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Jamie Dimon is worried again. And this time, he might have a good reason to be.
Speaking at a financial conference in New York, the JPMorgan Chase CEO said that what he perceived to be storm clouds have turned into a hurricane:
You know, I said there’s storm clouds but I’m going to change it … it’s a hurricane. Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there, down the road, coming our way, and nobody knows if the hurricane is a minor one or Superstorm Sandy. You’d better brace yourself.
Dimon sees several imminent threats, but the quantitative tightening we are undergoing might be the biggest head-spinner. (“Quantitative tightening” is the opposite of quantitative easing – instead of making money cheaper and more available, the Fed plans to restrict the money supply, making credit less common and more expensive.)
Stocks have already taken a beating, along with most other assets, as the Federal Reserve begins to cut interest rates to curb inflation and finally rein in monetary policy.
This tightening extends far past rate cuts, however. The Fed is also trying to reduce its balance sheet, and is expected to sell bonds on the open market monthly, starting in June.
"We've never had QT like this, so you're looking at something you could be writing history books on for 50 years," said Dimon, voicing concerns that the program is ill-advised on many levels. Analysts have repeatedly cautioned that quantitative tightening combined with a relatively weak economy will cause a recession. They’re most likely correct – in order to drag the U.S. economy out of the stagflationary 1970s, Paul Volcker had to deliberately induce not just one but two recessions, one of which ranks among the worst our nation has ever experienced.
For an awful lot of analysts, the Fed's actions are just too much for our house-of-cards stock markets to endure – even if the only other option is hyperinflation.
Maybe that “minor” hurricane of Dimon’s is just a severe recession of his “Superstorm Sandy” is, in fact, a hyperinflationary episode that would gut our bank accounts and destroy whatever financial credibility our nation has left…
Dimon, like others, pointed out that previous Fed actions have “backfired.” In particular, he listed negative interest rate as a huge mistake that shouldn't have happened. Some first-world nations did experience negative interest rates (Germany and Japan, for example) – but the U.S. never had a published negative interest rate. Rather, the Fed brainiacs thought it was less frightening to keep interest rates near zero, while letting inflation surge to 40-year record levels, resulting in a negative 6% yield on ten-year Treasury bonds (after inflation). That’s what Dimon means about “negative interest rates,” even though they weren’t technically negative, they might as well have been.
Meanwhile the largest military conflict in recent times is threatening to embroil Europe in chaos, economic and otherwise. Speaking of which, Dimon said the Russia-Ukraine conflict will certainly result in even higher prices on such necessities as food and gas. Dimon expects oil to hit $150 to $175 a barrel in the near term. The lackluster refining infrastructure and transportation shortfalls will be exposed, pushing prices even higher. Dimon thinks we aren’t doing what's necessary to prevent an oil crisis in the very near future – and he’s probably right.
As pessimistic as it was, Dimon's speech was meant to reassure his shareholders during a time when companies need to look squared away, ready to face a financial crisis. Dimon reiterated that JPMorgan will stick to a conservative approach with regards to its balance sheet so long as uncertainty persists. He didn't mention gold as a brick in his "fortress balance sheet," but we imagine it would be well-placed there, fitting right in alongside the world’s third-largest silver stockpile.
As it turns out, JPMorgan's defensive repositioning will worsen the overall economic conditions. The 2008 financial crisis had the privilege of central banks, private banks and foreign exchange trading firms soaking up the mass of cheap money by buying U.S. bonds. That worked once, back when the government had less than $8 trillion in debt – it probably won’t work again, with nearly $30.5 trillion in IOUs outstanding (and counting).
The world isn’t likely to want another few trillion dollars in U.S. paper promises-to-pay, prompting Dimon to wonder what a crisis will look like without bailouts to save the day.
“That’s a huge change in the flow of funds around the world,” he said. “I don’t know what the effect of that is, but I’m prepared for, at a minimum, huge volatility.”
Well, we already mentioned JPMorgan’s truly epic hoard of silver bars. Bet you didn’t know that JPMorgan also made about half of the total profits raked in by investment banks from gold trading. JPM owns one of the largest London gold vaults (at 60 Victoria Embankment, Blackfriars, London) holding an estimated 300 tons of gold along with several hundreds of tons of silver, platinum and palladium bars.
See, with Dimon at the helm, JPMorgan Chase has already braced themselves to endure and even prosper whether those dark clouds turn out to be a thunderstorm or another Hurricane Katrina. They’re extremely well-diversified into consumer banking, business lending, institutional investing, payments processing, real estate lending, wealth management and of course precious metals trading. Regardless of the economic climate, some segments of their business will boom while others languish.
Now, I can’t afford to build the fourth (or even tenth) largest stockpile of silver in the world. Idon’t have the capital to build and staff a secret underground vault in London’s financial center and stock it with tons of gold bullion bars.
What I can do, and what every prudent person probably should do, is brace ourselves for a hurricane. That means diversifying our savings with tangible physical assets that are more than just entries on some bank’s ledger. Along with contributing to my 401(k), that means I buy gold coins when I can afford to and buy silver coins when I can’t. (I have to pay the same prices as you – unfortunately, BullionMax doesn’t offer an employee discount.) I’m dollar-cost averaging, building up my “emergency fund” of gold and silver a little bit at a time.
Now, I hope I’ll never need to sell any of my American gold eagles, but if I do, I’ll be darned glad to have them. When the hurricane comes, I’m hoping I’ll be able to sleep through it with the knowledge that my gold and silver can’t be whisked away, no matter how high the winds rise.