'HE’S RIGHT': Big bank CEO BACKS Warsh’s critique of the Fed

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[00:00:03]Welcome back. Good Friday morning everyone. Thank you so much for joining us this morning. I'm Maria Bartero and it is Friday, May 29th. We are coming to you live this morning from the Reagan National Economic Forum here in Semi Valley, California. It is 7:01 on the East Coast. Right now, time for the hot topic of the hour and that is all about the economy. I sat down with JP Morgan Chase CEO Jamie Diamond here in California. I got his take on the broad macro story. The Federal Reserve with Kevin Worsh now at the helm and JP Morgan's investment plans for some $40 billion that he says he could use for an acquisition. Watch >> Jamie Diamond. Great to see you. Thank you so much for sitting down with us.

[00:00:41]>> Yeah, it's good to be here.

[00:00:42]>> Yeah. I want to get your take the largest bank. You've got so much exposure to the consumer and to housing as well as to commercial and business.

[00:00:51]How would you characterize the economy right now? Give us your sense of the macro story. Well, it's pretty good, which you all all your viewers know is that, you know, the economy is growing at 2%, unemployment is low, 3, 4.3%.

[00:01:01]Wages not going up that much anymore. Uh corporate debt's not that high. Consumer debts actually not that high. Uh you know, inflation is ticking up. That's not good. And you have a lot of stimulus. The one big beautiful bill, 300 billion of stimulus. The uh the additional spend AI is 300 billion of stimulus. Dereg, it's a form of good stimulus because it allows people to put their money to work in a better way. Um and so th those things are good and a lot of that and then but we have a huge deficit and and that's kind of stimulus that also ends up in corporate profits.

[00:01:29]So corporate profits you know are up huge this year. Um so you know people are feeling good stock price are up that's all good and there may be negatives. I think the one that you can see a little bit is inflation going up.

[00:01:40]>> Yeah.

[00:01:40]>> Um >> have you seen inflation cutting into consumers ability to actually spend? Are they cutting into their savings? Yes, I think well you got to separate consumers into various segments. For the high end, it doesn't do anything. And if you take the higher gas prices, a dollar of gas is a hundred billion dollars a year, but of course it affects lower income folks much more. And for them, they have to cut back something else or do something.

[00:02:04]So what has happened for some is they have cut savings and they still spend and you know and boring has gone up just a little bit. So it might be that it might not be sustainable forever and we don't know what's going on future gas prices. So uh you do have a little bit of that. And in terms of the big beautiful bill that you just mentioned, are you seeing companies increasingly use things like the expensing the the expensing options that were in that bill because you can write off so much right now?

[00:02:28]>> No, it's it's expensing options. It's the R&D credits. Uh it's it's a competitive t I think we need a competitive tax structure globally and this is competitive globally. And so that puts American companies in a position where they're going to invest here elsewhere. there's an incentive to do it here, too. Or at least not a disincentive to do it here and incentive to do it elsewhere. Before C taxes were cut, this happened in Trump's first term. You know, you you had huge sums of money going overseas and staying there because, you know, the returns were so much lower if you if you could do the exactly the same equivalent behavior.

[00:03:00]So, uh so that does matter.

[00:03:02]>> So, you feel good about where we are now in the economy even though inflation is ticking up.

[00:03:05]>> Yeah, I feel okay. I'm I'm a little more worried about other people. I see, you know, it's not it's not their immediate cracks in the economy. It's the other things I worry about that has a long list of serious issues that are going to have to be dealt with. I don't know how they're going to affect the economy this year. You can't put them in a base forecast. They are large items. I always refer to them as tectonic plates moving around that may cause issues that we don't fully understand today.

[00:03:28]>> I mean, it's interesting because this market has been in a meltup, right? Look at these major averages since the end of March. Are you surprised to see things like the NASDAQ up 28% in the last two months, even in the face of two wars that we're watching play out?

[00:03:41]>> I'm not surprised other than in the face of two wars that they, you know, they don't seem to have derailed anything.

[00:03:46]But you and I have seen this before where you have these kind of meltdowns and they often go on longer than you think. So, you know, the person says that's too much. Well, maybe not because they can go on for a long time before something reverses them and you don't know what that is. you know, it could be sentiment, it could, you know, could be uh inflation, it could be higher rates, it could be business sentiment, you know, obviously consumer demand if it drops that, you know, a lot of companies will cut back inventory and uh the profits will drop and all that. So, it's always a confluence of events. It's very hard to predict in the next 12 months what's going to happen. I and I actually think it's a huge intellectual error to say here's my base case. What I always look at is what's the range of outcomes?

