https://reports.jpmorganchase.com/investor-relations/2020/ar-ceo-letters.htm
Jamie Dimon is the legendary CEO of banking. The only one left preceding over the worst crisis in 2008, Jamie remains firmly at the helm of JP Morgan in 2021.
Before we delve into the letter, here are 3 interesting facts.
1. Jamie is one of 3 sons of Greek immigrants and has a fraternal twin brother, Ted.
2. He is both a cancer and heart attack survivor.
3. He is one of a few bankers to reach billionaire status at US$1.7B. In 2016, when bank stocks were collapsing. He threw in US$26m buying JPM stock at around US$53 saying he could buy this all day long. (Note: JPM in 2021 is at US$151)
Now for the letter.
A global leader with a lens on the world, Jamie has deep insight into what is happening around the world. It pays well to note on his observations precisely because of his experience in the finance sector (which encompassed the entire aspect of the economy).
To avoid butchering a 66 pager of a gem. I encourage you read it in its entirety. Below are my favourite passages for your interest (on decision making, leadership, fintech, inflation and the upcoming economic boom)
On decision making
Understand when analysis is necessary and when it impedes change. While I am fanatical about detail and multi- year analysis, it’s important to be cautious about its application. Assumptions are frequently involved, and small changes in a few variables can dramatically change an outcome.
Even net present value analysis fails to capture the true value of something after a certain period of time. For instance, people commonly look at the five-year net present value of a customer acquisition, which can mask the true compounding effect of keeping that client for 20 years. And we have often seen net present value analysis fail to capture ancillary benefits (like customer happiness) that can often be more important than the analysis itself.
Sometimes a new product or an investment should simply be considered table stakes meaning there’s no need to do analysis at all. Think about banks adding the capability of opening new accounts digitally, for example, or maintaining a strong technology infrastructure and adopting new technologies, like cloud or artificial intelligence (AI). These could be life-or-death decisions for a company, so instead of focusing on net present value, the emphasis should be on getting the work done properly, efficiently and quickly.
Bureaucrats can torture people with analysis, stifling innovation, new products, testing and intuition.
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On leadership
Remain open to learning how to become a better leader.
As companies get bigger and more complex, leaders need to be more like coaches and conductors than players. If CEOs are running a smaller business, they can literally be involved in virtually everything and make most of the decisions – they often rely on traditional command-and-control tactics. This approach does not work as companies get bigger – the CEOs simply cannot be involved in every major decision. Command and constant feedback may be better than command and control. Here is where leaders would be better off providing clear direction and letting people do their job, including making mistakes along the way. Soft power – essentially trust and maturity – may become more important than hard power. Soft power creates respect among team members, with the coach offering honest assessment and support while allowing flexibility. Here the boss makes fewer but tougher decisions, such as removing people – when it must be done – and even then, it is handled respectfully. People will give to the best of their ability for leaders they respect and who they know are trying to help them succeed.
Respect and learn from your people. Managers and leaders get spread pretty thin. While they should have a wide grasp of many subjects, they could not possibly know everything their people know. Leaders should continually be learning from their people. They should go to a sales conference and ask lots of questions of their salespeople. Gather technology people in the room with branch managers and ask, “How are things working?” Taking a road trip should not be only for the purpose of showing the flag but also for learning from your employees and customers.
Have curiosity. It’s important to ask questions to try to understand varying points of view. Be willing to change your mind. Read everything. Don’t defend decisions of the past. Leaders should be happy when their people prove them wrong. Do not have a rigid mindset. And do not be complacent.
Skip hierarchy. If everything in a large organization must go up and down the hierar- chical ladder, bureaucratic arteriosclerosis along with CYA sets in, and that company’s life expectancy is substantially shortened.
It should be routine that data, memos and ideas are shared – skipping hierarchies – and aren’t vetted by all in the chain of command. This makes people more responsible for what they are doing, improves the dissemination of new information and new ideas, and speeds things up overall. In addition, it’s good to have a few mavericks who are not afraid to shake things up. The ones who challenge authority or convention often get far more done than the ones who go along to get along. Collaboration is wonderful, but it can be overdone.
Act at the speed of relevance. When leaders have plenty of time to make decisions, they should analyze all factors over and overtake the necessary time, as choices can be hard to reverse. And there are other decisions that are more like “battlefield promotions” where there’s no luxury of time, and, in fact, going slow may make things much worse. I’ve also seen people take a tremendous amount of time to make an unimportant decision, which just wastes time and slows things down.
