EDITOR'S NOTE: Megabanks are like massive ships floating in an ocean of economic uncertainty. To navigate this fluid environment, a large vessel must keep its sights far ahead on the horizon as shifts in speed and direction require much more time and power than what most smaller crafts need to execute a swerve. But megabanks hold a special status in this environment: they’re the engines pulling the levers of economic growth. Businesses often depend on large banks for capital and liquidity. So, when a large megabank like JP Morgan Chase says that the economic outlook is deteriorating and that, as its CEO Jamie Dimon warns, risks are now “nearer than before,” such a call isn’t to be taken lightly. It means that a potential iceberg has been spotted and that it must now make sharp maneuvers to avoid its impact. It also means that Americans may be at risk of crashing into the same glacial mass that it suspects but can’t clearly see. In short, it’s time to brace for impact and to seek a safety hedge to mitigate the potential outcomes.
The leader of the nation’s largest bank cautioned risks to the U.S. economy appear “nearer than they were before" in a call with reporters following the bank's most recent quarterly report.
“I'm simply saying, there's a range of potential outcomes from a soft landing to a hard landing, driven by how much interest rates go up, the effectiveness of quantitative tightening, and defective, volatile markets,” Dimon said in a separate call with Wall Street analysts Thursday.
The bank reported a wider-than-expected drop in profit of 28% during the second quarter to $8.6 billion, or $2.76 per share share. Analysts surveyed by Bloomberg anticipated the figure to come in at $8.9 billion. Meanwhile, trading revenue rose 15% to $7.8 billion, slightly below the 17% increase analysts expected.
Dimon's comments come as the Federal Reserve moves forward with its most aggressive monetary policy in decades and war in Ukraine continues to disrupt global markets.
The remarks also come as JPMorgan readies its own balance sheet for a potential recession.
Last quarter, the bank temporarily suspended share buybacks and set aside an additional $428 million in credit reserves to cover potential loan losses, pointing to “modest deterioration in the economic outlook.”
The source of that deterioration comes from “two conflicting factors,” Dimon said in the company's earnings release. While the U.S. economy continues to grow and the labor market and consumer spending hold up despite a backdrop of macroeconomic headwinds, geopolitical tensions caused by war in Ukraine, deteriorating consumer confidence, and “never-before-seen quantitative tightening” are expected to have negative consequences down the line.
JPMorgan reported earnings one day after June inflation data showed consumer prices climbed at the fastest pace of the current inflation cycle, stoking fresh worries U.S. central bank officials may take even more aggressive action as economic growth shows signs of moderating.
The JPMorgan chief was among the first of Wall Street heavyweights to hint at a possible recession, sending a shockwave through financial markets last month when he predicted an economic “hurricane” was underway.
Despite warnings, however, Dimon fell short of formally calling for a recession.
“You can put any percentage you want on it — I’ve never changed my view,” he told reporters. “I’m not guessing what it is, I’ve always spoken about possibilities and probabilities, not about a single-point forecast.”
Dimon and JPMorgan CFO Jeremy Barnum also emphasized the health of U.S. consumers, pointing to still solid savings accounts and higher discretionary spending on dining and experiences.
Speaking to analysts, Dimon said consumers are in “great shape” if we enter a recession and hold far less leverage, particularly compared to the 2008 financial crisis and in 2020 when the coronavirus pandemic upended the economy.
Originally published on Yahoo Finance.