JPMorgan Chase President Daniel Pinto has vivid memories of what life is like when a country loses control of inflation.
As a child growing up in Argentina, Pinto, 59, said that inflation was often so high, prices for food and other goods spiked on an hourly basis. Workers could lose 20% of their salary if they didn’t rush to convert their paycheck into U.S. dollars, he said.
“Supermarkets had these armies of people 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 over again the next day.”
The experiences of Pinto, a Wall Street veteran who runs the world’s biggest investment bank by revenue, informs his views at a key time for markets and the economy.
After unleashing trillions of dollars in support of households and businesses in 2020, the Federal Reserve is grappling with inflation at four-decade highs by raising rates and pulling back on its debt-buying programs. The moves have cratered stocks and bonds this year and rippled around the world as a surging dollar complicates other nations’ own battles with inflation.
Living with pervasive inflation was “very, very stressful” and is especially hard on low-income families, Pinto said in a recent interview from JPMorgan’s New York headquarters. Price increases averaged more than 300% a year in Argentina from 1975 to 1991.
Aggressive Fed
While there is a growing chorus of voices who say that the Federal Reserve should slow or halt its rate increases 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, solidifying his status as CEO Jamie Dimon’s top lieutenant and potential successor.
“I think putting inflation back in a box is very important,” he said. “If it causes a slightly deeper recession for a period of time, that is the price we have to pay.”
The Fed can’t allow inflation to become ingrained in the economy, according to the executive. A premature return to easier monetary policy risks repeating the mistakes of the 70s and 80s, he said.
That’s why he thinks it’s more likely the Fed errs on the side of being aggressive on rates. The Fed funds rate will probably peak at around 5%; that, along with a rise in unemployment, will likely curb inflation, Pinto said. The rate is currently in a 3% to 3.25% range.
Markets haven’t bottomed
Like a string of other executives have said recently, including Dimon and Goldman Sachs CEO David Solomon, the U.S. faces a recession because of the Fed’s predicament, Pinto said. The only question is how severe the slowdown will be. That, of course, is being reflected in the markets that Pinto watches daily.
“We’re dealing with a market that is pricing the probability of recession and how deep it’s going to be,” Pinto said.
The economic situation this year has been unlike any other in recent history; apart from booming price increases for 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 coming, according to Pinto, and that could mean the market takes another leg down. The S&P 500 has dropped 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 heading into next year, expectations may still be too elevated; multiples in some equity markets including the S&P are probably a bit high.″
‘Big Black Swan’
Still, despite higher volatility that he expects to remain, Pinto said that the markets have been functioning “better than I was expecting.” With the notable exception of the U.K. gilt collapse that led to the resignation of that country’s prime minister last week, markets have been orderly, he said.
That could change if the Ukraine war takes a perilous new turn, or tensions with China over Taiwan spill onto the global stage, upending progress on supply chains, among other potential pitfalls. Markets have become more fragile in some ways because post-2008 crisis reforms forced banks to hold more capital tied to trading, which makes markets more likely to seize up during periods of great volatility.
“Geopolitics is the big black swan on the horizon that hopefully doesn’t play out,” Pinto said.
Even after central banks get a handle on inflation, its likely that interest rates will be higher in the future than they were in the past decade and a half, he said. Low or even negative rates around the world has been the defining characteristic of the previous era.
That low-rate regime has punished savers and benefited borrowers and riskier companies who could continue to tap debt markets. It also led to a wave of investment in private companies, including the fintech firms taking on JPMorgan and its peers, and supercharged the stock of tech companies as investors paid up for growth.
“Real rates should be higher in the next 20 years than they were in the last 20 years,” Pinto said. “Nothing crazy, but higher, and that affects many things like the 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. While JPMorgan and rivals including Morgan Stanley and others have allowed wealth management clients to get exposure to crypto, there appears to be little progress recently in terms of its institutional adoption, according to Pinto.
“The reality is, the current form of crypto has become a small asset class that is kind of irrelevant in the scheme of things,” he said. “But the technology, the concepts, something is probably going to happen there; just not in its current form.”
As for the broader economy, there are reasons for optimism amid the gloom.
Households and businesses have strong balance sheets, which should cushion the pain of a downturn. There is far less leverage lurking in the regulated banking system than in 2008, and higher mortgage standards should result in a less punishing default cycle this time.
“Things that triggered problems in the past are in a far better position now,” Pinto said. “That said, you hope nothing new pops up.”
