates, would revive volatility across markets. Investors, Dimon said, should “hold on to their hats.”
Why? Because, as Dimon explains, global central banks have purchased $12 trillion in assets since the crisis, supporting much of the global cross-asset rally. So logically, what would happen if the largest of those central banks were to stop buying?
“ANDREW ROSS SORKIN: Does the low volatility, by the way, make sense to you given all of the challenges and headlines in the world today?
JAMIE DIMON: Oh, listen, markets are markets. There’s low volatility until they’re highly volatile. The stock market is high until it goes low. Markets therefore have always been wrong. And I think people are making mistakes. I can give you reasons why it might be low. We’ve had this fairly consistent, coherent, consistent growth. But forget the geopolitical noise and stuff like that. We’re chugging along, 2%. Europe is doing 2%. Russia – I mean, Japan is doing 1.5%, China’s doing their 6%. You know, earnings are doing okay. We’ve had a fairly benign economic environment.
That’s a reason. I can give you another reason is that the Central Banks of the world that bought $12 trillion of securities. 12 trillion. Since they started doing QE. And that’s only just the U.S. That’s an awful lot of security purchases that might – in all things be equal, and remember things are never all equal – can reduce volatility. And there may be other sides that are known. And once other sides happen, watch out. Then volatility goes way up. They’ll say they’re a genius, they figured out when it’s going to happened. I don’t guess on which kind of volatility. Like I said, we do a business. And we have to manage the volatility.”
But regardless of the market consequences (after all, banks’ trading desks benefit when volatility climbs), the Fed should continue to raise interest rates. And the two hurricanes that just devastated parts of the southern US shouldn’t lead the central bank to pull any punches.
“ANDREW ROSS SORKIN: Do you think interest rates should go up by the end of the year, with these hurricanes this fall?
JAMIE DIMON: The hurricanes are irrelevant. I wouldn’t have any policy matter as a function of hurricanes. Going to reduce GDP in the short run, they’ll probably increase it after that. I’ll let the economists figure it out. But almost a $20 trillion economy, that isn’t a reason to change monetary policy. It will create a lot of noise in the numbers, but I wouldn’t overreact to that.
Advice, it’s very sympathetic. We’re doing – just so you know, we’re going to do a lot for affordable housing, get these people in these states 20,000 people in Florida, 6,000 in Houston. Most of the banks are waiving fees, delaying loan payments, offering special services for your employees and stuff like that.”
The Fed should ultimately predicate its decision on the health of the US economy. And with growth steadily picking up, Dimon says, the economy should be able to absorb the borrowing costs without much of a disruption.
“The question about rates and QE is always important at the same time, say the why. Okay? So I think rates need to go up. And for as long as the why is because the economy is strong and may be strengthening, that’s a good reason. It’s not a bad reason.
You know, remember Paul Volcker raised rates, people may have forgotten, 2%, 25 basis points, 2% Sunday night. Not in between meetings. On a Sunday. Okay? And he did it because inflation was going up, the stagflation at the time. That’s a bad why. They show if the why is doing well and the jobs are coming back, and people are entering the labor force, the economy will dwarf rates, the importance of rates.
And so far that’s what they’ve been doing. They’ve been watching the economy and lowering rates. I’m hopeful that will continue because I think rates do need to go up and the economy continues to be stable.
You know, people are joining the workforce, a lot of capital, markets are wide open, no major potholes in the American economy. I’m putting geopolitics – that would change if you might treat so many things, so they continue to raise rates, and they start QE. But it’s going to help the economy, you’ll all be fine.”
Dimon warned back in July that traders should brace for volatility to surge after the Fed begins unwinding its balance sheet, pouring cold water on the Fed’s complacency after Patrick Harker said the unwind would be as dull as watching paint dry.
“We act like we know exactly how it’s going to happen and we don’t,” he said at the time.