Fine, go ahead and sleep at night. I'm in a state of heightened anxiety. I have one eye open even at 3am...waiting for the shoe to drop.
Their coming for me and my money!
Jamie Dimon and Ray Dalio Warned of an Economic Disaster That Never Came. What Now?
Many experts thought high interest rates would break the economy and inflation couldn’t be tamed
By Gregory Zuckerman, WSJ
March 9, 2024
In mid-2022, JPMorgan Chief Executive Jamie Dimon warned that a “hurricane” was about to hit the U.S. economy.
It could be “a minor one or superstorm Sandy,” Dimon said at a financial conference in New York. “You’d better brace yourself.”
Last year, Bridgewater Associates founder Ray Dalio predicted a “debt crisis” after earlier anticipating a “perfect storm” of economic pain.
High-profile investors and economists including DoubleLine’s Jeffrey Gundlach and Rosenberg Research’s David Rosenberg were just as fearful, with Gundlach last March saying a recession would come “in a few months.” Early last year, economists predicted a 61% chance of recession in 2023.
The experts were way off. They underestimated the impact of government stimulus and the resilience of consumers and businesses. And they were too skeptical of the Federal Reserve’s ability to push inflation lower without sparking a recession. The economy continues to grow at a steady clip. Inflation is getting closer to the Fed’s goal of 2%, unemployment remains near a half-century low and the stock market is near record highs.
“I was bearish on the economy,” Dalio said in an interview. “I got it wrong.”
The Fed’s rate increases concerned many economists because surging rates in the past have preceded recessions.
Said Dimon, also in an interview: “I would have thought some of the fiscal stimulus would have worn off by now.”
Where we thought we were heading
At the time, the downbeat predictions made a lot of sense. Between March 2022 and last summer, the Fed raised interest rates 11 times to what is now a 23-year high.
In the past, surging rates have preceded recessions. Other telltale recession signs showed up, too. The yield curve inverted and remains that way, meaning yields on short-term U.S. Treasury bonds are higher than those on long-term bonds. The pace of GDP growth dropped, and inflation soared. Even Fed Chair Jerome Powell said there was only a narrow path to bring down inflation without pushing the U.S. economy into recession—the hoped-for “soft landing.”
Where we are now
So what happened? Many people were relatively unscathed by the higher rates—for example, those who locked in low-rate mortgages before the Fed’s rate increase or own their homes outright.
It’s also the case that U.S. politicians were much faster to act than in decades past to aid the economy. Several rounds of pandemic-related relief payments and other spending programs left many consumers and companies with extra cash, which fueled continued spending. Consumer spending accounts for roughly 70% of the U.S. economy.
“I got it wrong because, ordinarily, when you raise interest rates it curtails private-sector demand and asset prices and slows things down, but that didn’t happen,” Dalio said. “There was a historic transfer of wealth: The balance sheets of the private sector improved a lot and the balance sheet of the government deteriorated a lot.”
Bridgewater Associates founder Ray Dalio wonders whether all the debt the government has amassed will come back to haunt the economy.
A spokesman for Dimon said the JPMorgan chief gives a range of possibilities and weighs them, but doesn’t make predictions.
At the same time, a resilient stock market and bonds with higher yields have produced a positive “wealth effect” that encouraged consumers to spend rather than retrench.
It’s also true that interest rates aren’t that high, historically speaking: They just feel that way because the U.S. went through an extended period of superlow rates.
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Ed Yardeni, an economist who has been more bullish than most over the past two years, attributes some of the mistakes of the stars to excessive fear of higher rates.
“The economy can function just fine where interest rates are,” he said.
In hindsight, some indicators, such as the inverted yield curve, did accurately anticipate severe problems, such as last year’s regional banking crisis. But the Fed did a good job putting out fires in banking, and the troubles didn’t spread to other sectors.
Not out of the woods
The probability of a soft landing would appear to have improved, with the Fed signaling a willingness to cut rates this year. Economists recently pegged the chance of recession within the next year at 39%, down from the 61% a year ago.
But some of those who predicted tough times say difficulties are still on their way. Gundlach recently predicted a recession this year and a drop to 3200 for the S&P 500, which closed Friday at about 5100. Gundlach didn’t respond to requests for comment.
Pandemic-related relief payments left many consumers and companies with extra cash, buoying an economy driven by consumer spending.
For his part, Rosenberg said gross domestic income, adjusted for inflation, has been flat over the past year, the job market is weaker than it appears and personal income isn’t keeping up with spending. In an interview, he said the economy’s troubles will be clear later this year.
Dalio says key questions are whether productivity will continue to improve, as businesses embrace artificial intelligence, and whether all the debt the government has piled up—and the resulting debt payments that will have to be made—will come back to haunt the economy. The U.S. government is expected to pay an additional $1.1 trillion in interest over the coming decade, according to the Congressional Budget Office’s latest estimates.
As for Dimon, he says he remains worried about serious issues facing the economy, including inflation remaining too high, geopolitical upheaval, and rising government spending and debt. He says so-called stagflation, or slow growth with unhealthy inflation, is a concern.
“I wouldn’t count my eggs yet,” Dimon said.
Write to Gregory Zuckerman at Gregory.Zuckerman@wsj.com
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