The US needs to get its fiscal rather than monetary policy right if it has to fix the economy‘s problems, feels James Dimon, Chairman & CEO, JPMorgan Chase.
The US needs to get its fiscal rather than monetary policy right if it has to fix the economy's problems, feels James Dimon, Chairman & CEO, JPMorgan Chase. In an interview with CNBC-TV18, Dimon said the underlying strength of the US economy was intact and that the housing market was seeing a turnaround. But he cautioned that a credible fiscal policy was urgent needed to build on these strengths. Dimon's big worry is that a lack of agreement over the 'fiscal cliff' could push the US economy into a recession.
Fiscal cliff is being referred to as the situation when certain tax cuts will be withdrawn and simultaneously there will be a cut in government spending as well from the start of next calendar. The double whammy comes at a time when the US economy is still struggling with the after effects of the global financial crisis of 2008.
Dimon said already many businesses in the US were holding back their investments in anticipation of the fiscal cliff. He said the markets may prefer Mitt Romney as the next US President, over Barack Obama. Dimon said Europe was making slow progress, and that European markets had done better than expected.
Contrary to the widely-held view, Dimon expects the macro environment in China to improve, and not worsen.
Here is the edited transcript of the interview on CNBC-TV18.
Q: What is your view on the US economy now?
A: I am going to put two pieces for you. The underlying strength of the economy is actually pretty good. Corporations, middle market sized companies, consumers are in better shape. Housing is turning. It is not as strong as anybody would want. It is possible the election changes that, but I would also tell you it is possible the economy could do very well or very badly regardless of anything.
I think what is really, really important is good policy. We need good policy in United States. Think of a fiscal deal, Simpson-Bowles type deal, I think that will make all the difference and we would urge anyone who becomes president to try to get something like that done quickly.
Q: Who would the markets like Romney or Obama?
A: I do not really know. My guess is that the people who vote for Obama would say Obama, the people who vote for Romney would say Romney.
Q: What would the markets be pleased with?
A: Businessmen mildly favour Mitt Romney, but that does not mean that necessarily it will be better for the markets.Long time ago, they tried to separate the economy. It is far bigger than politics. It’s a machine in a oil tanker, its hard to move, but for better force.
Q: At JP Morgan are you worried about the fiscal cliff situation and which way it could turn in the month of December? Does it worry you?
A: Yes, there are two parts to the fiscal cliff. One is it would actually happen at the end of December and obviously you can feel the effects of that before the end of December. The second one is the real fiscal cliff. Does the United States of America show that it has the will and the capability to fix its fiscal problems? I think it can easily be done as you show from things like the Simpson-Bowles report.
I am not worried as much for JP Morgan as I am for American business and more than that the jobs and the average American. A fiscal cliff and another recession will be terrible for America. We should do everything that we can to avert something like that. It is not about JP Morgan, it is about what is right for the country.
Q: You do believe that White House and Congress will come together, even if it is at the last moment to do something which is fiscally acceptable?
A: I hope so. You can make a coherent argument that the Congress has done that under pressure before and they have. You can make a coherent argument, its going to be very hard this time. I don’t know. I would just urge them to come together and do something about it. We wont know the outcome exactly of the fiscal cliff, but I can tell you not knowing the outcome is same to saying I am going to take a big risk. We should not be taking a big risk this time.
Q: If it were not to come about, this kind of an acceptable solution, do you fear that we could have a recession next year again in the US? Chances are very high of that?
A: Yes. I think they are pretty high if we do not do something to fix the fiscal cliff. I am going to rely more on economist, he will tell you that it alone will take 3 percent or so out of the GDP. That is a recession because we have only been growing at 2 percent or so. The problem is that it is kind of a static analysis. Peoples' reaction could actually make it worse and I would be a little worried about that. I wouldn't take a chance at that. I think its not rationale to say, well it might be worse, but we will take the chance anyway. Why would anyone take that chance?
Q: How does that feel now, the business environment? Is it heading towards a bit of a freeze now pending the outcome of the fiscal cliff or do you think it is on the mend and it is accelerating?
A: I think other than the fiscal cliff it was on the mend and it was getting stronger. It seems that it might have been and that is more anecdotal that some people are pulling back a little bit in anticipation of a potential fiscal cliff. It is hard to see real data showing that, but anecdotally I have spoken to CEOs who say, no absolutely we are making decisions to protect ourselves in the event of a fiscal cliff and those were like investment decisions or hiring decisions.
