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Destroying Dimon's Delusionary View Of Economic Realities

Submitted by Lance Roberts via STA Wealth Management,

Over the weekend, I read an interesting article by Lucinda Shen at Business Insider discussing a recent interview between JPMorgan's CEO, Jamie Dimon, and NBC's Chuck Todd. According to Dimon:

"Amerca has the best hand ever dealt right now."

That is a pretty bold statement overall, but he does back it up with some statements of fact. However, for those "facts" to support such a sweeping statement of "greatness," they must be put into some context of previous economic cycles. Therefore, let's take a look at his points in a bit more depth.

"The U.S. economy has been growing at 2-2.5% for six or seven years, while that's not great, it's quite good."

The problem is, as shown in the long-term chart of economic growth below, it is the lowest average rate of economic growth in history. 

Importantly, notice that since 1980, when the primary shift from a manufacturing to a service-based economy began, economic growth rates have been on the decline. 

While Mr. Dimon may suggest that such a low economic growth rate is "good enough," it is not strong enough to foster higher rates or wage growth or economic prosperity for roughly 80% of American's. This was shown in the most recent Federal Reserve study on consumer finances. 

Since 2007, the media value of financial assets for families with holdings has DECLINED with the exception of those in the top decile that includes "some folks" like Jamie Dimon.

Median before-tax incomes have also fallen from nearly $52,000 annually to roughly $47,000 currently.

And, most importantly, families that own equity in a business (small businesses generate the bulk of all job creation) has plunged.

This last point is the most critical as it relates to Jamie Dimon's comments regarding employment:

"We've added 10 million jobs since the 'Great Recession.'"

While that statement is true, it is worth noting that there is a huge difference between "quantity" and "quality." There is no arguing that employment in the U.S. has grown since the end of the "financial crisis," however the jobs created have been primarily located at the lower end of the wage scale. We know this simply by looking at average wage growth for the 80% of population that are not "Supervisors."

Furthermore, while "creating 10-million jobs" since the end of the recession sounds like a strong accomplishment it was not sufficient enough to absorb the increase in the population. In other words, for every job created there are more individuals actually "needing" a job.

With roughly 94-million individuals not counted as part of the "official labor force," the downward pressure on wage growth due to the increasing demand for available jobs remains a pervasive force. Of course, since individuals must produce first in order to consume, the expectations for stronger future growth rates are likely to be disappointed in an economy which is almost 70% based on consumption.  

America Has Been Better

Jamie Dimon then goes on to support his thesis of "American exceptionalism" by stating:

"Make a list of everything important, rule of law, low corruption, unbelievable innovation, entrepreneurship ... the deepest capital markets — I'm not talking about banks. I'm talking about venture capital, private equity, companies, individuals, the best science, technology, engineering, math the world has. In fact, we train 40% of them [to] go back overseas."

As I have stated many times on daily radio broadcast, the "rule of law" and "low corruption" are two of the most important determinants of a country's economic prosperity. If businesses do not have faith in a fair and equitable backdrop in which to conduct business, they conduct business elsewhere. This is why 3rd world countries that are rife with corruption and ruled by dictators fail to succeed economically.

The problem is that America has slipped in these crucial ranks in recent years as noted by the most recently available data America ranks:

  • 19th in National Satisfaction
  • 14th in Education
  • 3rd in Global Competitiveness
  • 46th in Freedom of the Press
  • 26th in Child Well-being
  • 24th in Literacy
  • 19th in Perceived Honesty
  • 24th in Freedom from Corruption
  • 10th in Economic Freedom
  • 125th for GDP Growth per Capita
  • 12th in Entrepreneurship

But for Jamie Dimon the U.S. does rank #1 in the number of "super-rich," an elite club of which he is a member.

Of course, for the banks, Wall Street, private equity funds and all variations of capital markets, it has been an "economic nirvana." The massive infusions of capital by the Federal Reserve have flooded the financial system driving asset prices higher and forcing a misallocation of capital into increasingly risky assets. While the U.S. may indeed be "number one" for financial engineering in all forms, it is rooted in a deeply artificial foundation that will eventually disintegrate into the next financial crisis.

But while financial engineering and venture capital may be juicing the profitability and wealth of a vastly small number of the total population, it is not driving the entrepreneurship needed to spark real economic growth. As noted by Gallup:

"The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does....and this is our single most serious economic problem...for the first time in 35 years, American business deaths now outnumber business births.

 

Let's run some numbers. You will often hear from otherwise credible sources that there are 26 million businesses in America. This is misleading; 20 million of these reported 'businesses' are inactive companies that have no sales, profits, customers or workers. The only number that is useful and instructive is the number of current operating businesses with one or more employees.

 

There are only 6 million businesses in the United States with one or more employees. Of those, 3.8 million have four or fewer employees.

 

Next, there are about a million companies with five to nine employees, 600,000 businesses with 10 to 19 employees, and 500,000 companies with 20 to 99 employees. There are 90,000 businesses with 100 to 499 employees. And there are just 18,000 with 500 employees or more, and that figure includes about a thousand companies with 10,000 employees or more. Altogether, that is America, Inc."

As you can see, almost 80% of all businesses have fewer than 10-employees. This is why economic growth has failed to spark as financial engineering, and monetary interventions, have had little or no impact on the vast majority of American businesses. However, tighter lending standards, increased healthcare costs, increased regulations and higher taxes DO HAVE a large impact on the profitability and sustainability of America, Inc. Therefore, it is not surprising that entrepreneurship and business equity ownership remain on the decline.

Furthermore, if this is indeed the case, then the BLS is likely overstating the very job growth that Mr. Dimon is pointing to as evidence of American exceptionalism. 

Do not misunderstand me. I believe that America is the greatest country in the world. I have lived and worked in numerous countries during my life. and I will always call America my home.

For the top 20% of the population that have money actually invested, or directly benefit from surging asset prices like Mr. Dimon, life is great. However, for the vast majority of American's, the job competition is high, wages growth is stagnant and making "ends meet" is a daily challenge. 

While Mr. Dimon's view of America is certainly uplifting, it is a bit delusional. But of course, give any person a billion dollars and they will likely become just as detached from economic realities. 

As Jim Clifton, CEO of Gallup, sums up:

"The more we execute on our leadership's erroneous belief in innovation, the more our engine stalls out -- and the more people rightly worry about economic issues.

 

Because we have misdiagnosed the cause and effect of economic growth, we have misdiagnosed the cause and effect of job creation. To get back on track, we need to quit pinning everything on innovation, and we need to start focusing on the almighty entrepreneurs and business builders."

Does America have "greatest hand ever dealt." The data certainly doesn't suggest such. However, that can change. We just have to stop hoping that we can magically cure a debt problem by adding more debt and then shuffling it between Central Banks.