Dimon In The Rough


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What's going on?

Jamie Dimon’s annual shareholder letter is out! And the CEO of JPMorgan Chase struck a positive tone with his outlook on markets. Spoiler alert: he thinks the US Federal Reserve (“the Fed”) might have to raise interest rates faster than we all think!

What does this mean?

In his hotly anticipated annual letter to JPMorgan’s shareholders, Dimon said higher inflation and wages in the US could mean investors are underestimating how quickly interest rates might increase. Why? If inflation rises (resulting in higher prices for goods) above the Fed’s target level (around 2%), it’ll increase interest rates to keep inflation in check (with higher interest rates, it pays to save more — if you do, you’ll have less disposable income with which to push prices of goods even higher).

A stronger than expected economy could introduce more volatility into markets as investors try to quickly adjust their portfolios to rising interest rates. As prices for stocks, bonds and commodities (such as oil) move around more, it’s generally good for investment banks as their clients end up having to trade more (and the banks get paid commissions for helping them).

Why should I care?

For markets: Investors appear to share Dimon’s optimism.

Investors around the world are mirroring optimism as most major indexes went up on Thursday, partially reflecting some easing in the USA’s position in trade negotiations with China.

The bigger picture: Not all banks are looking towards a rosy future – in the UK particularly.

Ring-fencing regulation means that UK investment banks will have to split up their retail (savings and loans) operations from their more risky investment banking businesses (e.g. trading stocks and bonds). Barclays was the first bank to implement ring-fencing (today, in fact) but because it’s now two separate businesses (one pretty stable, retail; and the other pretty volatile, investment banking), Moody’s, a credit rating agency (think: Experian, but for companies), now ranks its debt just one level above “junk”! Barclays will have to pay more interest on future debt — making it more expensive for it (and soon, other UK banks) to compete globally.

Originally posted as part of the Finimize daily email.

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