"Markets Have Always Been Wrong" - Jamie Dimon Warns QE's End Will Cause Volatility To Spike

JP Morgan Chase & Co. CEO Jamie Dimon’s declaration that he would fire any JPM traders whom he knew were trading bitcoin unexpectedly ranked among the most popular stories on several respected financial media websites – despite stiff competition from Apple Inc.’s 10th anniversary product launch.

Given what’s transpired in the bitcoin market over the past few days (See “Chinese Bitcoin Trading Soars As Local Exchanges Deny Crackdown Reports”), its unsurprising that Dimon, who spoke publicly at an industry conference hosted by Barclays before sitting for an interview with Andrew Ross Sorkin at Institutional Investor’s Delivering Alpha conference, managed to break through the noise with his comments. During the earlier appearance, he warned investors that J.P. Morgan Chase & Co. trading revenue was on track to fall 20% year-over-year during the third quarter – echoing a similarly downbeat outlook delivered by Citigroup CFO John Gerspach the day before. Dimon’s revelation sent JPM stock tumbling off its highs of the day.

Jamie Dimon: There"s a huge vacuum if business isn"t involved in policy from CNBC.

Perhaps it’s understandable, then, that reporters ignored some of the bank CEO’s more prosaic-sounding comments, writing them off as too boring to print. However, in both of his public remarks, Dimon reiterated his view that the coming unwind of the Federal Reserve’s $4.5 trillion balance sheet, and the subsequent “normalization” of interest rates, would revive volatility across markets. Investors, Dimon said, should “hold on to their hats.”

Why? Because, as Dimon explains, global central banks have purchased $12 trillion in assets since the crisis, supporting much of the global cross-asset rally. So logically, what would happen if the largest of those central banks were to stop buying?

“ANDREW ROSS SORKIN: Does the low volatility, by the way, make sense to you given all of the challenges and headlines in the world today?

JAMIE DIMON: Oh, listen, markets are markets. There"s low volatility until they"re highly volatile. The stock market is high until it goes low. Markets therefore have always been wrong. And I think people are making mistakes. I can give you reasons why it might be low. We"ve had this fairly consistent, coherent, consistent growth. But forget the geopolitical noise and stuff like that. We"re chugging along, 2%. Europe is doing 2%. Russia - I mean, Japan is doing 1.5%, China"s doing their 6%. You know, earnings are doing okay. We"ve had a fairly benign economic environment.

That"s a reason. I can give you another reason is that the Central Banks of the world that bought $12 trillion of securities. 12 trillion. Since they started doing QE. And that"s only just the U.S. That"s an awful lot of security purchases that might - in all things be equal, and remember things are never all equal - can reduce volatility. And there may be other sides that are known. And once other sides happen, watch out. Then volatility goes way up. They"ll say they"re a genius, they figured out when it"s going to happened. I don"t guess on which kind of volatility. Like I said, we do a business. And we have to manage the volatility.”

But regardless of the market consequences (after all, banks’ trading desks benefit when volatility climbs), the Fed should continue to raise interest rates. And the two hurricanes that just devastated parts of the southern US shouldn’t lead the central bank to pull any punches.

“ANDREW ROSS SORKIN: Do you think interest rates should go up by the end of the year, with these hurricanes this fall?

JAMIE DIMON: The hurricanes are irrelevant. I wouldn"t have any policy matter as a function of hurricanes. Going to reduce GDP in the short run, they"ll probably increase it after that. I"ll let the economists figure it out. But almost a $20 trillion economy, that isn"t a reason to change monetary policy. It will create a lot of noise in the numbers, but I wouldn"t overreact to that.

Advice, it"s very sympathetic. We"re doing - just so you know, we"re going to do a lot for affordable housing, get these people in these states 20,000 people in Florida, 6,000 in Houston. Most of the banks are waiving fees, delaying loan payments, offering special services for your employees and stuff like that.”

The Fed should ultimately predicate its decision on the health of the US economy. And with growth steadily picking up, Dimon says, the economy should be able to absorb the borrowing costs without much of a disruption.

“The question about rates and QE is always important at the same time, say the why. Okay? So I think rates need to go up. And for as long as the why is because the economy is strong and may be strengthening, that"s a good reason. It"s not a bad reason.

