Daniel Pinto, Co-Chairman and Chief Operating Officer of JPMorgan Chase & Co., speaks at the Institute of International Finance (IIF) Annual Members Meeting in Washington, DC on October 18, 2019.
Al-Draco | Bloomberg | Getty Images
JPMorgan Chase President Daniel Pinto has vivid memories of what life is like when a country loses control of inflation.
As a child growing up in Argentina, Pinto, 59, said inflation was often so high that the prices of food and other goods skyrocketed on an hourly basis. Workers could lose 20% of their wages if they did not rush to convert their wages into US dollars, he said.
“Supermarkets had these armies of people using machines to relabel products, sometimes 10 to 15 times a day,” Pinto said. “At the end of the day, they had to remove all the tags and start again the next day.”
The experiences of Pinto, a Wall Street veteran who runs the the largest investment bank in the world by turnover, sheds light on his point of view at a key moment for the markets and the economy.
After releasing trillions of dollars to support households and businesses in 2020, the Federal Reserve is grappling with inflation at its highest level in four decades by raising rates and withdrawing its debt-buying programs. The moves have cratered stocks and bonds this year and reverberated around the world as a rising dollar complicates other nations’ own battles with inflation.
Living with widespread inflation was “very, very stressful” and is especially difficult for low-income families, Pinto said in a recent interview from JPMorgan’s New York headquarters. Price increases exceeded on average 300% per year in Argentina from 1975 to 1991.
Aggressive Fed
While there’s a growing chorus of voices saying the Federal Reserve should slow or halt its rate hikes amid some signs of price moderation, Pinto is not in that camp.
“That’s why when people say, ‘The Fed is being too hawkish,’ I disagree,” said Pinto, who became JPMorgan’s sole chairman and chief operating officer earlier this year. , consolidating his status as CEO. Jamie Dimonthe best lieutenant and potential successor of.
“I think putting inflation back in a box is very important,” he said. “If that causes a slightly deeper recession for a while, that’s the price we have to pay.”
The Fed cannot allow inflation to take root in the economy, the executive says. A premature return to looser monetary policy risks repeating the mistakes of the 1970s and 1980s, he said.
That’s why he thinks it’s more likely that the Fed will err on the side of aggressiveness on rates. The Fed funds rate will probably peak around 5%; that, along with rising unemployment, will likely dampen inflation, Pinto said. The rate is currently in a range of 3% to 3.25%.
Markets haven’t bottomed out
Like a chain of other frames said recently, including Dimon and Goldman Sachs CEO Dhungry for solomon, the United States is facing a recession due to the Fed’s difficult situation, Pinto said. The only question is how severe the downturn will be. This, of course, is reflected in the markets that Pinto monitors daily.
“We are dealing with a market that is pricing in the likelihood of a recession and its depth,” Pinto said.
This year’s economic situation is unlike any in recent history; In addition to soaring prices for goods and services, corporate profits have been relatively resistantconfusing investors looking for signs of a slowdown.
But earnings estimates haven’t fallen enough to reflect what’s to come, Pinto said, and that could mean the market is losing another leg. The S&P500 fell 21% this year as of Friday.
“I don’t think we’ve seen the bottom of the market yet,” Pinto said. “When you think about corporate earnings for next year, expectations may still be too high; the multiples of some stock markets, including the S&P, are probably a bit high.“
‘Big Black Swan’
Still, despite higher volatility than he expects to hold, Pinto said markets were performing “better than I expected.” With the notable exception of the collapse of UK gilts which led to resignation of that country’s prime minister last week, the deals were ordered, he said.
That could change if the war in Ukraine takes a perilous new turn, or if tensions with China over Taiwan spill over onto the world stage, upending progress in supply chains, among other potential pitfalls. Markets have become more fragile in some ways because post-crisis reforms in 2008 forced banks to hold more trading-related capital, making markets more likely to crash during periods of high volatility.
“Geopolitics is the big black swan on the horizon that hopefully won’t play out,” Pinto said.
Even after central banks get inflation under control, interest rates are likely to be higher in the future than they have been for the past decade and a half, he said. . Low or even negative rates around the world have been the defining characteristic of the previous era.
This low rate regime penalized savers and benefited riskier borrowers and companies that could continue to exploit the debt markets. It also led to a flurry of investment in private companies, including fintech companies taking on JPMorgan and its peers, and inflated the stock of tech companies as investors paid for growth.
“Real rates are expected to be higher over the next 20 years than they have been over the past 20 years,” Pinto said. “Nothing crazy, but higher, and it affects a lot of things like valuations of growing companies.”
Crypto: “a little out of place”
The post-financial crisis era has also given rise to new forms of digital currency: cryptocurrencies including bitcoin. While JPMorgan and its rivals, including Morgan Stanley and others have enabled wealth management clients to gain exposure to cryptothere appears to be little progress recently in terms of institutional adoption, according to Pinto.
“The reality is that the current form of crypto has become a small asset class that’s kind of irrelevant in the scheme of things,” he said. “But the technology, the concepts, something is probably going to happen there, but not in its current form.”
As for the broader economy, there are reasons for optimism amid the gloom.
Households and businesses have strong balance sheets, which should cushion the pain of a slowdown. There is much less leverage in the regulated banking system than in 2008, and higher mortgage standards should translate into a less penalizing default cycle this time around.
“Things that triggered problems in the past are in a much better position now,” Pinto said. “That said, you hope nothing new comes to light.”