JPMorgan CEO's Annual Shareholder Letter: Beware of Middle East Conflicts, AI, and Private Credit Risks

In the annual letter to shareholders released on the 6th local time, JPMorgan Chase CEO Jamie Dimon highlighted several headwinds in the current environment, including persistent inflation, the risk of further Federal Reserve rate hikes, geopolitical conflicts, volatility in the private markets, and “poor bank regulation.”

Dimon said that although the regulatory measures implemented after the 2008 financial crisis achieved some positive results, they also created a fragmented, slow-acting system that includes costly, duplicative, and cumbersome rule sets. Some of these weaken the financial system and reduce productive lending. He specifically pointed to the negative impacts stemming from capital and liquidity requirements and the current structure of the Federal Reserve’s stress tests, among other factors.

Dimon also said that JPMorgan Chase has received “mixed” reactions to the revised proposal for the final Basel III agreement released last month by U.S. regulators and to the Global Systemically Important Banks (GSIB) surcharge. “While it’s great to see that the most recently proposed final Basel III agreement (B3E) and GSIB requirement increases are lower than the 2023 proposal, there are still some aspects that are utterly absurd.” He said that, based on the proposed total surcharge amount of roughly 5%, compared with similarly sized loans to large non-GSIB banks, the firm “would need to hold as much as 50% additional capital in the vast majority of loans aimed at U.S. consumers and businesses. To be blunt, that’s not reasonable.”

Risks of persistent inflation and rising interest rates

Dimon warned that the Middle East conflict could trigger another round of persistent inflation and rising interest rates, pushing the U.S. economy into recession and reshaping the global economic order. But he added at the same time, “Of course, it also may not.”

In his letter to shareholders, he predicted that the U.S. economy this year will do well or at least maintain momentum, supported by President Trump’s tax cuts and deregulation, pro-business policies, and the “One Big Beautiful Bill” proposed by Republican lawmakers in Congress. He said these measures would contribute $300 billion to the U.S. economy and boost U.S. gross domestic product by about 1%. In addition, major investment in artificial intelligence (AI) and related technologies will also raise U.S. productivity.

In his view, the foundation of the U.S. economy today is stronger than in past years, which may help the U.S. avoid some of the economic crises brewing globally. But that does not mean the possibility of recession does not exist.

“While the economy may be more resilient than in the past, that doesn’t mean there isn’t a ‘tipping point’—it just means more factors are needed to reach one.” Dimon wrote in his 48-page letter. “The Middle East conflict increases the risk of major and sustained shocks to oil and commodity prices. It could also change global supply chains, similar to what happened after the outbreak of the pandemic. As in 2021 to 2023, we may face another round of stubborn inflation, and the Federal Reserve and other global central banks may raise interest rates substantially to deal with inflation. Just that alone could lead to higher interest rates and lower asset prices.”

Last week, the S&P 500 suffered its worst quarter since 2022, having been weighed down by the Middle East war and soaring energy prices since late February.

Dimon believes that gradual increases in inflation and interest rates could lead to declines in the stock market this year. He also warned that although the economy remains strong, it relies on growth and rising stock prices to sustain itself. If these factors weaken, some risks in the economy could evolve into problems. For example, as long as GDP keeps growing strongly and interest rates remain relatively low, the burden of massive government debt can be kept under control. But Dimon warned that this is only an “if”—if mismanaged, debt could evolve into a crisis in the future.

Continuing to build AI capabilities

Dimon also reiterated in the letter that the pace of AI adoption is unprecedented. While deploying AI will bring “transformation,” how this AI revolution ultimately unfolds remains to be seen. “Overall, investment in AI is not a speculative bubble. On the contrary, it will bring meaningful gains. However, we currently can’t predict the final winners and losers in AI-related industries.” He said that even if it’s hard to predict, “we also won’t turn a blind eye to this trend. We’re going to deploy AI the same way we deploy all other technologies.”

JPMorgan Chase has been at the forefront of Wall Street investment banks, actively introducing AI applications across every layer of the business. This February, Dimon also said that AI technology is reshaping JPMorgan Chase’s workforce, and that the firm has drawn up a “large-scale employee redeployment plan.” He said, “We’ve focused on some ‘known and predictable’ events and some ‘known unknowns’ events. But major technological changes like AI always generate second- and third-order effects, and those effects could have far-reaching impacts on society… We should also closely watch for changes of this kind.”

Dimon further emphasized that a major issue AI faces next is how the government should help society prepare for the labor market changes AI is about to bring.

“The speed at which AI is deployed may outpace workers’ ability to adapt to new jobs. Businesses and governments can take a range of measures—providing incentives such as retraining, income support, skill upgrading, and early retirement for people whose jobs may be negatively affected by AI. AI will impact almost every function, application, and process at companies. It will certainly eliminate some jobs, while increasing the value of others.” He said.

Volatility in private credit does not constitute systemic risk

Dimon also discussed volatility in the U.S. private market. After last year’s turmoil, private credit funds recently faced large-scale redemption requests again, driven by concerns about loans to software companies. Dimon said, “Overall, private credit tends to lack a high degree of transparency, and the loan valuations aren’t strict enough. As a result, even if actual losses have hardly changed, this feature increases the likelihood that investors will sell when the outlook worsens. Given the current environment, investors’ actual losses really are already above what they should be.”

He expected that “whatever happens next, it’s foreseeable that insurance regulators will, sooner or later, insist on stricter rating standards or downgrade more private credit institutions’ ratings.” However, he added that although investors have recently pulled back from related funds due to fears that advances in AI technology could harm underlying borrowers, the private credit industry “may” not pose systemic risk.

Dimon has long been cautious about the boom in private credit, but he has also allowed JPMorgan Chase to be deeply involved so as not to lose competitiveness in the business of large private equity clients. Currently, the firm has allocated $50 billion worth of balance-sheet resources to make private loans to clients.

At the end of March this year, Dimon ordered a comprehensive review of the firm’s loan book, assessing its exposure to software company loans, and restricting the firm’s credit authority for part of its private credit funds’ software risk exposures. At the same time, the firm also created short-selling strategies for investors such as hedge funds, targeting exposures related to private credit.

(This article is from Yicai Finance.)