Daniel Pinto, co-president and chief operating officer of JPMorgan Chase & Co., speaks at the Institute of International Finance (IIF) Annual Members Meeting in Washington, DC, October 18, 2019.
Al Drago | 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 prices for food and other goods rose every hour. Workers could lose 20% of their paychecks if they don’t rush to convert their paychecks to US dollars, he said.
“Supermarkets had these armies of people using machines to relabel products, sometimes 10 to 15 times a day,” Pinto said. “Eventually they had to remove all labels and start over the next day.”
The experiences of Pinto, a Wall Street veteran who leads the world’s largest investment bank by earnings, gives his opinion at a critical time for markets and the economy.
After the Federal Reserve released trillions of dollars in support for households and businesses in 2020, the Federal Reserve is grappling with four-decade inflation by raising interest rates and reversing its debt-buying programs. The moves this year have seen stocks and bonds ripple around the world as a rising dollar complicates other countries’ own struggles with inflation.
Living with ubiquitous inflation has been “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 in Argentina averaged more than 300% per year from 1975 to 1991.
Aggressive Fed
While there is 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 I disagree when people say, ‘the Fed is too aggressive,'” said Pinto, who became JPMorgan’s sole president and chief operating officer earlier this year, extending his status as a top lieutenant and potential CEO successor. Jamie Dimon stiffened.
“I think it’s very important to put inflation back into a box,” he said. “If it causes a slightly deeper recession for a period of time, that’s the price we have to pay.”
The Fed cannot allow inflation to become entrenched in the economy, according to the director. A premature return to a more accommodative monetary policy risks repeating the mistakes of the 1970s and 1980s, he said.
Therefore, he thinks the Fed is more likely to make the mistake of being aggressive with rates. The Fed Funds rate is likely to peak around 5%; that, along with a rise in unemployment, is likely to curb inflation, Pinto said. The rate is currently in a range of 3% to 3.25%.
Markets haven’t bottomed out yet
As a host of other executives have said recently, including Dimon and Goldman Sachs CEO David Solomon, the US is facing a recession due to the Fed’s predicament, Pinto said. The only question is how severe the delay will be. This is of course reflected in the markets that Pinto looks at on a daily basis.
“We’re dealing with a market that is estimating the likelihood of a recession and how deep it will be,” Pinto said.
The economic situation this year was unlike any other in recent history; aside from sharp increases in goods and services, corporate earnings have been relatively resilient, confusing investors looking for signs of a slowdown.
But according to Pinto, earnings estimates haven’t fallen far enough to reflect what’s to come, and that could mean the market is moving one step further. The S&P 500 is down 21% from Friday this year.
“I don’t think we’ve seen the bottom of the market yet,” Pinto said. “If you think about corporate earnings going into next year, expectations may still be too high; multiples in some stock markets, including the S&P, are probably a bit high.”
‘Great black swan’
Despite the higher volatility he expects to continue, Pinto said the markets have “functioned better than I expected.” With the notable exception of the collapse of UK government bonds known as “gilts”, which led to the resignation of that country’s prime minister last week, markets were orderly, he said.
That could change if the war in Ukraine takes a dangerous new turn, or if tensions with China over Taiwan spill over onto the global stage, disrupting progress in supply chains, among other potential pitfalls. Markets have become more vulnerable in some respects as the post-2008 crisis reforms forced banks to hold on to more capital in trading, making markets more likely to seize during periods of high volatility.
“Geopolitics is the big black swan on the horizon that hopefully won’t come true,” Pinto said.
Even after central banks get inflation under control, it is likely that future interest rates will be higher than they have been in the past year and a half, he said. Low or even negative rates around the world were the defining feature of the previous era.
That low-interest regime has punished savers and benefited borrowers and riskier companies that were able to continue tapping into debt markets. It also sparked a wave of investment in private companies, including the fintech companies that JPMorgan and his colleagues acquired, and pushed up the shares of tech companies as investors paid for growth.
“Real interest rates should be higher in the next 20 years than they have been in the past 20 years,” Pinto said. “Nothing crazy, but higher, and that affects a lot of things, like the valuations of growth companies.”
Crypto: ‘Slightly irrelevant’
The post-financial crisis era also gave rise to new forms of digital money: cryptocurrencies including bitcoin. While JPMorgan and rivals, including Morgan Stanley and others, have allowed asset managers to gain exposure to crypto, there seems to have been little progress with its institutional adoption of late, according to Pinto.
“The reality is that the current form of crypto has become a small asset class that is a bit irrelevant in the scheme of things,” he said. “But the technology, the concepts, something is probably going to happen there; just not in its current form.”
As for the economy in general, there are reasons for optimism amid the gloom.
Households and businesses have strong balance sheets, which should ease the pain of a downturn. There is much less leverage lurking in the regulated banking system than in 2008 and higher mortgage standards should result in a less punishing default cycle this time around.
“Things that caused problems in the past are now in a much better position,” Pinto said. “That said, you hope nothing new pops up.”