Q: This earnings season has not panned out as a great one in the US so far. What you were alluding to in some cases are beginning to see a little bit of hesitation. Is that showing up on earnings or do you think it is sort of tipping over after a couple of good quarters?
A: I do not know about tipping over. I actually have not added up all the earnings report, so I do not know. I know we had a record quarter, so I am proud. Though I remind everybody that financials in the quarter are based upon decisions you make over years, not just because what you did in that quarter. I do know some companies were struggling with the top-line growth or if you are an exporter, the exports are down a little bit to parts of Asia and Europe. But, so far I think the earnings results have been okay.
Q: On the day of your earnings you made a statement that, housing has turned around or is turning around. You are sure about that, that you have a trough in US housing?
A: Yes. We can’t be positive about anything, but all of the things that talk about the future of housing, are flashing green. All time affordability, we are adding 3 million Americans a year. Prices are actually up from the bottom, even in the worse markets, if you go to Las Vegas, Miami and parts of California they are actually up 5 or 10% from the bottom. The shallow inventory, the delinquent loans, the foreclosed loans are coming down. The amount of distress sales is coming down. The homes available for supply, is at six months supply. So, all those signs are flashing positive. To me as long as we add jobs, housing will continue to get better. If we have a recession obviously, housing won’t get better.
Q: If you had to stick your neck out and make a guess, does it feel like a three-four quarter kind of a bounce or recovery which might fade, it is still too fragile or can you say that with some degree of confidence you have started on an uptrend?
A: It is hard to say that. I think I can say with confidence that the underpinnings of the economy are actually pretty good. I mentioned that companies have a lot of cash and liquidity. Individual debt service ratios are better. Home prices are going up. The stock markets are up. All of those signs are pretty good.
You have the obvious kind of potential risk. Europe can get worse or some geopolitical situation may be worse. I think if we do the right things America will get strong quickly. That’s what I believe. I do not know if that is true, but I do believe in that and the right things are very simple, Simpson-Bowles.
Do something that shows that we have the will to fix it, that we have rationally fixed the long-term fiscal issue we have without causing a problem in the short run, that we have got a more competitive tax system because I think America’s taxes are not competitive right now and it is confusing to consumers and businesses. I think if we do those things and we are consistent, America will get better and will get better quicker.
Q: Can you say the same about Europe that it has troughed out and you might have put the worst behind you?
A: Europe is far more complicated because you have seen the leaders, they are making a lot of progress. There is Outright Monetary Transaction (OMT) which says make sovereign debt good as long as countries meet the conditions. That is an important statement.
Having a banking union is an important statement to make sure that no country has run out of its banks. Obviously, they have to fix the long-term issue about the master trade agreement between the nations about how you can run deficits etc. and they are making progress on all those fronts, except there are 17 nations. It will not happen all at once, so it is going to be a little bit of a roller coaster as they go through all these things.
What I see is that the head of the European Central Bank to the head of the governments want to fix those things. They kind of know what needs to be done. They need to get it through their parliaments and legislators, but they seemed to be devoted to it. I see progress. There is always a chance that something turns south, yes, but I think they will hopefully get their way through all that.
Q: How much of this confidence that you are talking about seems to be coming back because of liquidity injection by the Federal Reserve?
A: I think QE 1, 2 and 3 had added about USD 2 trillion to what the Federal Reserve owns of treasury or kind of increase the money supply we measure. The total valuable American financial assets is USD 70 trillion. But it is not this huge unbelievable number. I think the Fed has done an unbelievable job dealing with a complex situation.
I now think it is not monetary policy, but it is fiscal policy. We do not need monetary policy, we need better fiscal policy. Obviously, what they have done is probably stabilizing half the situation. Inspite of that corporate America, middle market America, consumers are in far better shape. Companies have paid down their debt and obviously helped by lower rates. All those things have put the actual fundamentals in much better shape than before.
Q: You spoke about the signals from corporate America. What about the signals from the investing community? From your vantage point of both fixed income and equity investors, do you get the feeling that people are now beginning to say that they have hidden in fixed income long enough and it is time to take a little bit more risk?
A: In the investing world, everyone has got their own opinion. So, some would say yes and some would say no. Equity markets have picked up a little bit, rates are lower. Everyday you are going to read a little bit more and more about fixed income rates lowering. Some very famous people have come out and said people are better off buying stocks than bonds. I don’t need to repeat all that, but I do think there has been a little bit of a change in sentiment.
