Are you expecting disinflation? According to Jamie Dimon, you may be quite surprised.
Investors are currently investing like nothing is wrong, but there is one person who says investors will be quite surprised, and a lot of them may get burned. That man is none other than Jamie Dimon himself. What does Dimon think is in store for us?
We are currently experiencing a big wave of optimism in the markets, with investors noting the falling rate of inflation, another thing that has partly added to investor optimism is the resurgence of the Chinese economy. Lastly, investors have been helped to maintain their optimism by a recent statement from Fed Chairman Powell himself announcing that he sees the first signs of disinflation.
But what is this disinflation? It is the opposite of inflation. Quite simply, it is a short-term slowdown in the rate of inflation. Sometimes the term is also used when there is a short-term decline in inflation. Mostly, however, it is a slowdown in the rate of growth. Unlike inflation and deflation, which express direction, disinflation expresses speed.
Jamie Dimon
Jamie Dimon is an American billionaire businessman and banker who has been Chairman and CEO of JPMorgan Chase since 2005 . Dimon was formerly a member of the Board of Directors of the Federal Reserve Bank of New York. He was also included in Time magazine's list of the 100 most influential people in the world in 2006, 2008, 2009 and 2011. Dimon's net worth is estimated at $1.8 billion.
Under Dimon's leadership, JPMorgan Chase has become the leading U.S. bank in domestic assets under management, market capitalization, and publicly traded stock value through acquisitions during his tenure. In 2009, Dimon was considered one of "The TopGun CEOs" by consulting agency Brendan Wood International.
Dimon was one of the first people to predict aggressive interest rate hikes by the Fed. He also believed that the Fed would raise interest rates more than four times in 2022, as others expected.
So my view is that there's a pretty good chance the increase will be more than 4, it could be 6 or 7. I grew up in a world where the Carter and Reagan era Fed chief Paul Volcker raised interest rates 200 basis points on Saturday night. And this whole notion that somehow it's going to be sweet and gentle and nobody's ever going to be surprised, I think that's a mistake, but that doesn't mean we're not going to have growth.
This was Dimon's rationale for his expectations of more aggressive interest rate hikes for foxbusiness in early 2022. As we can see today, Dimon wasn't far off the mark with his claim, with the Fed actually raising interest rates seven times in 2022.
Investor naivety?
According to Dimon, there is too much optimism in the markets at the current moment, which could perhaps even be called naive. He thinks the lawsuit suggests that investors are not looking at the situation with a big enough perspective, and are celebrating a victory when the fight is not yet over.
I just think people should take a deep breath before declaring victory because the monthly number looked good.
Because according to Dimon, the market needs to see a long-term result to win, and that hasn't been forthcoming. In short, people must not get overly excited at this time when a good monthly result comes out. In short, we have to look at the markets and the economy in the long term, and we have to be careful with any celebrations, especially now. But this is not the end. According to Dimon, interest rates will have to climb to 5% as quickly as possible and then stop raising rates. This should help the Fed in its assessment of the results. Once the effects of the measures are known, the Fed can then make further decisions.
https://www.youtube.com/watch?v=2rvaBDK5jig
Critical threshold
But according to Dimon, even if inflation falls, we are still not out of the woods. Inflation may be moving in the right direction, but there is a threshold that could force the Fed to raise its target interest rates to more than 5%. If inflation were to stall at somewhere between 3.5% and 4%, while failing to drive that inflation further down, Dimon says a situation could arise where the Fed would have to resort to more drastic measures and be forced to raise interest rates higher than the current expected 5%.
If inflation falls to 3.5% or 4% and doesn't move any further, the Fed may have to go higher than 5% with its interest rates
This, of course, would put further pressure on the economy, and especially on growth stocks. In my personal opinion, this will mainly have a significant impact on the real estate market and possibly on banks that are not diversified enough in their activities, where such high interest rates could dampen the demand for loans quite a bit.
Strong labour market
According to Dimon, it is the labour market, which is still showing some strength despite the recent relatively large layoffs, that may put the brakes on a potential decline in inflation. Another thing is that there is not currently high unemployment in the US, this is due to the fact that quite a few jobs are opening up overall. This can be seen in the additions to the unemployment claimant count, with this aspect recently beating Wall Street analysts' estimates.
That said, most people are still staying in circulation among firms. Short of one firm laying off, the next firm is hiring. So the only aspect where inflation and the measures are having an effect on the labor market is wage growth, which has been slowing since December. This means that a lot of people are secure, and their willingness not to spend is less than that of people who are currently out of work.
Summary
In short, according to Dimon, people are looking at the current situation from a relatively small perspective and not seeing the problems in the economy in the longer term. Investors are currently celebrating only because the inflation numbers came out positive, add to that the reopening of China and they think the situation has turned around and it will only be good. Or at least that's what the markets are saying.
Instead of giving investors hope, the Fed should raise rates to 5% as quickly as possible and wait to see the results of the action. According to Dimon, these gradual increases only lead to delaying future problems. We're going to look at that 5% anyway, but it makes a difference whether we look at it today or sometime in the future. This measure could slowly start to bear fruit now, so we will have to wait for that, unfortunately.
At the moment, the Fed is facing a relatively strong labour market. This complicates the situation with regard to persuading people to save. If things continue like this, we could see a situation where the inflation rate actually comes to a standstill somewhere between 3.5% and 4%, and the Fed will have to proceed with further interest rate increases, to a target rate of more than 5%.
WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.
Sources:
https://www.foxbusiness.com/markets/jpmorgan-ceo-jamie-dimon-interest-rate-hikes-possible-2022
https://www.investopedia.com/terms/d/disinflation.asp