An Iconic Report
My comments on JP Morgan’s Annual Report, Jamie Dimon
One of the most powerful investment bankers in the West, Jamie Dimon of JP Morgan released a 46-page annual report highlighting concerns which need to be weighed heavily. Here are some themes which have been discussed in previous Camp Chatter pieces. This year Dimon used a large chunk of his 46-page letter to share his thoughts on regulation, financial growth, government and public policy, saying it’s hard to look at the last 20 years in America “and not think that it has been getting increasingly worse.” The overall report shows that being an international bank with over 100 satellite offices which are almost like embassies for business increase scope, relationships and potential business. Investments banks are required to be global, they are a desperately needed function to the West. Make no mistake the traders, and bankers are the first line of battle that insures a countries economic stability and wellbeing.
2017 was another record year for JP Morgan as they delivered record earnings per share. The bank earned $24.4 billion in net income on revenue of $103.6 billion. Fantastic growth making them the second largest investment bank to Goldman Sachs and just nudging past the French bank Societie Generale. What is interesting though is that in the last five years, they have bought back nearly $40 billion in stock. This is a theme in the market that I have pointed out in the Camp Chatter section of the site. This may not be the case, but often executives get remunerated for achieving stock price milestones. Even if this is not the case in all the companies taking this approach no other solution was going to achieve as profitable a result.
“In prior years, I explained why buying back our stock at tangible book value per share was a no-brainer. While we prefer buying back our stock at tangible book value, we think it makes sense to do so even at or above two times tangible book value.”
In other words, the past five years provided a cycle in which it was more profitable to buy back stock off the market then to grow the business organically. The capital was better used to promote the stock price then allocated towards the core business of investment banking. To be fair not all the stock price was due to buyback as the acquisitions of Bear Stearns and Washington Mutual were completed in 2017. Dimon defends his approach but does acknowledge it is better to use money to grow business:
“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… 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.”
The troubling consideration is if companies borrowed capital at essentially free rates to turn around and buyback stock: are they swapping equity for debt? This leads to more questions and is an indicator of finance and not the economy. I am not challenging all companies, but it is important to keep that critical possibility in mind. It appears this is advice JP Morgan shared with their clients, and competitors. The list of companies involved in buybacks is vast and seen the clearest in technology: Alphabet, Visa, Goldman Sachs, Apple, Cisco, Boeing and Merk to name a few. Buy back your stock, push the price in the market and tell people to keep buying and borrowing money for things they do not need. This is troubling because it points to an increase in the stock market and not necessarily to the overall health of the economy, domestically or globally. This is troubling because it is not just in banking. The culture of the West, if you can call it culture is consumerism. It is a vapid, soul destroying belief shoved into the people from school to media, advertising and every outlet. People are focussed too much on the short term, on quarterly objectives. We are becoming so near sighted and hyper individualistic and self interested. This is reflected by the attack on nationalism, family and core values which built the West. It reflects a shift in society to what is smugly called ‘progressive’. It is a Marxist unified belief that we are all the same and it is being pushed in the media despite glaring obvious data to the contrary. Media is a problem and it treats information and news as a commodity that is merely consumed. If it is not salacious news for ratings, the only other function seems to be for propaganda and indoctrination. It is so divisive in its approach that it is hard to find an actual news story that is not pushing an agenda. It is pushing people into a passive state. People are fed news stories on top of new stories, saturating the public. These stories reflect narratives, and personal stories which often contradict fact. They are created to stir emotion and negate logic. Most people cannot even remember news from a couple months back. Everything is about here and now, and how does it make you feel. This is seen in investing, too. Today, the general population has no active participation in the market, and if any at all would be passive through an individually owned fund or pension fund. There is a need for individuals to take responsibility for their financial success. There are vast opportunities around the world that people who have curiosity and fortitude can think outside passive thought and wrestle markets that are largely untapped. Take for example the junior mining sector that is poised for a growth cycle. People who enjoy reading, research, who are driven to shape their own future should take some passive investments off the table and shift them to new ideas that are, not in mainstream news. The stock market reflects a wildly wealthy minutia of the population, right now. The amount of data and information on markets, the increasing use of algorithms and model trading has left most people passive and too tired to even want to think critically. Dimon points out the immediacy of media and the demands of short term thinking. In our hurry to get good news, we often are too demanding and many unaware of the business cycle that is required to hit milestones and targets.