Q: You can sense that?
A: Yes, a little bit.
Q: We have been hearing some scary forecast from the IMF about global growth. You are in this part of the world right now. Do you sense that a big slowdown is happening in big economies like China which could lead to some problems for global growth as well later in 2013?
A: Forecasting the future is a very difficult thing and it is very important to understand we run this company not knowing the future, but we try to invest in people, systems, banks, clients etc. and then try and manage the risks around that which are large. China in my opinion is going to meet its own objectives. They are very smart.
They have the financial wherewithal. In fact, the very recent numbers show it is getting better not worse. Other parts of Asia had slowed down. You know India better than I do. It has had a pretty good run until 2010 or so and slowed down. Of course, you are growing at 4-5 percent, the rest of the world would love to grow at 4-5 percent, but in India you wanted to see more like 8 percent growth.
Europe has done better than people expect considering the problems or I would say some mild recession, maybe it has gone a little bit worse. The United States have been very steady and hopefully, it will stay steady. I think it is important for us that the United States stays steady and becomes the engine this time to help the rest of the world grow a little bit faster.
Q: Are you optimistic about 2013 or do you think it might be bumpy after the kind of good performance you have seen in 2011-2012 from a US market point of view?
A: I think it might surprise you on the upside. As a business person we prepare for the good, the bad, the ugly and we are going to be there for our clients regardless. All things being equal I think people might be surprised by the upside. But I just wanted to caution. The upside is based upon the United States making good policy decisions. I do not know what is going to happen if we fail through the whole course of 2013 to do something to deal with our issues. We need to deal with our issues, and I think us dealing with our issues in America it would be good for the rest of the world.
Q: When you say issues, what specifically do you have in mind?
A: The fiscal issues we have. We have fiscal issues. We need reform of taxes. We need to bend the fiscal cliff to a curve to reduce our deficits.We can’t run this kind of deficits forever both in the United States and in our trade deficit. We need to show that we can control that little bit. We need some sort of security reform, tax reform and some reform around medical entitlements.
Q: This kind of fiscal management, would it not strain the kind of nascent growth that you are beginning to see?
A: No. That’s the whole point. It could be done without causing any issue in the short run, like the next year or two. It is actually credible and believable that it would reduce the deficit after that. Fiscal management would be hugely positive for markets, business and consumer sentiment which is like the secret source of growth. We would be on a good stead and that would have shown the world we could be rational and thoughtful and our businesses would get better.
Q: From what you have heard of the two candidates, whose plan seems more credible to you in terms of getting to the fiscal objectives that you are speaking about?
A: I am not getting involved in politics like that. Election is twelve days away. The American people decide. JP Morgan is going to continue to serve our clients.
Q: What is your perception on how risk prone the environment is right now? There has been a lot said about the last hit that JP Morgan had to take because of an erroneous decision. How risky is the environment in which you deal today?
A: Well the problem is self inflicted. It has got nothing to with riskiness through environment. We have mostly got that fixed and analysts say that JP Morgan is going for record year, this year.
We are a big company. We are going to make mistakes every now and then, hopefully not quite that big. That was big and embarrassing and stupid. The issue with the economy and global economy is, there is always a risk out there which is not self inflicted. There are always black swans. Geopolitics is always a black swan. You have unanticipated things or shifts in the economy. You are just not going to be able to figure it out, it is beyond human understanding. Then there are risks which we create, like our fiscal cliff. We don’t need to be adding those risks to the risks we already have. So, that’s why I would separate the two.
Q: You are a relatively frequent visitor to India. What is your take on what this country is going through today? We have slowed down, but as you said we are growing faster than many other countries. What kind of problems do you see out here?
A: It is funny. Wherever you travel around the world, citizens of that country are very soft critical and they think things are going towards a disaster and it is going to get worst. Here is my view of India and it is a longer view. When I first came here for JP Morgan we covered depending how you measure 20 or 30 companies and we had very little capital here and not that much credit exposure.
Today, we cover 120 companies as research that we sell and educate the world. We have equity conferences about some of the best companies you have here. We have USD 14 billion of credit exposure here. We are helping Indian companies here. We are helping subsidiaries of multi-nationals come here. If you look at the growth of customers, clients and business can grow like this, economy will always be a little bit like that.
We are going to look through the short-term slowdown and growth. I still believe that the growth of our client base, the growth of Indian corporations, multi-nationals who want to do business here is going to grow pretty rapidly over the next 15 years.