SerpApi.Org
JPMorgan CEO Jamie Dimon, one of Wall Street’s most venerated leaders and a man once on the shortlist of names to become Treasury Secretary, offered some straight talk on the value of U.S. debt and the impact of deficit spending this week.
Dimon, who at the age of 70 is nearing the end of his two decade tenure at the helm of the world’s biggest bank but remains the market’s central conscience, told Wilfred Frost’s Master Investor Podcast that he wouldn’t be a buyer of U.S. Treasuries. At least not at current levels.
“I don’t understand what the upside is,” he said, noting that debt and deficit figures are hitting startling levels even as the economy, and broader equity markets, continue to outperform. “[Usually] you have to have a ‘Great recession’ or a depression or war to have numbers like that…And so my view is it will become a problem.”
Dimon said the government can handle the issue one of two ways, either through a bipartisan effort similar to the Simpson-Bowles Commission of 2010, proposed by President Barack Obama and led by Republican Congressman Paul Ryan, or “waiting for it to become a problem.”
“My guess is that is what’s going to happen,” Dimon said. “That will exhibit itself in higher interest rates, a rattled market, and people talking about things like ‘bond vigilantes.’ Hopefully not worse than that, but it could be.”
Overall U.S. debt levels are on pace to $40 trillion by the end of the year, and are growing at a rate of around $1 trillion every five to seven months, according to the Economic Policy Innovation Center.
The current federal government deficit, meanwhile, is likely to surpass $2 trillion this fiscal year, which ends in September. The nine month tally, published last week, reached $1.4 trillion.
More immediate concerns for Dimon, however, appeared to center around U.S. Treasury valuations, and the pace of inflation tied in part to the war with Iran.
Benchmark 10-year note yields were last marked at 4.6% in early Tuesday trading, up 23 basis points since the end of last month and more than 65 basis points from their late February lows.
“Even if inflation was 2%, the 10-year bond should probably be at 4.5% and the short rate should be at 3.3%,” he said. “And they’re almost there today. And by the way, [inflation has been] over 3% for almost five years.”
That suggests that, even with the eye-watering levels of U.S. debt, and the constant run of $2 trillion deficits, U.S. Treasuries are arguably overvalued. “Personally, I wouldn’t buy them,” he said.
That could be a worrying assessment for the $31 trillion Treasury market, which is facing inflation risks tied to rising crude prices and a new Federal Reserve Chairman devoted to taming them.
Markets are betting on a September Fed interest-rate hike, which would take the central bank’s base lending rate to between 3.75% and 4%, but remain split as to what happens after that.
Further moves higher in crude and faster inflation readings set against a resilient domestic economy could further the case for a second hike, pushing bond yields firmly higher and prices notably lower.
Additional pressures from government borrowing plans, and a projected national debt level expected to surpass $50 trillion by 2033, could pile further pressures onto one of the most important financial markets in the world.
Bond investors aren’t there yet. This month’s $39 billion auction of 10-year notes drew bids worth more than $101 billion, suggesting a demand ratio of around 2.59, the highest of the year. Foreign investors, in fact, accounted for around 81% of the overall bid total and 65% of the actual sale.
How long that will last, however, is another question.
Inflation “may very well tick down,” Dimon said, but he followed that view with a worrying assessment of events that took place in the 1970s, which was stoked in part by an OPEC oil embargo, wage and price controls and a stagnating domestic economy.
“Deficits were less, and ‘guns and butter’ tied to the Vietnam war was over,” but inflation climbed from 2% in 1972 to 13.5% in 198o, Dimon said.
“There was the oil crisis of ‘73 and again in 1980, that is true, unions were more powerful…all these reasons,” he added. “But it didn’t stop.”
Will it this time?
Write to Martin Baccardax at [email protected]
