Jamie Dimon released his annual letter recently, offering his usual update on JPMorgan Chase’s activities along with a critique of financial regulation and government policy. Reading through the letter, which runs 95 printed pages, one contrarian theme stands out: Unlike many prominent economists and executives, Dimon doesn’t see a recession coming in 2019 or soon after—and he thinks people should probably be a bit more optimistic.
“Of course, we hyper-focus on today’s problems, and they often overshadow the progress we are making across the globe,” Dimon writes. “We should not overlook the positive signs.” (Among the encouraging signs he observes: a “strong U.S. economy,” continued global growth, the likelihood that trade negotiations will be “properly resolved” and the upturn in previously struggling markets such as Brazil.)
Making his view extra clear, Dimon draws an important distinction—that just because JPMorgan accounts for a worst-case scenario doesn’t mean it believes it’s likely to happen. “We are prepared for—though we are not predicting—a recession,” he emphasizes.
He does issue one caveat: That the next recession may not happen for the same reasons as recessions in the past, making it difficult to spot the signs. “Next time,” he writes, “the cause may be just the cumulative effect of negative factors—the proverbial last straw on the camel’s back.”
Still, here are five clues Dimon drops in his letter for why he doesn’t think a recession is imminent.
The Inverted Yield Curve Doesn’t Matter
For the past couple of weeks, investors have been fretting over the recent (and temporary) inversion of the yield curve, a phenomenon in which short-term Treasury bonds pay out higher interest rates than their longer-term counterparts, the 10-year Treasury. It’s a sign that investors are worried the economy will be worse in the future than it is today, and historically has been a consistent harbinger of recession.
But Dimon isn’t buying it this time. “I would not look at the yield curve and its potential inversion as giving the same signals as in the past,” he writes, citing “extreme” stimulus measures by the Federal Reserve and others following the 2008 financial crisis. “There has simply been too much interference in the global markets by central banks and regulators to understand its full effect on the yield curve.”
People Might Be Underestimating Growth
Though economists and investors have largely resigned themselves to a slowdown in the economy (thinking that the post-crisis expansion has likely run its course), Dimon thinks they might be overly pessimistic.
“There may be too much certainty that growth will be slow and inflation subdued,” he writes in his letter, noting that “employment and wages continue to go up.”
After all, he continues, “This has been a very slow recovery, and it is possible that the ‘normal’ increase of inflation late in the cycle, due to wage demands and limited supply, can still happen. We don’t see it today, but I would not rule it out.” In other words, don’t count out a late-cycle growth spurt just yet.
Market Fears Are Overblown
Dimon spends an entire section of the letter dissecting the stock market plunge at the end of 2018, which rapidly erased all of the S&P 500 and Dow Jones Industrial Average’s gains for the year.
Though he does warn that such investor panic could return and bring more market volatility, Dimon comes to a fairly certain conclusion: It was an “overreaction.”
Indeed, he repeats a laundry list of positive economic indicators—continued growth of employment, wages, and GDP; “healthy” financial markets; “strong” consumer and business confidence (even if below all-time highs); the fact that “the consumer balance sheet and credit are in rather good shape;” and tight housing supply in cities across the U.S. (“which should eventually be a tailwind”).
That’s why Dimon reminds his readers to take stock moves with a grain of salt, and to act rationally: “Market reactions do not always accurately reflect the real economy, and, therefore, policymakers and even companies should not overreact to them.”
China Is Going to Be Just Fine
While companies and investors have been hanging on to every bit of news coming out of the trade talks between the U.S. and China, wondering whether the two sides can come to an agreement, Dimon isn’t sweating it. “We believe the odds are high that a fair trade deal will eventually be worked out,” he writes. Of course, if that fails, there will be “serious repercussions,” he notes—but nothing China can’t handle: “China can deal with many serious situations because, unlike developed democratic nations, it can both macromanage and micromanage its economy and move very fast.”
Dimon also thinks developing nations have become more stable, making their debt loads less of a risk: “The emerging markets, both countries and companies, are much bigger and stronger than they were in the past,” Dimon writes.
Debt Isn’t Too Bad Yet
Dimon also waved off fears about the growing U.S. budget deficit, and its potential to cause a recession: “America’s debt level is rapidly increasing but is not at the danger level.”
He’s more concerned about what he calls “shadow banking,” or an increase in lending by non-banks, particularly mortgages and student loans as well as higher-risk leveraged loans. Still, “we don’t think this is yet of the size or quality to cause systemic issues in the financial system,” Dimon writes. “At this level, it is still a manageable issue.”
The bottom line: “Today is nothing like 2008,” Dimon writes.
For everyone’s sake, let’s hope he’s right.