Who am I to Disagree with Jamie Dimon?

Earlier this week, the Chairman and CEO of JP Morgan Chase – Jamie Dimon – published his annual ‘letter to shareholders’.  (I am one of those shareholders, by the way.)   This 50-page document is chock-full of information.  About the bank.  Global finance.  Forecasts.  And some amazing financial results.

In 2015, the bank had revenue of almost $100 billion!   On revenue of $96.6 billion, JPM realized a net income of $24.4 billion.   That’s about $2 billion a month of net income.  Wow.  Well, it goes without saying, they did better than I did.  🙂

Which suggests they have far greater resources available to them … and their forecasts, as a result, are probably more accurate than mine.  Yet, this one, appearing on the bottom of page 18, bothers me.  When asked…

“How do you manage your interest rate exposure? Are you worried about negative interest rates and the growing differences across countries?”

…he replied:

“No we are not worried about negative interest rates in the United States….  I am a little more concerned about the opposite: seeing interest rates rise faster than people expect.

We hope rates will rise for a good reason; i.e., strong growth in the United States. Deflationary forces are receding – the deflationary effects of a stronger U.S. dollar plus low commodity and oil prices will disappear. Wages appear to be going up, and China seems to be stabilizing.

Finally, on a technical basis, the largest buyers of U.S. Treasuries since the Great Recession have been the U.S. Federal Reserve, countries adding to their foreign exchange reserve (such as China) and U.S. commercial banks (in order to meet liquidity requirements). These three buyers of U.S. Treasuries will not be there in the future. If we ever get a little more consumer and business confidence, that would increase the demand for credit, as well as reduce the incentive and desire of certain investors to buy U.S. Treasuries because Treasuries are the “safe haven.”

If this scenario were to happen with interest rates on 10-year Treasuries on the rise, the result is unlikely to be as smooth as we all might hope for.”

For the myriad of reasons stated, Mr. Dimon – the CEO of this banking behemoth holding $2.4 trillion in assets – is a bit concerned interest rates will soon be rising – and rising quickly.  Needless to say, the word ‘faster’ is not well defined.  Does this mean he expects rates to rise this year?  Is that what ‘faster’ means?  Perhaps.  Or maybe by the end of 2017?   It’s hard to say…but ‘faster’ suggests it will happen soon – sooner that we expect.

Of course, he may be right.  But I think he is not.

And neither does the Federal Reserve.  In their most recent forecast – entitled“Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy, March 2016” the Fed bank presidents released their usual ‘dot’ forecast for the ‘federal funds’ rate:

March 16, 2016 ‘Economic projections of the Federal Reserve Board members….’

Each dot represents the rate forecast/opinion of one FOMC member or Fed bank president.   For the end of 2016, these forecasts ranged between .6% and 1.4%.   That’s about 8 or 9 months from now.  Not ‘high’ or quick by any measure.

And for the end of 2017, their rate forecast ranged between 1.6% and 2.8%.   Over a year and a half from now.

It’s important to also look at their historic forecasting success.   How accurate have the FED members and bank presidents been?  Let’s take a look:

Hmmm…both individually and collectively, their record isn’t very good.  And the range is large.  Even they can’t seem to agree.   Collectively, they have consistently forecast rates quite a bit higher than what occurred.  And they actually control and determine this rate!  Somewhat.

Clearly rate forecasting is tough.  Even for the big boys.  Re-read his comment above and you’ll see Chairman Dimon supports his forecast with some upbeat economic expectations:

• strong growth in the United States.
• receding deflationary forces
• low commodity and oil prices will disappear
• rising wages
• China seems to be stabilizing

In the macro, I don’t take exception with any of these ideas.   I simply disagree on the extent.

Here’s a chart from the St Louis FED research system ‘FRED’ showing GDP growth for the last 50 years, as a percentage year over year.   Perhaps I’m mistaking his intent, but I don’t feel the current 2.5% GDP growth (or there about) we’re experiencing is ‘strong.’  Strong was the 7.3% GDP growth we saw in 1984, or even the 4.7% we experienced in 1999.  2 to 2.5% is not, in my book, strong.

Low commodity and oil prices are going to ‘disappear?’   Google the word:  The Merriam Webster dictionary defines it as ‘to stop existing.’  Does this mean Mr. Dimon feels we will soon see oil back near $100 a barrel?

In my opinion, this is not likely.  I feel commodity and oil prices will rise – but not by that extent.    The world is awash in both.   This oversupply will not ‘disappear’ soon.  It will diminish – for a variety of reasons – but it will not disappear.

So maybe we disagree on the extent to which these factors will influence US and global economic conditions…and interest rates by extension.

Regardless, I don’t agree interest rates will be jumping any time soon.  I hope Mr. Dimon doesn’t make me sell my stock.

• Terry Liebman