You know, remember Paul Volcker raised rates, people may have forgotten, 2%, 25 basis points, 2% Sunday night. Not in between meetings. On a Sunday. Okay? And he did it because inflation was going up, the stagflation at the time. That"s a bad why. They show if the why is doing well and the jobs are coming back, and people are entering the labor force, the economy will dwarf rates, the importance of rates.

And so far that"s what they"ve been doing. They"ve been watching the economy and lowering rates. I"m hopeful that will continue because I think rates do need to go up and the economy continues to be stable.

You know, people are joining the workforce, a lot of capital, markets are wide open, no major potholes in the American economy. I"m putting geopolitics - that would change if you might treat so many things, so they continue to raise rates, and they start QE. But it"s going to help the economy, you"ll all be fine.”

Dimon warned back in July that traders should brace for volatility to surge after the Fed begins unwinding its balance sheet, pouring cold water on the Fed’s complacency after Patrick Harker said the unwind would be as dull as watching paint dry.

Jamie Dimon on regulations: We"re talking about calibration from CNBC.

“We act like we know exactly how it’s going to happen and we don’t,” he said at the time.
 

US Threatens To Cut Off China From SWIFT If It Violates North Korea Sanctions

In an unexpectedly strong diplomatic escalation, one day after China agreed to vote alongside the US (and Russia) during Monday"s United National Security Council vote in passing the watered down North Korea sanctions, the US warned that if China were to violate or fail to comply with the newly imposed sanctions against Kim"s regime, it could cut off Beijing’s access to both the US financial system as well as the "international dollar system."

Speaking at CNBC"s Delivering Alpha conference on Tuesday, Steven Mnuchin said that China had agreed to "historic" North Korean sanctions during Monday"s United Nations vote. "We worked very closely with the U.N.  I"m very pleased with the resolution that was just passed.  This is some of the strongest items.  We now have more tools in our toolbox, and we will continue to use them and put additional sanctions on North Korea until they stop this behavior."

In response, Andrew Ross Sorkin countered that "we haven"t been able to move the needle on China, which seems to be the real mover on this, in terms of being able to apply the real pressure. What do you think the issue is?  What is the problem?"

The stunner was revealed in Mnuchin"s answer: "I think we have absolutely moved the needle on China.  I think what they agreed to yesterday was historic.  I"d also say I put sanctions on a major Chinese bank.  That"s the first time that"s ever been done.  And if China doesn"t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the U.S. and international dollar system.  And that"s quite meaningful."

And to underscore his point, the Treasury Secretary also said that "in North Korea, economic warfare works. I made it clear that the President was strongly considering and we sent a message that anybody that wanted to trade with North Korea, we would consider them not trading with us.  We can put on economic sanctions to stop people trading."

In other words, to force compliance with the North Korean sanctions, Mnuchin threatened Beijing with not only trade war, but also a lock out from the dollar system, i.e. SWIFT, something the US did back in 2014 and 2015 when it blocked off several Russian banks as relations between the US and Russia imploded.

Of course, whether the US would be willing to go so far as to use the nuclear option, and pull the dollar plug on its biggest trade partner, in the process immediately unleashing an economic depression domestically and globally is a different matter.  So far Washington has been reluctant to impose economic sanctions on China over concerns of possible retaliatory measures from Beijing and the potentially catastrophic consequences for the global economy. Washington runs a $350 billion annual trade deficit with Beijing, while the PBOC also holds over $1 trillion in US debt.

Ironically, the biggest hurdle to the implementation of the just passed sanctions may be the president himself.  “We think it’s just another very small step, not a big deal,” Trump told reporters at the start of a meeting with Malaysian Prime Minister Najib Razak. "I don’t know if it has any impact, but certainly it was nice to get a 15-to-nothing vote, but those sanctions are nothing compared to what ultimately will have to happen,” said Trump who has vowed not to allow North Korea to develop a nuclear ballistic missile capable of hitting the United States.

Separately, at a hearing of the House Foreign Affairs Committee on Tuesday, Republican Chairman Ed Royce said the U.S. should target major Chinese banks, including Agricultural Bank of China Ltd. and China Merchants Bank Co., for aiding Kim’s regime. Russia also came in for criticism. Assistant Treasury Secretary Marshall Billingslea said in prepared remarks to the committee that North Korean bank representatives “operate in Russia in flagrant disregard of the very resolutions adopted by Russia at the UN.”