“Do not confuse financial success with profits in a quarter or even in a year. All businesses have a different customer and investment life cycle, which can be anywhere from one year to 30 years… Generally, anything our business does to grow will cost money in the short term (whether it’s opening branches or conducting research and development (R&D) or launching products), but it does not mean that it is not the right financial decision.”
Dimon goes on to encourage people to consider each company in each market specifically. It is after all at the core of investment banking. A mines life cycle from exploration to discovery, and from discovery to feasibility and then to working mine is quite long. If you were focused on constant quarterly results you would abandon the project early. One must have a grand design and big picture outlook for spectacular results. Technology has not done us any favors in this regard, as there have been incredible discoveries and growth that have made the publics expectations unrealistic within the core financial markets. People need and want to hear good news at least every quarter. The attention span becoming narrow. Investment banks and advisors understand each moving part of a company to see if there is opportunity even during painful periods. Sometimes, a company could be losing money on its way to bankruptcy or on its way to a very high return on invested capital. The difference in this situation often come down to diligent management teams working a long-term solution and not fixated on short term goals. Sometimes it is necessary to hunker down and stick to the long-term plan dealing with the short-term obstacles for the future growth. This can be said across the board, but I believe Dimon is suggesting that there are capable hands working on providing best long-term solutions. This is important because we are seeing a great deal of volatility in the market. The reasons are vast due to geopolitical concerns; domestic politics; regulation or lack of oversight; flaws in algorithms/computer trading, the list goes on. This reminds me of the wonderful movie Margin Call when Jeremy Irons character meets the team that has crunched the default risk and he stands at the head of the boardroom table and explains how ‘the music is about to stop. ( https://www.youtube.com/watch?v=UOYi4NzxlhE) I don’t hear any music.’ It is time to move to the next thing. It is time to look at longer term considerations. Finance is about the correct application of money allocation. These companies and banks have money but are having a hard time allocating it. Looking at long term infrastructure growth like China’s One Belt One Road Initiative, the global reliance on gold and the need for cobalt, lithium and other minerals and elements is a great place to consider. There is a desperate need for these resources now and in the future. There is a current acknowledgement of a large copper crunch coming, as well.
“We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate — reacting to the markets, not guiding the markets. A simple scenario under which this could happen is if inflation and wages grow more than people expect. I believe that many people underestimate the possibility of higher inflation and wages, which means they might be underestimating the chance that the Federal Reserve may have to raise rates faster than we all think.”
