Dimon’s Detached View Of Economic Realities

“The chart below shows the deficit, 10-year average GDP growth, and the annual change in Federal Debt. The problem should be obvious. Since the Federal government began ramping up debt, and running deficits, growth continues to deteriorate. Such is not a coincidence.”

Dimon's View Economic, #MacroView: Dimon’s Detached View Of Economic Realities

With the government already running a massive deficit and adding another $4.25 trillion to date, the negative impact of debt on economic growth will increase.

Recent Wharton School analysis confirmed the same:

  • The spending provisions of the AJP, in the absence of any tax increases, would increase government debt by 4.72% and decrease GDP by 0.33% in 2050, as the crowding out of investment due to more significant government deficits outweighs productivity boosts from the new public investments.
  • The tax provisions proposed in the AJP, in the absence of any new spending, would decrease government debt by 11.16 percent in 2050. Despite reducing public debt, the AJP’s tax provisions discourage business investment and thus reduce GDP by 0.49 percent in 2050.

The reason this is important, from an investment standpoint, is the linkage between economic growth and the stock market.


Two Ways To Correct Valuations

In his letter, Dimon noted that stock market valuations are “quite high.” Still, a multiyear boom may justify current levels because markets are pricing in economic growth and excess savings that make their way into equities.

That is a significant statement and one that will most likely be proven wrong.

There is little argument valuations are high. As such, historically speaking, valuations have always reverted by prices falling to align with earnings. However, what Dimon is proposing is a period where prices remain flat while earnings rise.

Dimon's View Economic, #MacroView: Dimon’s Detached View Of Economic Realities

Such has never happened historically. However, such is particularly relevant given that economic activity drives corporate profits and earnings.

Dimon's View Economic, #MacroView: Dimon’s Detached View Of Economic Realities

If Dimon is correct about interest rates and inflation, the drag on economic growth will increase.

“Conversely, in this boom scenario it’s hard to justify the price of U.S. debt (most people consider the 10-year bond as the key reference point for U.S. debt. This is because of two factors: first, the huge supply of debt that needs to be absorbed; and second, the not-unreasonable possibility that an increase in inflation will not be just temporary.”

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