Dimon, one of the world’s most influential business leaders, warned in his annual letter to shareholders on Monday that the dispute posed a significant threat to the economic recovery that began less than two years ago.
The conflict has already caused severe turbulence in the markets for energy, agriculture and other raw materials.
JPMorgan, like other major banks, has lowered its growth forecasts for the United States, Europe and, of course, Russia. Dimon recalled how the 1973 oil embargo caused oil prices to skyrocket, plunging the world into a recession.
“Many other sanctions could be added which could greatly and unpredictably increase their effect,” he wrote.
Dimon said the Covid-19 stimulus-induced recovery, 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 what we have experienced in the past – and their confluence can significantly increase the risks ahead,” he said. “While it is possible, and hoped, that all of these events will have peaceful resolutions, we must be prepared for potential negative outcomes.”
Unite against “all forms of evil”
The war in Ukraine is also testing America’s role on the world stage and Western ideals.
“America must be prepared for the possibility of a protracted war in Ukraine with unpredictable results,” Dimon said. “We have to prepare for the worst and hope for the best. We have to take this as a wake-up call.”
JPMorgan boss applauded Western world ‘merger’, across Europe, NATO countries, Australia, Japan and Korea, in support of Ukraine and called for further ties narrower.
“We must make this a permanent and enduring stand for democratic ideals against all forms of evil,” Dimon said.
The economic challenge is amplified 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 Fed must do ‘just the right thing’
To fight inflation, the Federal Reserve raises interest rates, perhaps quickly. And that will complicate things for both the economy and the markets.
“I don’t envy the Fed for what it has to do next: the stronger the recovery, the higher the rates that follow (I think that could be significantly higher than what the markets are expecting),” he said. Dimon said, adding that rates will have to go up “substantially” and it will be “hard work.”
Yet the harder the Fed brakes by raising rates, the greater the risk of a crash in the economy, markets, or both.
‘Very volatile markets’ are coming
Dimon struck a cautious tone about whether the Fed can pull off a so-called soft landing: taming inflation without dampening the recovery. He said if the Fed got it “just right,” the economy could enjoy years of growth and inflation would “eventually start to come down.”
Either way, Dimon said, investors should buckle up.
“In any event, this process will cause much consternation and very volatile markets,” he wrote.
Already, markets have seen wild swings, highlighted by the Nasdaq which recently plunged into a bear market.
But Dimon, Wall Street’s most powerful leader, urged the Fed not to overreact to what’s happening in the markets.
“The Fed shouldn’t worry about market volatility unless it affects the real economy,” he said. “A strong economy outweighs market volatility.”
In other words, do what you think is right, even if it means a bear market for US stocks.
Has Washington overdone the stimulus?
Recession fears are somewhat surprising as the US economy benefits from such a robust rebound from Covid.
Dimon hailed the “strong US economy, which we hope has Covid-19 in its rearview mirror.”
Again, the concern is rather 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 part in the strength of the recovery.
Dimon said the Fed and the government “did the right thing” by resorting to bold actions in response to the pandemic, including the central bank’s purchase of billions of dollars in bonds through a program known as the name quantitative easing, or QE.
“But also in hindsight, the drug (tax expenditures and QE) was probably too much and went on too long,” Dimon said, adding that it’s easy to second-guess complex decisions after the fact.
A Marshall Plan for energy
Dimon said that plan involves securing needed energy supplies for the next few years, while reducing emissions and tackling climate change.
The war in Ukraine, along with Covid-19, has exposed glaring weaknesses in the supply chains that underpin the global economy.
Dimon said there was no doubt that supply chains needed to be restructured, in part to ensure America’s enemies could not take advantage of them in a crisis.
“For any products or materials critical to national security (think rare earths, 5G, and semiconductors), the U.S. supply chain must either be domestic or open only to totally friendly allies,” he said. wrote Dimon.
“We cannot and should never depend on processes that can and will be used against us,” Dimon said, “especially when we are most vulnerable.”