Daniel Pinto, co-president and chief operating officer of JPMorgan Chase & Co., speaks during the annual membership meeting of the Institute of International Finance (IIF) in Washington, DC, October 18, 2019.
Al Drago | Bloomberg | Getty Images
JPMorgan Chase President Daniel Pinto has vivid memories of life when a country loses control of inflation.
As a child growing up in Argentina, Pinto, 59, said inflation was often so high, the prices of food and other goods rose by the hour. Workers could lose 20% of their wages if they didn’t hurry to convert their paychecks into US dollars, he said.
“There were these armies of people at supermarkets using machines to relabel products, sometimes 10 to 15 times a day,” Pinto said. “At the end of the day, they had to remove all the labels and start again the next day.”
Pinto’s experience, a Wall Street veteran who runs the world’s largest investment bank by revenue, informs his views at a key time for markets and the economy.
After releasing a trillion dollars to support families and businesses in 2020, the Federal Reserve is tackling four-decade high inflation by raising rates and pulling back on its debt-buying programs. The moves in stocks and bonds have ended this year and worsened around the world as a surging dollar complicates other nations’ own battles with inflation.
Living with rampant inflation has been “very, very stressful” and is very difficult for low-income families, Pinto said in a recent interview from JPMorgan’s New York headquarters. From 1975 to 1991, prices in Argentina averaged more than 300% a year.
While there is a growing chorus of voices saying the Federal Reserve should slow or stop its rate hikes amid some signs of price moderation, Pinto is not in that camp.
“That’s why when people say, ‘the Fed is too hawkish,’ I disagree,” said Pinto, who became JPMorgan’s sole president and chief operating officer earlier this year, cementing his status as chief CEO Jamie Dimon’s lieutenant and potential successor.
“I think it is very important to put inflation back in a box,” he said. “If it makes the recession a little deeper for a period of time, that’s the price we have to pay.”
The Fed cannot allow inflation to be ingrained in the economy, according to the executive. There is a risk of making the mistakes of the 70s and 80s, he said, with a premature return to easier monetary policy.
That’s why he thinks it’s more likely that the Fed is erring on the side of being aggressive on rates. The fed funds rate is likely to peak at around 5%; that, along with an increase in unemployment, is likely to curb inflation, said Pinto. The rate is currently between 3% and 3.25%.
Markets are not established
Like a string of other executives said recently, including Dimon and Goldman Sachs CEO David Solomon, the United States is facing a recession because of the Fed’s predicament, Pinto said. The only question is how big the slowdown will be. That, of course, is reflected in the markets that Pinto watches daily.
“We are dealing with a market that is pricing in the likelihood of a recession and how deep it will be,” Pinto said.
The economic situation this year was unlike any other in recent times; Apart from the big increases in the prices of goods and services, corporate earnings have been relatively resilient, confusing investors looking for signs of a slowdown.
But profit estimates haven’t fallen far enough to reflect what’s to come, according to Pinto, and that could mean the market will take another leg down. The IS S&P 500 fell 21% this year as of Friday.
“I don’t think we’ve seen the bottom of the market yet,” Pinto said. “When you think about corporate earnings going into next year, expectations may still be too high; multiples in some equity markets including the S&P are probably a bit high.“
‘great black swan’
Still, despite higher volatility that he expects to remain, Pinto said the markets are performing “better than I expected.” With the exception of the collapse in the United Kingdom’s government bonds, known as “gilts,” that country’s prime minister resigned last week, the markets were orderly, he said.
That could change if there is a dangerous new turn in the war in Ukraine, or if tensions with China go against Taiwan on the world stage, depending on the progress of supply chains, among other potential pitfalls. Markets have become more vulnerable in some ways because the post-2008 crisis reforms have forced banks to hold more capital tied up in trading, making markets more likely to seize during periods of high volatility.
“Geopolitics is the big, unexpected black swan on the horizon,” Pinto said.
Even after central banks get a handle on inflation, interest rates are likely to be higher in the future than they have been in the past decade and a half, he said. Low or even negative rates around the world were the defining characteristic of the previous era.
That low rate regime punished savers and benefited riskier borrowers and companies that could continue to take advantage of debt markets. It also led to a wave of investment in private companies, including the fintech firms taken by JPMorgan and its peers, and boosted the tech company’s stock as investors cashed in on the growth.
“Real rates should be higher in the next 20 years than they have been in the last 20 years,” Pinto said. “Nothing crazy, but higher, and that affects many things like valuations of growth companies.”
Crypto: ‘Kind of Irrelevant’
The post-financial crisis era also gave rise to new forms of digital money: cryptocurrencies including bitcoin. Who JPMorgan and competitors including Morgan Stanley while others have allowed wealth management clients to gain exposure to crypto, there seems to be little recent progress in its institutional adoption, according to Pinto.
“The reality is, the current form of crypto has become a small asset class that’s kind of irrelevant in the scheme of things,” he said. “But the technology, the concepts, probably something will happen there; but not as it is now.”
For the economy as a whole, there are reasons for hope amid the gloom.
Households and businesses have strong balance sheets, which should ease the pain of a downturn. There is much less leverage in the regulated banking system than in 2008, and higher mortgage standards should result in a less punitive default cycle this time around.
“Things that caused problems in the past are in a much better condition now,” Pinto said. “That said, you hope nothing new pops up.”