While China and Russia supported the latest UN sanctions, officials made clear they were troubled by Haley’s comments in the Security Council that the U.S. would act alone if Kim’s regime didn’t stop testing missiles and bombs. They emphasized the world body’s resolution also emphasized the importance of resolving the crisis through negotiations. “The Chinese side will never allow conflict or war on the peninsula,” Foreign Ministry spokesman Geng Shuang said in a statement on Tuesday.

In a soundbite late on Tuesday, Japan"s Nikkei quoted prime minister Shinzo Abe who said that "in the end, [the North Korean] problems should be solved through diplomatic dialogue," adding that Japan will "work together with the international community to apply maximum pressure, so that North Korea commits to perfect, verifiable and irreversible denuclearization." For Japan to engage with the regime, he stressed it would have to be "on the condition that North Korea commits to" this complete denuclearization."

Which, of course, won"t happen: “sanctions of any kind are useless and ineffective,” Russian President Vladimir Putin told reporters earlier this month at a summit in Xiamen, China. “They’ll eat grass, but they won’t abandon their [nuclear] program unless they feel secure.”

Predictably, North Korea"s Foreign Ministry slammed the sanctions saying it “condemns in the strongest terms and categorically rejects” the United Nations adding more sanctions, North Korea’s state-run KCNA reported on Wednesday morning. Instead, North Korea warned it “will redouble efforts to increase its strength” as it seeks to establish “practical equilibrium” with U.S.

And so, not only is the entire geopolitical circle jerk back at square one, but the ball is again back in North Korea"s court, while the decision on whether or not to launch another ICBM really depends on whether China will give it the quiet go ahead; a China which responds notoriously poorly to being threatened in the global financial arena, like for example when the US threatens to kick it out of the global dollar system...

Jack Ma Accuses The US Of Spending $14 Trillion On War Instead Of Its People

In a CNBC clip, which slipped between the cracks last week,  Alibaba founder Jack Ma, who has been busy trying to get into Donald Trump"s "circle of trust", spoke in Davos and blamed the problems of the United States on the United States itself, as a country which has spent trillions of dollars to wage war, instead of investing in infrastructure and its own people.

Asked by Andrew Ross Sorkin about Trump"s decision to impose new tariffs on Chinese imports to protect domestic American manufacturers, Ma said blaming China for any economic issues in the U.S. is misguided. If America is looking to blame anyone, Ma said, it should blame itself.

"It"s not that other countries steal jobs from you guys," Ma said. "It"s your strategy. Distribute the money and things in a proper way."

According to Ma, the US wasted over $14 trillion in fighting wars over the past 30 years rather than investing in infrastructure at home. Ma named this as the main reason that the US economy is weakening.

Ma was not the only critic of the costly U.S. policies of waging war against terrorism and other enemies outside the homeland, however, the Alibaba founder said this was the reason America"s economic growth had weakened, not China"s supposed theft of jobs. In fact, Ma called outsourcing a "wonderful" and "perfect" strategy.

"The American multinational companies made millions and millions of dollars from globalization," Ma said. "The past 30 years, IBM, Cisco, Microsoft, they"ve made tens of millions — the profits they"ve made are much more than the four Chinese banks put together. ... But where did the money go?"

One answer: a couple of offshore bank accounts, or - now that Rothschild is managing Nevada tax havens - onshore.

He added that the U.S. is not distributing or investing its money properly, and that"s why many people in the country feel wracked with economic anxiety. Ma added that too much money flows to Wall Street and Silicon Valley. Instead, the country should be helping the Midwest, and Americans "not good in schooling," too.

 At least in theory, much of this forms the basis of Trump"s policies. 

"You"re supposed to spend money on your own people," Ma said. "Not everybody can pass Harvard, like me." In a previous interview, CNBC said that Ma said he had been rejected by Harvard 10 times. Along those lines, Ma stressed that globalization is a good thing, but it, too, "should be inclusive," with the spoils not just going to the wealthy few.

"The world needs new leadership, but the new leadership is about working together," Ma said. "As a business person, I want the world to share the prosperity together."