In business, some decisions should be made carefully – for instance, putting the right people in the right job. But others, such as making pricing decisions, dealing with customer problems and handling reputational issues, must be done quickly, for these problems do not age well
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On fintech and the competitions
Fintech and Big Tech are here ... big time!
Fintech companies here and around the world are making great strides in building both digital and physical banking products and services. From loans to payment systems to investing, they have done a great job in developing easy-to-use, intuitive, fast and smart products. We have spoken about this for years, but this competition now is everywhere. Fintech’s ability to merge social media, use data smartly and integrate with other platforms rapidly (often without the disadvan- tages of being an actual bank) will help these companies win significant market share.
Importantly, Big Tech (Amazon, Apple, Facebook, Google – and, as I said, now I’d include Walmart) is here, too. Their strengths are extraordinary, with ubiquitous platforms and endless data. At a minimum, they will all embed payments systems within their ecosystems and create a marketplace of bank products and services. Some may create exclusive white label banking relationships, and it is possible some will use various banking licenses to do it directly.
Though their strengths may be substantial, Big Tech companies do have some issues to deal with that may, in fact, slow them down. Their regulatory environment, globally, is heating up, and they will have to confront major issues in the future (banks have faced similar scrutiny). Issues include data privacy and use, how taxes are paid on digital products, and antitrust and anticompetitive issues – such as favoring their own products and services over others on their platform and how they price products and access to their platforms. In addition, Big Tech will have very strong competition – not just from JPMorgan Chase in banking but also from each other. And that competition is far bigger than just banking – Big Tech companies now compete with each other in advertising, commerce, search and social.
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On inflation
... consider how surprising it is that $3.4 trillion of quantitative easing (QE) and deficit spending averaging 5% of GDP over a 10 year period after the Great Recession did not result in higher GDP growth and possibly higher inflation. As a reference point, in the mid-1970s, there was no QE – and deficit spending hit 4%, which many people thought was the main reason for the overheated economy and inflation, which, at its peak, was over 12%.
And so why did all this quantitative easing not have the effect you would have thought? QE was never effectively tried prior to the Great Recession, and it is different from fiscal spending. QE is the purchase of securities from security holders who tend to reinvest in the same or similar securities. Clearly, QE reduces interest rates, pushes up asset prices and creates some spending (through the wealth effect). QE, on the one hand, may have some inflationary effects, mostly on asset prices. But on the other hand, it also may have some disinflationary effects – lower interest rates themselves, which is an input cost for businesses, and lower income to savers – which may reduce consumption and may increase the propensity to save (e.g., we may need to set aside more money to protect retirement income). And finally, in this most recent round of QE, much of the money simply made a round trip – because of the new liquidity rules, it ended up back as deposits at the Fed, not as loans.
The fiscal deficit is, pure and simple, giving various individuals and institutions money to spend – which they will spend over time. All things being equal, this is, and always has been, inflationary. Of course, in a recessionary environment with low inflation, like after the Great Recession, this might be precisely what is needed without causing overheating or excessive inflation.
My own view: The anemic growth in the decade after the Great Recession was due to some of the factors I mention above but also due to many of the public policy failures...
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The upcoming economic boom (till 2023)
In the United States, the average consumer balance sheet is in excellent shape. The consumer’s leverage is lower than it has been in 40 years. In fact, prior to the last $1.9 trillion stimulus package, we estimate that consumers had excess savings of approximately $2 trillion. Corporations also have an extraordinary amount of cash on their balance sheet estimated to be approximately $3 trillion. And the financial system and investors have already adopted more conservative leverage requirements due to regulations – so they have very little need to deleverage. The QE in this go-around will have created more than $3 trillion in deposits at U.S. banks, and, unlike the QE after the Great Recession, a portion of this can be lent out.
I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom. This boom could easily run into 2023 because all the spending could extend well into 2023. The permanent effect of this boom will be fully known only when we see the quality, effectiveness and sustainability of the infrastructure and other government investments. I hope there is extraordinary discipline on how all of this money is spent. Spent wisely, it will create more economic opportunity for everyone.
While equity valuations are quite high (by almost all measures, except against interest rates), historically, a multi-year booming economy could justify their current price. Equity markets look ahead, and they may very well be pricing in not only a booming economy but also the technical factor that lots of the excess liquidity will find its way into stocks. Clearly, there is some froth and speculation in parts of the market, which no one should find surprising. As Captain Louis Renault said in Casablanca, “I’m shocked, shocked to find that gambling is going on in here!”
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As Mario Gabelli said - Worth a read. And deserves a re-read.
Till next time. Invest well
Joel Siew