[00:04:23]You could put probabilities in those outcomes. You know, my probabilities of a of worse outcome are higher than other people's and it's mostly about inflation driven by multiple factors.

[00:04:32]>> Yeah. But I think the other day you made some news at the Bernstein conference.

[00:04:35]You said you were cautiously pessimistic.

[00:04:37]>> Yes, I know. I joke I was kind of joking because everyone says cautiously optimistic.

[00:04:42]>> Okay. So cautiously pessimistic. The other thing you said which I thought was interesting is you you tend to buy back your stock all the time, but you said you're not fond of buying back the stock of JP Morgan at these levels.

[00:04:52]>> I have been very consistent. We are buying back the stock at these levels.

[00:04:56]Uh I prefer to buy them at lower levels.

[00:04:59]I prefer to help my existing shareholder, not my leaving shareholder and we've always believed that investing our company is better than buying back the stock. However, we have a lot of excess capital and you know the stock is you call equilibrium but I I don't like equil I like to buy it when I think it's kind of cheap and it's a bargain. So Warren Buffett says the same thing and so do a lot of people. Buying it automatically I think is just a intellectual fault. That's not that's not you should be buying it. If you if if stock price go from here to here, you buy more here and less here. And that's kind of what we do.

[00:05:28]>> It's the it's the most fundamental thing you learn on Wall Street. Buy low, sell high.

[00:05:33]>> Exactly. And then it takes judgment, but that is and it's hard to fight the market. You know, the market says a stock's worth X. Well, it is probably.

[00:05:39]Yeah.

[00:05:39]>> But that doesn't mean I want to buy at that price. Particularly when I think I can use my capital. That's the other thing I I probably mentioned at the conference is that we have all this excess capital estimated about $40 billion. I believe now that we can deploy it in our businesses over time.

[00:05:53]It may take a couple years because of things like SRRI and that I'd rather do that. So if I had no other options and you know maybe it'd be more stock buyback.

[00:06:01]>> Yeah. You're talking about your security uh initiative and I'm going to get to that in a moment because you also said just as you were saying that JP Morgan is earning 20% as opposed to your target of 17% in terms of a return on tangible common equity. You said that you personally think that you're over earning. The entire industry is over.

[00:06:21]>> I didn't say I didn't say the industry.

[00:06:22]I said us. It just means when when you have our business always has volumes that go high to low. Okay. Credit losses that go high to low. Credit losses are kind of normalized. Volumes are quite high. Exuberance is quite high. Profits are made at the margin. The next trade is more profitable than the average trade. And people sometimes forget that.

[00:06:41]And so I have a little humility because look at what happens in in 120 company years between the last 10 years. How many companies earned over 17 in banking or earned over 17%. It was like literally 8% of the time. So to think it's going to go on forever is a mistake. It's a competitive world. It's a capitalist world. As Jeff Bezos says, your margin is my opportunity. And I and I we have a lot of competition and they're coming and they're smart. You know, I I recognize that. They've done very well. And the base competition is quite good. They're all back. It's not like anyone's weak anymore and and you you see that in the numbers. So, uh I just think we should be a little cautious about bragging about our results.

[00:07:18]>> So, so trading volume is abnormally high right now.

[00:07:21]>> It's it is high and values are high. So, remember values values drive a lot of things. Custody, treasury, deposits, uh asset prices going up and so all these things drive a lot of things. And if you model it through, there's another side of that mount sometimes. And I I don't know when that's going to happen. I just think, you know, eventually something will happen and volumes will go down.

[00:07:42]There'll be a little recession, credit laws will go up and uh and we'll still be do fine. And I think actually that's when you perform. It's really important to perform in bad times, not just in good times.

[00:07:51]>> Now, I'm wondering if the Federal Reserve uh changes is going to be a catalyst for for for those changes.

[00:07:57]What's your take on Kevin Walsh and how he's going to approach his new job as chairman of the Fed?

[00:08:01]>> I think the world of Kevin, he's quite experienced in this field in all fields.

[00:08:05]You know, uh he's been in the central bank before. He obviously knows global markets and I like I like what he says which is you know the the Fed should focus more on the financial system and not so much regulatory we he's right to say all these years rule after rule around the world I mean Basel 3 has been 10 years in the making so is this is if we wanted what was the outcome can we make it better I actually think you can make regulations simpler less costly get more loans out there and make the system better and safer And I think that should be the goal. And so I hope they they do that. Uh and then you know rates I don't know he remember he's going to walk in a room with 12 other governors and so he has his ideas. He's a smart guy but he's got to give them time to think about it do some research and all that. So you know it won't be immediately. He he can't decide by himself in day one what to do.

