Jamie Dimon Sends Stark Economic Warning After $170 Million Hit
Prudent investors should take the commentary from JPMorgan’s president to heart.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
The market has recovered a good chunk of its losses from Friday’s huge sell-off.
The small-cap Russell 2000 has made a complete round trip. Concerns around global trade tensions between the two biggest economies in the world — the U.S. and China — appear to have had the half-life of a mouse fart. This is a mistake in my view.
Any sort of significant reduction or closing off of rare earth exports from China would have substantial and profoundly negative impacts on the defense complex, the technology sector and a lot of industries in between. That is a topic for another column, however.
Today, I would like to highlight new commentary from Jamie Dimon, long-time head of JPMorgan Chase & Co. (JPM) , around cracks starting to appear in the credit markets. This is one of several current economic landmines that prudent investors should be paying more attention to right now.
Dimon, after the bank reported better-than-expected third quarter results on Tuesday, took the time to riff some on the state of the credit markets. He stated that corporate lending standards had gotten too lax in the past decade or so. And if the economy hits a recession, a lot more credit issues will pop up. This is one area I have been monitoring closely. These things always tend to run in cycles.
In a recession, the Federal Reserve always takes extreme steps to re-inflate the economy. This sets the stage for the next bubble. The central bank slashed the fed funds rates following the internet bust. This and lax regulation birthed the massive housing bubble that followed. The housing bust then played out, starting in 2007. This event was a key trigger that resulted in the Great Financial Crisis.
Following the COVID lockdowns, the Federal Reserve brought down the fed funds rate to basically zero. The central bank also bought mortgage-backed securities which drove 30-year mortgage rates to under 3% for the first time in U.S. history. Not done, the Federal Reserve boosted the money supply by some 40% in two years.
All of this incentivized some bad investment decisions — and to think we are not going to have to pay the piper for that largesse is naïve, in my view. We already see housing bubbles starting to burst in many major metro regions like Oakland, New Orleans, Austin, Phoenix, Las Vegas and Tampa.
As Dimon noted, there is never one cockroach. Toward this end, he highlighted the recent bankruptcies of sub-prime lender Tricolor Holdings and auto parts supplier First Brands as potential cracks in the credit market. Of note, JPMorgan took a $170 million hit with Tricolor’s demise. That is minor compared to the $700 million Fifth Third Bancorp (FITB) is on the hook for with Tricolor and UBS’s $500 million exposure to First Brands.
I am particularly concerned about the private credit market. Following the GFC, new regulations made it less attractive for banks to hold riskier assets. Private credit has stepped in to fill that void. And this niche of the market has grown from next to nothing during the last financial crisis to some $1.7 trillion.
And private credit does not have access to low-cost customer deposits like commercial banks. These entities also don’t have to file quarterly filings with the SEC. This means the markets could easily be blindsided by more blow-ups in the credit markets over the coming quarters. I hope Dimon is wrong in his skepticism but fear he will be proven prescient.
At the time of publication, Jensen had no positions in any securities mentioned.
