The annual letter to shareholders from JPMorgan Chase & Co. JPM, -2.49% CEO Jamie Dimon isn’t quite as hotly anticipated as the one penned by Berkshire Hathaway boss Warren Buffett, but it’s pretty close. And at 46 pages of commentary on everything from the bank’s performance to U.S. government policy, the letter is a sort of Rorschach test: It can be viewed as the common-sense observations of a titan of business, a self-indulgent ego trip or something in between.
In any event, it’s likely to lose a lot of readers before the halfway mark, so MarketWatch thought it would be helpful to offer some of the most interesting nuggets. (Check out our early-morning take, and read the full letter on JPMorgan’s website.)
On deploying cash:
We much prefer to use our capital to grow than to buy back stock. Buying back stock should only be considered when we either cannot invest (sometimes that’s a function of regulatory policies) or when we are generating excess, unusable capital. We currently have excess capital, but due to recent tax reform and a more constructive regulatory environment, we hope, in the future, to use more of our excess capital to grow our businesses, expand into new markets and support our employees.
On catering to the high-end — and the not-so-high-end — client:
In the high-net-worth business ($3 million to $10 million) and the Chase affluent business ($500,000 to $5 million), our market shares are only 1% and 4%, respectively. We have no doubt that we can grow by adding bankers and locations, particularly because we have some exciting new products coming soon. There is no reason we can’t more than double our share over the next 10 years.
We are also adding new products, like index funds and exchange-traded funds (ETF), that we believe will help drive growth.
On privacy, don’t say he didn’t warn you:
We spend an enormous amount of resources to protect all of our clients and customers from fraud, cybersecurity risk and invasion of their privacy. These capabilities are extraordinary, and we will continue to relentlessly build them. As part of this, we have consistently warned our customers about privacy issues, which will become increasingly critical for all industries as consumers realize the severity of the problem. ...
We cannot do enough as a country when it comes to cybersecurity.
I cannot overemphasize the importance of cybersecurity in America. This is a critical issue, not just for financial companies but also for utilities, technology companies, electrical grids and others. It is an arms race, and we need to do whatever we can to protect the United States of America.
On risk:
When I hear people talk about banks taking risks, it often sounds as if we are taking big bets like you would at a casino or a racetrack. This is the complete opposite of reality.
On geopolitical shifts:
We will be prepared for Brexit.
So far, it has turned out pretty much like we expected: It’s complex and hard to figure out, and the long-term impact to the United Kingdom is still uncertain. Last year, we spoke about whether Brexit would cause the European Union to unravel or pull together — and it appears, particularly with the new leadership in France and the steady hand in Germany, that the countries might pull together. As for JPMorgan Chase, fortunately, we have the resources to be prepared for a hard Brexit, as we must be. It essentially means moving 300 [or] 400 jobs around Europe in the short term and modifying some of our legal entities to be able to conduct business the day after Brexit.
On the return of volatility:
It is not an unreasonable possibility that inflation could go higher than people might expect. As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment. Remember that former Chairman of the Federal Reserve Paul Volcker increased the discount rate by 100 basis points on a Saturday night back in 1979 in response to a serious double-digit inflation problem. And when markets opened the next business day, the Fed funds rate went up by over 200 basis points.
And again:
There is a risk that volatile and declining markets can lead to market panic.
Financial markets have a life of their own and are sometimes barely connected to the real economy (most people don’t pay much attention to the financial markets, nor do the markets affect them very much). Volatile markets and/or declining markets generally have been a reaction to the economic environment. Most of the major downturns in the market since the Great Depression reflect negative future expectations due to a potential or real recession. In almost all of these cases, stock markets fell, credit losses increased and credit spreads rose, among other disruptions. The biggest negative effect of volatile markets is that it can create market panic, which could start to slow the growth of the real economy. The years 1929 and 2009 are the only real examples in the United States in the past 100 years when panic in the markets caused large reductions in investments and hiring. I wouldn’t give this scenario very high odds — in fact, I would give it low odds. Most people think of those events as one-in-a-thousand-year floods. But because the experience of 2009 is so recent, there is always a chance that people may overreact.
On efficiency:
I was recently at a senior leadership offsite meeting talking about bureaucracy. We heard bureaucracy described as “a necessary outcome of complex businesses operating in complex international and regulatory environments.” This is hogwash. Bureaucracy is a disease. Bureaucracy drives out good people, slows down decision making, kills innovation and is often the petri dish of bad politics. Large organizations, in fact all organizations, should be thought of as always slowing down and getting more bureaucratic. Therefore, leaders must continually drive for speed and accuracy to eliminate waste and kill bureaucracy. When you get in great shape, you don’t stop exercising.
And on meetings:
Meetings. Internal meetings can be a giant waste of time and money. I am a vocal proponent of having fewer of them.
On policy making:
We should find it rather easy to recognize that bad thinking often leads to bad policymaking. Let me list a few of the culprits:
Binary arguments. When people argue as if there are binary solutions, the argument is almost always wrong. When people say you should not do something because it is like going down a “slippery slope,” it generally is not a good argument. In the modern world, there are reasons to calibrate various parts of policy instead of just denying the argument altogether.
“They complain too much” arguments. When a point has been made and someone calls it a complaint, the point is diminished right away. When someone complains about something, a better response is to think about where or how the person might be right or partially right.
Not listening to one another. I tell my liberal friends to read columnists like Arthur Brooks and George Will. And I tell my conservative friends to read writers like Tom Friedman.
On fiscal challenges:
The real problem with our deficit is the uncontrolled growth of our entitlement programs.
We cannot fix problems if we don’t acknowledge them. The extraordinary growth of Medicare, Medicaid and Social Security is jeopardizing our fiscal situation. We have to attack these issues. I am not going to spend a lot of time talking about Social Security. I think fixing it is within our grasp — for example, by changing the qualification age and means testing, among other things. When President Franklin Delano Roosevelt astutely put Social Security in place in 1935, American citizens would work and pay into Social Security until they were 65 years old. At that time, when someone retired at age 65, the average life span after retirement was 13 years. Today, the average person retires at age 62, and the average life span after retiring is just under 25 years.