[00:08:54]>> Well it's a very different backdrop than it was when he first was expected to take on the Fed. I mean he was expected to cut rates. How do you cut rates with inflation where it is >> right? And and he'll have to deal with that too. And the market's expecting a hike in interest rates.

[00:09:07]>> I saw that.

[00:09:08]>> Are you?

[00:09:10]>> I think it's possible. I mean, I I don't know. And I don't spend that much time guessing about stuff like that. If you ask me, I can give you all the analysis around why it might go up and why it might go down. I can give you probabilities. I don't know. And and you but we are prepared for higher rates, too, and higher credit spreads, which we have not seen in a long time, you know, as people get a little more credit conscious, which I expect to happen.

[00:09:30]Now, one thing that Kevin Walsh did say was that he wants to make the Fed's balance sheet smaller, shrink the balance sheet.

[00:09:37]>> What does that mean for JP Morgan, though? I mean, what does that mean for a bank like yours, which you've got to keep money at the Federal Reserve?

[00:09:43]>> Well, but that we keep money at these things because of regulations, requirements, liquidity rules. So, I think he's right. The Fed shouldn't have to intervene every single time there's a kuffle in the markets. It's a mistake.

[00:09:53]It's a is a policy error that somehow we got to make everyone comfortable. But to do it, he's got to change some of those regulations and these, you know, the LCR and SLR and certain GCF rules to give banks more flexibility. But the important thing is it's not to deregulate to make it easier for banks to make a lot of money and then go bankrupt. It's to I think you can do it make the system safer. And I think Kevin's quite bright. He probably knows that. And it's going to take a little bit of analysis. We've got a lot of reports to the Fed about how that can be done. I think Secretary Bess has actually spoken about it. You know, to do that, we we have to change some of these requirements. But the banks have so much capital and so much liquidity.

[00:10:28]It's a good question to say you can never use it again in your life. And for us it's a trillion$1.2 trillion dollars of basic cash and treasuries can never use for productive purposes other than safety which is a good one. But I think we could do it much differently and have more safety and and then we can intermediate more more actively in the markets as opposed to the Fed having to intermediate when the time comes.

[00:10:49]>> And Mickey Bowman has been working on this and has >> I I she is on top of all these issues.

[00:10:53]Yes. Jamie, let me get back to something you just said and that's the $40 billion.

[00:10:57]>> Just so you know, a lot of banks are lending a lot more today. So there's they're doing it in anticipation of some of these changes.

[00:11:03]>> And is that what JP Morgan is doing?

[00:11:05]>> A little bit. Yeah.

[00:11:06]>> And and where is the lending specifically? Would you say is the bulk of the lending?

[00:11:09]>> I think you know if you I was just reading some reports flying out here.

[00:11:12]Some will say commercial banking, some will say, you know, markets related financing issues, balance sheet issues.

[00:11:18]Remember the needs of all these global investors are huge. So, you know, banks constrain themselves sometimes like even providing repo because of some of these rules. So, I think it's literally across the board.

[00:11:27]>> Does it does it uh indicate where we are in the macro economy based on where the lending is?

[00:11:33]>> No, but but lending creates money.

[00:11:35]>> Okay. So, when the Fed buys securities, it creates money and when banks lend, it kind of creates money. So, it's kind of a a bullish thing which is happening right now.

[00:11:43]>> Jamie, you just talked about this $40 billion in capital. Well, you said that at the Bernstein conference as well and you said that that money could be used as an acquisition for an acquisition.

[00:11:51]What are you considering?

[00:11:52]>> I'm shocked that people think that's shocking. I didn't have I don't have anything in mind. I'm simply saying yes, of course it could be used for that if it makes sense. If it if it if we did one, I'd explain to shareholders why we're doing this, why it makes sense. It will make sense. It won't be some, you know, something that'll surprise people in a terrible way. And so, uh, and of course, I I remind people, I'd rather invest, we could invest organically. So it's quite clear organic growth is the best kind of growth. It's your people, it's your culture, it's your systems, it's your tech. You're not taking on whole new different things. You know, mergers are can be very tough and we're quite conscious that. So it doesn't mean we won't do them. And there may be a small We've done a lot of small ones by the way that you don't even know about.

[00:12:28]First Republic is $300 billion of assets. You know that I don't know how you measure that, but that was a massive acquisition.

