Despite the downward inflation trend, JPMorgan CEO Jamie Dimon, 68, isn't ruling out a "hard landing" for the US economy.
On the prospects of a "hard landing," Dimon said in a recent CNBC interview at the JPMorgan Global China Summit in Shanghai: "Could we actually see one? Of course, how could anyone who reads history say there's no chance?"
A "hard landing" is, for instance, when the US Federal Reserve tightens its monetary policy by hiking interest rates aggressively to curb high inflation and cool down consumer spending, but results in a steep economic slowdown and a subsequent recession. However, a "soft landing" is if the rate hikes are palatable to the consumers and sufficient to slow the economy and lower inflation without causing a recession and job losses.
However, Dimon's worst fear for the US economy is "stagflation," where inflation continues to inch higher alongside rising unemployment and slowing economic growth, seen as worse than regular recessions. In a separate interview, Dimon said he was concerned that the US economy "looks more like the '70s than we've seen before."
Recently, he reiterated that "after looking at the range of outcomes, again, the worst outcome for all of us is what you call stagflation, higher rates, and recession. That means corporate profits will go down, and we'll get through all that. I mean, the world has survived that, but I just think the odds have been higher than other people think."
A US stagflation was last seen in the 1970s when budget deficits, the oil embargo, and the crash of the managed currency rates fueled high inflation and stunted economic growth. Back then, the prime lending rate was increased to a whopping 21% to bring down inflation. Today, stagflation could wreak havoc in stock markets.
Despite a gloomy outlook, Dimon said consumers will likely weather such economic volatility despite low confidence levels induced by elevated inflation. "Unemployment has been below 4% now for a year and a half or two years," he said. "Wages are going up at the low end, which I think is a very good thing. Home prices are up. Stock prices are up. Even if we go into a recession, they are in pretty good shape."
Meanwhile, the US Fed's minutes released on May 22 revealed officials are more worried about persistent inflation, citing the slump in progress toward the Federal Open Market Committee's (FOMC) 2% inflation target. The Committee voted unanimously to retain its benchmark short-term borrowing rate between 5.25%-5.5%, marking a 23-year high.
Several committee members hinted they might need more confidence to begin rate cuts. At the same time, many are willing to tighten the monetary policy further should their hand be forced by persistent inflation.
Dimon thinks rates could still go up "a little bit." He said: "I think inflation is stickier than people think. I think the odds are higher than other people think, mostly because the huge amount of fiscal, monetary stimulus is still in the system and may still be driving some of this liquidity."
He cautioned that while market forecasts are "pretty good, they're not always right," adding that "the world said [inflation] was going to stay at 2% all that time. Then it says it will go to 6%, then it says it's going to go to four. It's been a hundred per cent wrong almost every single time. Why do you think this time is right?"
Dimon's comments come soon after his chief market strategist Marko Kolanovic warned recently that the S&P 500 could decline by 20% to 4,200 by year-end. The index was trading above 5,300 on May 27.
Kolanovic cautioned investors to refrain from the bullish sentiment fueled by the Dow Jones Industrial Average, which recently breached the 40,000 mark. His warning of impending stock market volatility despite the indexes continuing their record rallies was based on the argument that rates would stay in the restrictive region for longer amid a bleak geopolitical outlook and signs of weakness amongst lower-income consumers.
"With very high equity valuations, we do not see equities as attractive investments at the moment, and we don't see a reason to change our stance," Kolanovic said. "We don't think narrow themes like AI chips can compensate for all those traditional market challenges that historically worked against the cycle."
He is among the last few top banking analysts worldwide to stick with their bearish sentiments amid one of the historic bull runs. Kolanovic has maintained a bearish outlook on stocks through 2024 and last year.
"You're going to be hearing a lot about stagflation for the rest of today. Ignore it." Ian Sheperdson, chief economist at Pantheon Macroeconomics, had posted on X last month.
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