Never attribute to malice that which is adequately explained by stupidity. In our specific case here, never attribute to deviousness what is plainly incompetent Economists. Jamie Dimon, the CEO of JP Morgan, though he works atop one of the world’s biggest banking money dealers he got there by being a trained Economist. To bring this home, in March 2008, just as his bank was being asked to “rescue” Bear Stearns, Dimon was named to the Federal Reserve Bank of New York’s nine-member board of directors.
He apparently fit right in.
Central bankers are Economists nowadays, having always before been at least familiar with banking itself. In many cases, there aren’t even bankers running banks. The sorry state of the world should really start to make sense given only this information.
Thus, when in May 2018 Dimon proclaimed his hatred for US Treasury securities it was typical Economist-speak. JPM’s CEO went on BloombergTV and unequivocally declared BOND ROUT!!!! with all his might; just as any FRBNY official would have wanted and Jay Powell certainly had. The 10-year UST, Mr. Dimon said, was heading toward 4% – and that was just the start.
Except, obviously, interest rates which had nowhere to go but up according to Economists like Dimon ended up going down. Again. A lot. Undaunted, by May 2019, Dimon remained adamant about Treasury securities. A supposedly “weak” 10s auction apparently demonstrated the fragility of demand for these cursed instruments, the rout undoubtedly just around the corner.
Not a chance; the bid remained steady anyway as anyone, such as a bank CEO, who watched the auctions could see. Who kept buying up these things? The answer was, of course, JP Morgan.
So, had Dimon been duplicitous? Nah. He’s just an Economist and bureaucrat behaving exactly like an Economist and bureaucrat would. Incompetence. The man can run a complex banking organization, but that doesn’t mean he really knows what, why, or how it does the things it does.
Like hysterias over inflation that isn’t coming, some things never change:
I would not be a buyer of Treasurys,” Dimon said Tuesday at an annual Goldman Sachs financial services conference. “I think Treasurys [sic] at these rates, I wouldn’t touch them with a 10-foot pole.”
This is not the rest of his May 2018 or May 2019 quote, rather this is instead his brand new take which merely rehashes his old ones. That’s the other clear trait attributable to the formally trained Economist; the gross and utter inability to learn anything about money, finance, and, most of all, the real economy no matter how many mistakes in all three pile up under your ledger.
We’ll have to wait to see if JP Morgan has been or has become another big buyer despite its leader’s public disdain for the securities. I’d bet they are and have been for some time. The Federal Reserve’s data on the banking system as a whole indicates that if not JPM specifically, then at least a sizable chunk of its peers.
Before getting to those, however, first the distinct lack of inflationary fire in the banking system. QE, money printing, supporting markets, Fed “put”, etc. All these things were meant primarily to reassure the financial system, domestic banks first and foremost, there is nothing to fear. Risk-taking should be the only course moving forward under so much “cover” and “accommodation.”
And that’s where the inflation would actually come from…if there was anything like a realistic chance the banking system domestically (forget about the putrid state of its foreign pieces of it for now) was about to get really cozy with the mainstream narrative. Balance sheet expansion would mean more money and credit (the blurred lines between them) entering and chasing opportunities throughout the real economy.
Too much money, as in what’s said about the Fed’s role here, there’s not just hot inflation but runaway inflation. Either way, Powell’s policymakers have already declared they’ll readily welcome the first and risk the second.
The Federal Reserve compiles an exhaustive set examining as much of the domestic financial system as it has so far figured out to examine. In these Financial Accounts of the United States (Z1), the banking data, on the other hand it’s yet another huge data series pointing in the opposite direction as the mainstream narrative espoused by either Mr. Dimon or Mr. Powell.
On the contrary, deflationary. Risk aversion. The kinds of conditions and traits that are, you know, good for Treasuries.
The latest figures for Q3 2020, released a few days ago, indicate that where inflationary potential had been inferred (below) during the crisis quarter that’s already cooled right down in the last one (data for Q4 2020 won’t be compiled and released until March 2021).
“Risk” assets – which I calculate as all assets minus the most liquid – declined slightly during Q3. From $18.75 trillion to $18.63 trillion, that level had surged during the first and second quarters this year but not because banks were in the mood to radically expand their balance sheets.
On the contrary, most of that forced upon them by companies all over the world doing business with US banks drawing down on every penny of existing revolving credit lines. Between the end of 2019 and the end of Q2, the GFC2 period, total assets of domestic banks increased by $2.7 trillion (of that jump, $1.2 trillion was the QE byproduct bank reserves).
The aggregate loan book gained $605 billion, of which $644 billion was due to loans not-elsewhere-classified (nec), and in this dataset the category includes these C&I revolvers. In other words, as companies drew them down for liquidity rather than investment or spending purposes, banks had to (or chose to) scramble to cut back in other lending categories.
And they have. Again, risk aversion not risk taking. In the first half of this year, mortgage lending came to a standstill while consumer credit loans have declined. Those trends continued through the full summer.
If banks aren’t lending (outside of ST loans to liquidity panicked companies) because they don’t feel the Fed’s inflationary, money printing love, what are they doing?
Sorry, Jamie, they’ve been buying up US Treasuries and agency paper hand over fist, by as much as they can get their hands on. In the third quarter of 2020 alone, holdings of reported Treasuries jumped by $79 billion (in addition to $172 billion of agencies), among the highest quarterly changes on record (though dwarfed by the $209 billion record added during Q2’s GFC2). Ever since the fourth quarter of 2018 (landmine), the banking system has been on an absolute buying binge of the safest, highest quality (most repo-able) assets.
This hadn’t changed last quarter despite the arrival of Inflation Hysteria #2 goading now Jamie Dimon’s latest contribution to it.
For the first nine months of 2020, the domestic banking system added an astounding three-quarters of a trillion of these things. The first two quarters this year would be understandable, but that rate, and the behavior/outlook driving it, did not change in Q3!
As of these latest estimates, domestic banks now hold nearly 19% (above) of all their assets in the form of US Treasuries or agency debt. This highly defensive posture hasn’t been this high of a proportion since the early 1990’s. Rather, this kind of determined safety allocation is reaching S&L Crisis, and even pre-eurodollar, post-Great Depression era, levels.
Banks don’t want to lend to consumers or businesses (except under pre-GFC2 agreements), they sure do want to own the assets with the least liquidity risks (including bank reserves).
Furthermore, these numbers here are only what the domestic banking system has reported to the Federal Reserve; both non-banks (in the US and overseas) as well as foreign financials have almost certainly followed along the same trend and in all likelihood have done so to an even greater extent.
Where’s this inflation going to come from?
Dimon wouldn’t touch US Treasuries with a ten-foot pole because that’s what econometrics tells him opining on matters beyond his comprehension (he’s another great example of how these statisticians don’t understand bonds). Makes for compelling TV, pleasing to the mainstream idea of effective, “data driven” science wielded by a wise technocracy made up of formally trained Economists. That is what he’s selling, whether or not JP Morgan the bank is once more buying the very thing its CEO needs to, for the first time, start up this fantasy.
The rest of the banking system has been doing just that ever since the first time he opened his mouth. Not malice, just Economist.