Until I read Too Big to Fail by Andrew Ross Sorkin, I thought Jamie Dimon was “just another banker.”
Smart, no doubt. But I didn’t realize that of all the players in the crisis of 2007-08, he was among the few who truly understood how complicated the situation was – how the web of derivatives in housing related to bond structures, insurance companies, and the overall stock market.
Nowadays, he’s probably the world’s most prominent banker.
So, Each year when his annual JPMorgan (JPM) shareholder letter is released, thousands of investors, traders, and money managers break out their magnifying glasses to pore over every last word.
And, rightfully so.
Mr. Dimon released the 61-page letter of 2023 yesterday, and it didn’t disappoint.
Here are three major themes and places to invest over the next 12 months:
One: Economic and Geopolitical Uncertainty
Yes, this is one we all know.
Russia invaded Ukraine. Israel is at war with Hamas. Iran is threatening retaliation following an Israeli strike. Houthi rebels are still attacking ships off the Yemen coast. Yellen just visited China and relations are still as fragile as ever.
Thing is, not even one of these issues will be resolved overnight. We don’t know the end for any of them.
And what’s more, there are still more issues to come.
In terms of global economics, these situations have led to higher energy and food prices, inflation rates, and volatile markets.
Dimon has always been a champion of U.S. democracy and enterprise, and he says these global issues underscore the importance of America’s role in global leadership and the necessity for the country to work in partnership with Western nations.
The key for this is reading between the lines – This implies a prediction that geopolitical tensions and wars will persist. in the global community more than we already do… this is probably a prediction that the geopolitical tensions and wars will persist for time to come.
What’s this mean? Sticky inflation. Divergent global trade routes. Wider sovereign gaps.
Invest in hard assets, the things that people need – water, food, energy.
Two: Soft Landing? Probably Not
Dimon says that most economists and analysts are estimating at 70 to 80 percent chance for a “'soft landing'.” This just means that interest rates were raised in a way that slowed demand, lowered inflation, and didn’t put us in a recession.
Odds are much lower than that. We’re still not out of the potential recession camp.
There are concerns about the potential for persistently high inflationary pressures and the broad range of outcomes for interest rates.
He noted that the economic indicators at the time were generally good, including inflation, but highlighted several factors that could contribute to ongoing inflationary pressures.
These include fiscal spending, remilitarization, restructuring of global trade, and capital needs for the green economy.
Dimon emphasized the importance of being prepared for a wide range of interest rates, from as low as 2% to as high as 8% or more, and the corresponding economic outcomes.
He also pointed out the unusual nature of current fiscal deficits, which are larger and occurring during boom times, supported by quantitative easing—a situation without precedent before the Great Financial Crisis.
His concerns extend to the effects of quantitative tightening, which he views with more alarm than most, given its scale and the lack of precedent for its impact.
Three: artificial intelligence (AI)
It’s a requirement from every person writing an annual shareholder letter at this point to talk about where they see AI going and how its already affecting their business.
Dimon didn’t disappoint.
He highlighted AI as one of the most important issues facing the company, indicating a strong belief in its potential to transform JPMorgan as significantly as major technological inventions of the past.
He likened the onslaught to the innovation of the steam engine itself.
The letter notes the firm's material growth in its AI organization, now including over 2,000 AI/machine learning experts and data scientists.
Dimon emphasized the use of AI and machine learning in various aspects of the business, including marketing and risk management, and expressed an intent to continue investing in AI capabilities, given their potential to augment nearly every job at the company.
What’s most important is what he gets at next.
He discussed the company's proactive approach to managing AI-related risks, especially as the regulatory landscape evolves, and the importance of maintaining high ethical standards and transparency in AI's decision-making processes.
The discussion on AI also touches on the challenges and threats posed by bad actors using AI, underscoring the firm's efforts to incorporate AI into its security measures to counter such threats.
I’ve seen it said a lot that well, with AI, cybersecurity companies can now automate a lot of their processes.
True.
However, malicious actors can do the same.
That’s why cybersecurity spending from corporations is supposed to grow 14% this year, up to $215 billion.
Cybersecurity will be a huge theme we continue coming back to in the months ahead.
The overall tone of the letter is cautious optimism. There are many, many challenges ahead. But U.S. resilience, grounded in an understanding of our origins and global identity, will prevail.