The big banks will kick off Q3 earnings season on Friday.
And preceding that, today we heard from Jamie Dimon the CEO of JP Morgan.
No one has more information on the health and trends of consumer and business behavior than the head of the biggest bank in the country. With that position of power, he also has a seat at the table with the Fed chair and White House economic advisors, as a member of the "President's Working Group on Financial Markets." He has influence.
So, what did he say?
His comments started hitting the wires a few minutes after the open of the stock market this morning.
He said "AI is real."
Not coincidentally, the AI trade was dominant today. Nvidia finished 4% higher. The Nasdaq and S&P both had big days, led by big tech.
With the technology revolution in mind, he talked about the backlog for IPOs.
We talked about this IPO outlook earlier this year, in looking at the parallels between the current environment and the late 90s boom.
A technology revolution was underway in the late 90s, with the rapid adoption of the internet. Productivity was high. Growth was hot. Inflation was low. And the Fed juiced it with rate cuts, starting in 1995.
Take a look at the volume of IPOs in the late 90s, the biggest of which came early, in 1996.
Then the frenzied return chasing came in late 1999.
If history is our guide, we should expect a coming boom in IPOs.
And the Wall Street kings of underwriting (the big banks) will be big beneficiaries.
What else did Jamie Dimon say today?
He agreed with the Fed rate cut.
And he had another comment about monetary policy that is interesting, particularly ahead of tomorrow's release of the minutes from the last Fed meeting.
Remember, as of September, the Fed is now easing policy through interest rate cuts, but it continues to withdraw liquidity from the system (i.e. it's simultaneously tightening) via its quantitative tightening program.
On the latter, Jamie Dimon has said in the past, that "rate cuts relate to inflation," while "QT relates to volatility and liquidity in the Treasury market."
And in this interview this morning, he talked about the risk of volatility in the Treasury market.
He complained that the banks have tons of excess cash but can't use it efficiently due to regulatory constraints. It's affecting their ability to provide liquidity in the Treasury market, while the Fed is simultaneously extracting liquidity from the Treasury market.
And with that, he implies that we will likely see another episode of big Treasury market volatility, caused by the Fed's quantitative tightening (he mis-spoke and said QE in the interview).
Jamie Dimon said the Fed should start "fixing" this "today."
Remember, back in 2019, the Fed's attempt at quantative tightening brought about this 300 basis point spike in the overnight lending market …
The Fed explained it as … "strains in money market … against a backdrop of a declining level of reserves, due to the Fed's balance sheet normalization and heavy issuance of Treasury securities."
So, after a period of "balance sheet normalization" (QT), the Fed was forced to return to QE.
With all of the above in mind, we'll see in tomorrow's Fed minutes what the committee had to say about plans to end QT (if anything).