Monetary policy will no doubt effect the next few years, but to what extent it is tough to know. Market making is dramatically smaller than in the past. We see this in Canada, particularly in the junior mining sector. A great deal of effort and regulation has gone into shifting people from looking at individual stocks and encouraging them into managed product. Many firms piling on regulation, paperwork and other red tape to penalize the broker who tries to grow a business with stock recommendations. There is good result from this as Western Canada did have a wild West feel to it back in the 1980’s and 1990’s with a very loose junior market. Providing some safety to that speculative market did help consumers that often where gambling, and a trading platform that had a bad image. What has been lost is the key financing arm of our main wealth in Canada: resources; particularly mining. What has happened now though is that we have gone too far the other way. The Global model is chosen. Managed money, ETF’s and segregated funds. Roughly, $9 trillion of assets, which represents about 30% of total mutual fund long-term assets, is managed passively in index funds or ETFs (both of which are very easy to get out of). Some of these funds provide far more liquidity to the customer than the underlying assets in the fund, and it is reasonable to worry about what would happen if these funds went into large liquidation. The market has vast and massive empty open spaces. These gaps are nearly forgotten about, because people just buy a fund. There are great junior mining opportunities that hold no more risk then many ‘tech’ plays but are neglected because they are not sexy enough. The entrepreneurship that created incredible growth in Oil and Gas and Mining in Canada has been swallowed by a Global model. A model where risk is spread far and around. Risk is shared so far and wide that no one can be responsible. Everyone learned that ‘if you are too big to fail and fail then you really did not fail.’ There is no repercussion for that model. You and I will bail them out. There is a need to fill junior growth stock. There is incredible potential is this sector, but often the deal size is too small for massive funds. Many firms shifted from this model which leaves a smaller pool of money at a smaller number of financial firms. As Jamie Dimon, and Warren Buffet both attest there is a need to drive this growth sector. Being too big has many problems in the stock market. While in the past that total may have been too high, virtually every asset manager says today it is much harder to buy and sell securities, particularly the less liquid securities. Dimon touches on this problem of being too big that Buffet spoke about back in 1999: “If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” This is incredibly encouraging news because there is a sector that is cyclical, has been in a decline for years but now cresting up. There is a sector that Goldman Sachs see’s as ‘attractive’ and it requires comparatively small funding to have a major impact and that sector is mining.
“Liquidity requirements, while much higher, now have an element of rigidity built in that did not exist before. Banks will be unable to use that liquidity when they most need to do so — to make loans or intermediate markets. They have a “red line” they cannot cross (they are required to maintain hard and fast liquidity requirements). As clients demand more liquidity from their banks, the banks essentially will be unable to provide it.”
Having regulation is necessary but too stringent can be cumbersome. The above quote is a plea to politicians. It is reminding global clients that JP Morgan wants to be able to help you in tough times, where your government cannot. Remember this is not just for the US. This is a message for a global elite. We want to get things done properly, but we want to insure funds flow quickly, efficiently and effectively. As reported in many Camp Chatter pieces and individual stock reports capital funds are coming home to Canada specifically for mining projects.
There is another dramatic and important comment from Dimon that might stir up some feelings from people: “The continuous politicization of complex policy is an issue. No one can believe that very detailed and complex global liquidity or capital requirements should be set by politicians.” It reminds me of the famous Rothschild quote: Permit me to issue and control the money of a nation, and I care not who makes its laws! This is a message to politicians: back off. Stay out of your way. We are your first line of defense against the world. We drive wealth. Your laws mean nothing to us. This horrible statement has become the basis for Western policy, and the core reason for the decline of the Republic, and other Empires to fail. Dimon is instilling that we have moved from ideology, nation and philosophy to strictly economic and financial world order. Of course, the level of complexity is enormous in global finance, but firms like Goldman, JP Morgan and Morgan Stanley have always had a symbiotic relationship with governments. There is a revolving door between these banks and governments. Bankers have always been council to the President and that is not including the Fed, which as we have mentioned is a private corporation run by these same bankers. It would appear that this is occurring under a globalist plan.
Dimon appears to make a bold assertion that banks helped in the last financial crisis. Once again, I a reminded that we are not the audience. He is not talking to the public. He is standing up for his clients, while warning politicians. He is telling his audience that banks are the heroes of 2009 and for a large part of the wealthy they were. They are just not heroes for the country, or for the masses. They never have been and are not designed that way. This is not a shocking revelation. The people provide risk absorption, and money creation and provide excellent fees, leverage, and assets for banks to do their real work. This is not surprising, as it has not changed since Greece, Rome. Dimon states:’ No banks to the rescue this time — banks got punished for helping in the last go-round.’ I would think a lot of average people out there would not be too thrilled to hear that statement from the head of an Investment Bank. Conclusion what is the narrative conclusion for this.