[00:12:34]>> That's a massive acquisition by any standard. But look, we know you can't buy another deposit institution in the United States, right? You're at the limit in terms of deposit. So, do you want to buy a tech company? Are you going to buy fintech? What are you thinking about?

[00:12:46]>> We we look at everything, you know, just to be smarter. And you know, a lot of these fints have done a great job. Uh it it doesn't seem to me like that's the likely outcome. But it's possible that someone's going to come, you know, I always say to myself, I don't care what I think. I want you to tell me what you think. And if you come up say that's a great idea, we'd consider buying something.

[00:13:01]>> What about wealth management?

[00:13:03]>> Yeah, that that could make sense, too.

[00:13:05]Yeah.

[00:13:06]>> I see.

[00:13:06]>> But but in every area, we can do it organically. So you're always going to compare it to an organic possibility.

[00:13:12]Some people they're not in that position. They can't do it organically.

[00:13:15]They have to buy it. I think we have the luxury of saying no, I can build it too.

[00:13:19]>> Let me ask you about that because you you mentioned the security and resiliency initiative and you talk about investing uh in items and industries that are central to the US economy to defense. I know you've also taken this international. You're going to go to the UK and and talk about doing it elsewhere. What specifically have you identified in terms of security security and resiliency uh potential investments?

[00:13:43]>> Yeah. So, you know, the the first thing which I know your viewers know is that America is still the beacon of light in the hill is still the arsenal of democracy, the bastion of freedom. I'm quite patriotic in that and that this country provides safety to the whole world was and it wasn't just our allies.

[00:13:58]It actually provides safety to India.

[00:14:00]You know, people who are not allied nations, United States of America. And I think the most important thing is we have the strongest military in the world.

[00:14:06]underpinned by the strongest economy in the world. And if you ask me about the dollar dominance, it's depend on those two things. If those two things disappear, so will dollar dominance one day. That may take 30 years. But um so that that was the first thing. But but we we didn't identify it ourselves. It's kind of been identified by the military itself, by the administration, by others about we don't we rely on outside parties for rare earths. We should have been self-reliant or at least friendly reliant or neighbor reliant or something like that. That was true for active pharmaceutical ingredients and the ingredients that go into the drugs that people take you know mostly come out of China and India and and and then there are things we do in manufacturing that we should have done here and we didn't keep productive capability to build more bombs and and missiles and so we can't double production and so all these things like and then people know it now we got to go do it. So this was our effort to say you know instead of complaining about it what are we going to do and so we looked at what we already do and then we said we're going to do 50% more uh that's the 1.5 trillion over 10 years it's been outstanding I mean we've been in contact with thousands of companies we've we've already Todd Combmes came in and done a great we've already invested two billion directly in companies um we're going to beat this 1.5 trillion I'm pretty sure but we've learned a lot in the process importantly and this might be interesting to your viewers we've done research around the ship building ecosystem we're doing around the drone ego ecosystem. We did it around the API ecosystem, around the rare earthy ecosystem. And that teaches you what policy should be. And then we're going to promote policy to, you know, here's how we can keep productive capability, you know, ready to go for another commercial use. But if you need it for military purge, you push a button, the other stuff goes out. And you can do that for ship building, you can do that for missiles, you can do it for a lot of different things. And so it's been a great effort. We're learning a lot. We have a lot of partners, a great advisory board. And as you pointed out, we're going to roll it out to allied nations, which is UK, France, Germany, Italy, Poland, Australia, Japan, Korea, Canada.

[00:15:56]>> And so you're going to be looking to invest in things like drone companies, ship building in those economies as well.

[00:16:01]>> Yes. And this is normal commercial business. So it's not we may do some venture capital type of stuff, but it's mostly just helping companies grow and expand like we do in middle market, corporate banking, and investment banking. Why did it take so long for corporate America to understand that the supply chains and and by the way um elected officials uh Congress and the White House, how come it's taken so long to understand that we can't have other countries particularly adversaries making our stuff? That's important.

[00:16:25]>> We should have we should have 15 years ago, right?

[00:16:28]>> The military, the government and business should have said we need to run things that are needed for national security and resiliency the same way companies do. We've got backups for almost everything. And we didn't. Now you and I can cry over spilled milk, but my view is admit it, acknowledge the problem, roll up your sleeves, get to work. And that's what this is. And you have it, I mean, you have a huge amount of companies, a lot of other people doing this, not just us, which is a small part of this. You have the military's behind the, you know, getting this thing right. They burn Steven Fineberg who's doing a great job at that. They've got uh Bessins working on some of these things. So we're it's fully engaged. You got to read the book Freedom Forge. How the America got fully engaged after Pearl Harbor. Like we went from building almost no ships, no tanks, no aircraft to we built 144 aircraft carriers in four years. There was no car produced in America from 1943 to 1945.

