The news: JP Morgan chairman and CEO Jamie Dimon warned that losses for lenders to indebted companies are likely to be higher than feared in his annual letter to shareholders published on Monday.
Dimon wrote that while the sector “probably does not” pose a systemic risk, when a credit cycle eventuates, “which will happen one day, losses on all leveraged lending in general will be higher than expected, relative to the environment.”
The context: Dimon said that this will be a result of weakening credit standards and that the sector does not have “great transparency or rigorous valuation ‘marks’ of their loans”, increasing the chance that people will sell should the environment worsen. He added that actual losses are currently higher than they should be relative to the environment and that if rates or credit spreads ever go up, companies that borrowed will have to borrow at even higher rates, adding further stress.
Dimon, who has previously used the term “cockroaches” to describe problematic loans in the sector wrote: “It has always been true that not everyone providing credit is necessarily good at it. There are many players who are late to this game, and it should be expected that some credit providers will do a far worse job than others. We have not had a credit recession in a long time, and it seems that some people assume it will never happen.”
He also used the annual letter to raise concerns about geopolitical pressures, inflation and AI.
At the top of the list, Dimon cited “the terrible ongoing war and violence in Ukraine, the current war in Iran and the broader hostilities in the Middle East, terrorist activity and growing geopolitical tensions, importantly with China.”
He added that not only is the war impacting nations which are heavily dependent on importing energy, it is impacting commodities as global supply chains are experiencing disruption.
“The outcome of current geopolitical events may very well be the defining factor in how the future global economic order unfolds — then again, it may not”, he wrote.
He noted that the potential for significant ongoing oil and commodity price shocks, along with the reshaping of global supply chains, could lead to sticker inflation and higher interest rates than markets currently expect.
On artificial intelligence, Dimon wrote that investment in AI is not a “speculative bubble” and that it will delivery benefits for the economy, however, “at this time, we cannot predict the ultimate winners and losers in AI- related industries.”