(CNN Business) — JPMorgan’s Jamie Dimon is concerned about powerful shock waves in the economy caused by the combination of high inflation and war in Ukraine.
Dimon, one of the world’s most influential business leaders, warned Monday in his annual letter to shareholders that the conflict poses a major threat to the economic recovery that began less than two years ago.
The impact of the Ukraine war, according to JPMorgan
“The war in Ukraine and the sanctions on Russia will, at a minimum, slow down the world economy, and it could easily get worse.” wrote the CEO of JPMorgan Chase (JPM) in the letter.
The conflict has already triggered serious turmoil in energy, agriculture and other commodity markets.
JPMorgan, like other big banks, has lowered its growth forecasts for the US, Europe and, of course, Russia. Dimon recalled how the 1973 oil embargo sent oil prices skyrocketing, pushing the world into a recession.
Jamie Dimon, CEO of JP Morgan Chase, speaks during the Bloomberg Global Business Forum in New York on September 25, 2019. (Credit: KENA BETANCUR/Afp/AFP via Getty Images)
“Many more sanctions could be added, which could dramatically and unpredictably increase their effect,” he wrote.
Dimon said the stimulus-driven recovery from Covid-19, the need to quickly raise interest rates to fight inflation, and the war in Ukraine present a unique set of challenges.
“They present completely different circumstances than we’ve experienced in the past, and their confluence can dramatically increase the risks ahead,” he said. “While it is possible, and hopeful, that all of these events will have peaceful resolutions, we must prepare for possible negative outcomes.”
Unite against “all forms of evil”
The war in Ukraine is a test for the role of the United States on the world stage and also for Western ideals.
“The United States must be prepared for the possibility of a protracted war in Ukraine with unpredictable results,” Dimon said. “We must prepare for the worst and hope for the best. We must see this as a wake-up call.”
The head of JPMorgan hailed the “uniting” of the Western world, across Europe, NATO countries, Australia, Japan and Korea, in support of Ukraine and called for closer ties.
“We have to make this a permanent and lasting stand for democratic ideals against all forms of evil,” Dimon said.
The economic challenge is magnified by the fact that the war is adding pressure to stressed supply chains and driving up food and energy costs at a time when inflation is already very high.
The Federal Reserve has to do it “perfectly”
To fight inflation, the Federal Reserve is raising interest rates, perhaps rapidly. And that will make things difficult for both the economy and the markets.
“I don’t envy the Fed for what it needs to do next: the stronger the recovery, the higher the rates that follow (I think this could be significantly higher than markets expect),” Dimon said, adding that interest rates will have to rise “substantially” and this will be “hard work”.
However, the harder the Fed slams on the brakes by raising interest rates, the greater the risk of a crash in the economy, the markets, or both.
“Very volatile markets” ahead
Dimon was cautious about whether the Fed can pull off a so-called soft landing: taming inflation without sinking the recovery. He said that if the Fed gets it “right,” the economy can enjoy years of growth and inflation “will eventually start to recede.”
In any case, Dimon said, investors should buckle up.
“In any case, this process will cause a lot of consternation and very volatile markets,” he wrote.
Markets have already seen wild swings, most notably the Nasdaq’s recent plunge into a bear market.
But Dimon, the most powerful leader on Wall Street, urged the Fed not to overreact to what is happening in the markets.
“The Fed shouldn’t be concerned about market volatility unless it affects the real economy,” he said. “A strong economy overcomes the volatility of the markets.”
In other words, do what you think is right, even if it means a bear market in US stocks.
Has Washington gone overboard with stimulus?
The recession concern is somewhat surprising because the US economy is enjoying a strong rebound from Covid-19.
Dimon praised the “strong US economy, which, we hope, has Covid-19 in its rearview mirror.”
On the other hand, if there is anything to worry about, it is that the economy is so hot that it is overheating. And Washington’s unprecedented response under the Trump and Biden administrations to Covid-19 played a role in the strength of the recovery.
Dimon said the Fed and the government “did the right thing” in resorting to bold actions in response to the pandemic, including the central bank buying trillions of dollars in bonds through a program known as Quantitative Easing, or QE. .
“But also in hindsight, the medicine (tax spending and QE) was probably too much and lasted too long,” Dimon said, adding that it’s easy to question complex decisions after the fact.
A “Marshall Plan” for energy
Looking ahead, Dimon reiterated his private appeal to President Joe Biden in the sense that the United States must develop a “Marshall Plan” to promote the energy security of the United States and its European allies.
Dimon said that plan involves securing needed energy supplies now for years to come, while cutting emissions and fighting climate change.
The war in Ukraine, along with covid-19, have exposed glaring weaknesses in the supply chains that underpin the global economy.
Dimon said there is “no question” that supply chains need to be restructured, in part to make sure America’s enemies can’t take advantage of them in a crisis.
“For any product or material that is essential to national security (think rare earths, 5G, and semiconductors), America’s supply chain must be domestic or open only to fully friendly allies,” Dimon wrote.
“We cannot and should never rely on processes that can and will be used against us,” Dimon said, “especially when we are most vulnerable.”