[00:17:19]>> Wow.

[00:17:20]>> All those plans, all of them, and not just GM and Ford. All those plants were building bombers, fighters, tanks, jeeps, ships. We went from building a Liberty ship in one year to two days.

[00:17:32]And so it's just we just got to get this machine going. and hopefully this will get it done fast enough.

[00:17:37]>> Well, you've always been a patriot, Jamie, and I love that about you. Let me get your take on what you're seeing around the world uh given um what the effort is in the United States. You're just back from China. The president obviously had his own trip to China, but what did you do in China? What can you tell us about u what you're doing in China?

[00:17:53]>> Yeah. Well, you want about the world, you want about China?

[00:17:55]>> China.

[00:17:56]>> So, we we we've been in China for a long time and we have exposure. We have China, we got Hong Kong, got Taiwan. I went, by the way, from Shanghai to Taiwan. You did.

[00:18:05]>> I had to stop in Okinawa because they're not allowed to go direct. Uh so, you know, we have a lot of clients in Taiwan, too. So, we we've had a China conference for years, the 3,000 investors from around the world. When we bank people in China, we bank some Chinese companies, only those that were allowed to by the United States government or the European government.

[00:18:21]So, you know, we followed the rules that were supposed to. Uh but but we also we also bank something like I I forgot the number. I'm going to say 2,000 multinationals in China. So, we probably bank Fox in China. We probably bank everyone else in China and we want to and you want us to and you know all these companies we bank want us to and we all follow the laws of the United States which they've gotten very tough and they should you know sanctions you know what could be sold there what could be sold here etc. Um, and it makes you smarter. So, I believe what the government's doing is the right thing.

[00:18:50]Full engagement. Full engagement, but do things in our own self-interest when it comes to security. And I think we're actually doing that. And so, um, uh, and and there's more to do. I mean, we haven't quite gotten there in a bunch of these things, but there and there's more to do, but we'll we'll be okay. And we just got to move quickly.

[00:19:06]>> But it's a balance.

[00:19:07]>> And the other thing I said very important when I look at the what we need to do, we need to maintain the strongest military in the world and the strongest economy in the world. And that a lot of that's us doing a better job.

[00:19:16]It's not about potential adversaries. We could do a hell of a lot better job in our own business, our own economies, our own growth, our own standards, you know, teaching people about civic responsibility in this country that people, you know, billions of people would come here if you opened up the borders, you know, billions of people.

[00:19:33]And we're not teaching our own kids that this the I always tell the Constitution is a legal embodiment of values. Those values are principles. life, liberty, and the pursuit of happiness. Freedom of speech, freedom of enterprise, country, God. That's what it's about. And we don't teach that anymore. And those values are why that those values of freedom are everything. They're more they're more powerful than anything in the world. And you know, we've done a terrible job making that part of our school system. And and I put the work ethic in there. Yes. I I would It's a good thing to work.

[00:20:03]>> You know, you've been working for a long time >> and work hard and and try to do well.

[00:20:08]Okay. Treat people well. And so uh so it's all kind of one big bundle of getting this stuff right.

[00:20:12]>> But in charge of China and I asked President Trump this as well. I mean it's a balance to walk because here we have an adversary that is surveilling the country, right? Surveillance um breaching our networks, right? I mean you know cyber activity and then you just go and you sit down with Xi Jinping and you have a conversation like your like your buddies. Meanwhile, you know that they're and and he said to me, "Well, they're doing it to us and we're doing it to them." I mean, how do you walk that balance?

[00:20:35]>> Well, that's not my job.

[00:20:36]>> I understand your point. But are they surveilling your company?

[00:20:39]>> I probably and I but and the president knows a hell of a lot more about what's actually going on than I do. And so, you know, when the government tells us to do something, we salute, but we're quite conscious of that. I do think we need to do a lot more. But you know he has to deal with China the way they are and there's still a lot of trade with it and the China but also like America like one of the things I think it's important we keep our military allies and our economic allies and I and I think more than just a little I think it's like geopolitically brilliant and and so to me if we do that well that's a great thing and we should be conscious that's the best way to counter adversaries is that keep your you keep yourself very strong and so uh but I understand your point and I don't know what private conference they've had and he probably not going to tell you either.

[00:21:23]>> And we've got part two of my interview with JP Morgan Chase CEO Jamie Diamond coming up in the 8 a.m. hour. And a lot more of that interview all morning