Trying to predict the path of the American economy at the moment is like looking into a dark well – nobody knows how deep the hole goes.
Even Jamie Dimon, CEO of JPMorgan Chase and an experienced forecaster for everything financial, is stunned. As head of the financial system, a $ 3.2 trillion bank serving nearly half of US households and a large part of its business, Dimon has a unique view of the world's largest economy.
"The unprecedented word is rarely used properly," said Dimon this week after JPMorgan reported second quarter earnings. "This time it is used correctly. It is unprecedented in what is going on around the world and obviously Covid is a key attribute itself."
More than four months after the onset of the coronavirus pandemic, the financial damage caused by the outbreak has yet to be fully registered. Take JPMorgan, for example: The bank increased its provisions for expected credit losses by USD 15.7 billion in the first half of this year. However, second-quarter loan write-offs in the large retail bank declined 3% to $ 1.28 billion, roughly the same as before the virus.
This is because the $ 2.2 trillion CARES law injected dollars into homes and businesses to cover up the effects of widespread closings. When the key components of this law expire, true pain can begin. By the end of July, 25.6 million Americans will lose higher unemployment benefits, and it is unclear whether Congress will extend the additional payments of $ 600 a week, which has given so many households a boost.
"In a normal recession, unemployment increases, arrears increase, depreciation increases, property prices decrease; none of this applies here," said Dimon. "Savings have risen, incomes have risen, real estate prices have risen. So you will see the effects of this recession; you will simply not see them immediately because of all the momentum."
The bank has been forgiving on 1.7 million accounts; So far, more than half of the credit card and mortgage customers in the programs have made at least one monthly payment. However, these vulnerable customers could stop paying as their federal services expire.
In connection with the Federal Reserve's historic moves to support financial markets, several banks actually had a banner quarter. JPMorgan had the highest sales ever in the second quarter at $ 33.8 billion, mainly due to a boom in trading activity and a rush of companies to enter debt and stock markets. It was the best quarter for Wall Street in ten years, so Goldman Sachs and Morgan Stanley also set records.
But investors haven't stacked up in bank stocks. JPMorgan stocks have barely moved since the results were released. Fear of the future, of the long-term effects of defaults and low interest rates, and of possible dividend cuts is holding them back.
To make matters worse, the number of coronavirus cases in the US has risen and 70,000 new cases per day were reported for the first time on Friday as the outbreaks in the south and west worsened. This has caused states like California to reverse aspects of economic reopening, and even cities that have managed to suppress the virus are taking precautions.
Banks have potential credit losses, but they fly blind in the pandemic. JPMorgan sees no less than five different paths that the economy can take. The company has become more pessimistic and sees unemployment in its standard baseline scenario reaching almost 11% by the end of this year, 4.3% worse than the same forecast in April.
In a worst-case scenario, in which the virus continues to rise in the fall and force another round of widespread shutdowns, unemployment could peak at around 23%, the bank says.
The range of results for the country is incredibly broad and will have a direct impact on households, businesses and ultimately investors.
If the more benign base case occurs, JPMorgan is largely done with providing cash for default values. In that case, it could start buying back billions of dollars in its shares, perhaps as early as the fourth quarter. In the worst scenarios, however, JPMorgan could be forced to cut its quarterly dividend of 90 cents to get capital.
At this point, it's little more than a guess, says Dimon.
"If you look at the base case, an undesirable case, an extremely negative case, they are all possible and we only guess the probabilities of these things; that's all we do," he said. "You will have a much drearier economic environment in the future than in May and June, and you have to be prepared for that."
"We just don't know," added Dimon, "and we're wasting time guessing, by the way."