Liam Dann: The big storm warning we should take seriously

Buckle-up, the full force of the economic storm may still be ahead. Photo / Getty Images

OPINION:

Jamie Dimon, chief executive of giant investment bank JPMorgan Chase, just warned that the American economy has a hurricane headed its way.

If it does, then so too does New Zealand - although I guess we'd call it a cyclone down here in the Southern Hemisphere.

Hurricane, cyclone, whatever. Dimon was reminding us that we are still headed into the storm.

It was a chilling warning from someone who's had a birds-eye view of the US financial system for decades.

Dimon has been JPMorgan CEO since 2005, he steered it through the Global Financial Crisis. He's been on the US Federal Reserve's board of directors.

He's a billionaire but he's no Elon Musk - which is to say he doesn't joke around with frivolous comments on social media.

He's not party politically motivated. He's a conservative Democrat, which means he isn't just trying to undermine Joe Biden's presidency with his negativity.

There's no shortage of people - including myself - who've warned the next several months will be tough as interest rates are hiked to bring inflation to heel.

But there's optimism that it will be an orderly controlled process.

Even as markets have retreated bearishly they have avoided the black days of 1987 or 2008.

Dimon is saying we should be braced for more chaos.

"Right now it's kind of sunny, things are doing fine. Everyone thinks the Fed can handle this," Dimon told analysts. "That hurricane is right out there down the road coming our way.

"We just don't know if it's a minor one or Superstorm Sandy. You better brace yourself."

JPMorgan Chase was preparing for a "non-benign environment" and "bad outcomes", he said.

Right now it's kind of sunny?! Sorry, what's that sir?

Things sure don't seem too sunny, but Dimon's timing was specific.

He made the comments last week during a period of relative respite on Wall Street.

After two torrid months of falls which saw markets lose around 20 per cent of their value, stocks rallied last week, bond yields eased.

Everyone is prepared for slowing growth and even a technical recession in the next 12 months.

But there is a sense that inflation is priced in and we can see a clear path to a rebalanced post-pandemic economy.

What if we knock the stuffing out of the domestic economy and inflation doesn't play ball?

What if all the global issues are bigger than that?

What if we pull all the monetary policy levers and events conspire to keep supply-side inflation rising?

Dimon warns that the war in Ukraine would continue to put pressure on commodities markets and could push oil prices up to US$150 or US$175 a barrel.

That's another 25-50 per cent from where they sit now.

JPMorgan Chase CEO Jamie Dimon. Photo / AP

He didn't reference China's stumbling efforts to maintain zero-Covid but they also add downside risk to the inflation story.

Even he hopes he's wrong. But if he's right then what?

Stagflation - inflation and recession at the same time?

Stagflation is one of the ugliest words in economics, both phonetically (it sounds like a German death metal band) and in terms of the damage it does.

What would the policy prescription be then?

I don't know but I am a firm believer that it should start with: don't panic.

Stagflation in the sense of some overlap between inflation and recession in the coming months seems plausible.

You'll likely be seeing more of the word in the media.

I'm still confident we're not headed for structural 1970s and 1980s style stagflation.

But ensuring that it isn't persistent requires the kind of awareness and caution that Dimon is referring to.

It will involve recognising mistakes however much they were understandable, with hindsight, in the context of a pandemic with no playbook.

It was heartening then to hear US Treasurer Janet Yellen do just that last week.

"I think I was wrong then about the path that inflation would take," she told CNN's Wolf Blitzer.

"There have been unanticipated and large shocks that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly that I ... at the time, didn't fully understand."

That's the kind of frank reassessment politicians are usually very bad at.

Of course, while Yellen is part of the Biden administration, she is an economist and central banker and prone to higher standards of self-reflection.

Through the pandemic, I leaned cautiously, and perhaps optimistically, into the transitory inflation camp.

I say cautiously because my definition of transitory was always longer than most. It looked clear from the beginning that the supply-chain issues would take years to fully unwind.

The war in Ukraine and China's issues have exacerbated things.

But demand held up better than I expected and inflation proved more difficult to look through.

I still have faith that technology and globalisation can reassert dominance and we'll see the costs of production and shipping fall in the long term.

But - as John Maynard Keynes once quipped - we're all dead in the long term.

We have to deal with problems we face in the short and medium term.

The language coming from central banks and policymakers like Yellen gives me comfort that we are not on the descent into the kind of stagflation that gripped the world 40 years ago.

Dimon's words are a reminder that the pandemic was no small thing. It was an epic historic event that we're still dealing with.

There are big forces at play and we may still just be in the eye of the storm.