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Jamie Dimon Has One Thing Right – the Market Has Never Seen so Much Debt.

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I’ve been a consistent critic of Jamie Dimon as CEO of J. P. Morgan and its predecessor banks where Dimon worked. He has enriched himself to billionaire status and JPMorgan Chase stock (JPM) is near an all-time high thanks in part to over $40 billion of stock buybacks. That’s fine for himself and his stockholders, but the benefits to the U.S. economy are far less clear. Dimon conveniently ignores the U.S. government bailouts of 2007-2009, the artificial inflation of bank profits through the Fed’s zero-interest rate policy, ZIRP, and his own embarrassing public remarks including this April 2015 classic from his annual shareholder letter:

“Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations — an unprecedented move — an event that is supposed to happen only once in every 3 billion years or so  (the Treasury market has only been around for 200 years or so — of course, this should make you question statistics to begin with). Some currencies recently have had similar large moves.”

This is statistical nonsense, of course. Referring to “7 or 8 standard deviations” is a reference to a normal distribution (also know as a Gaussian distribution) that presupposes a bell-curved degree distribution of risky events. That distribution leads quickly to the “3 billion years” estimate.

But, risk is actually distributed on a so-called “power curve” in which extreme moves happen with much greater frequency than a normal distribution. The empirical support of analyzing risk in a power curve distribution has been amply demonstrated since the early 1960s, but mostly ignored.

Dimon is either wildly off-base in this estimate, or is relying on subordinate analysis. Both outcomes are disturbing. That said, Dimon does hit home in some remarks in this article including those in a cut-and-paste TV interview.

Dimon says that quantitative easing was unprecedented (correct), quantitative tightening is unprecedented (correct) and the U.S. debt-to-GDP ratio is near unprecedented levels (also correct, except the prior heights brought victories in the Civil War and the Second World War). Dimon’s understanding of the statistics may be sketchy, but his bottom-line conclusions are correct. Let’s give credit where it’s due and heed these prudent warnings from the most powerful private banker in the world.

Accredited investors interested in learning more about Jim Rickard’s private placement in the world’s first predictive data analytics startup that combines human and artificial intelligence with complexity science should check out his offering at Meraglim Holdings. Click the link to learn more.

 

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