Wall Street has long bemoaned the Federal Reserve Bank’s insistence that inflation will be temporary, and now America’s largest bank is putting money down on it.
JP Morgan is stockpiling cash, in a move that shows definitive confidence that inflation is here to stay. Although the Federal Reserve has been staunch in their stance that inflation is transitory and a side-effect of persisting pandemic pressures, JP Morgan CEO Jamie Dimon believes otherwise.
“If you look at our balance sheet, we have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,” Dimon said in a press conference on Monday.
“I do expect to see higher rates and more inflation, and we’re prepared for that” he added, per CNBC.
The reason this is of particular importance is because during even transitory times of inflation, banks especially will try to rid their balance sheets of as much cash as possible.
Cash loses value during inflationary periods, as the value of money decreases. The purchasing power of cash decreases as prices increase. To illustrate this, imagine today a chocolate bar costs $1 and you have $1 which means you can buy a whole chocolate bar. Tomorrow, however, the price of the chocolate bar goes up to $1.50, but you still only have $1. That $1 of yours can no longer buy a whole chocolate bar, and thus, the value of your money has decreased.
Banks are astute to this, and are typically some of the quickest to purchase inflation hedging assets like real estate and commodities which perform better as prices rise. What is unique to this particular possibility of inflation is that the largest American bank is holding its cash position before deciding to purchase any assets, in almost a defiance of the Fed’s repeated recommendations that inflation will eventually go away.
A $500 billion dollar bet on inflation that’s here to stick around has the power to move markets and influence other investors as well. Such a large cash position signals that JP Morgan is certain that equities will rise, which is typical during periods of inflation. The volume though — half a trillion dollars — means that the bank is willing to risk an incredible loss of money on the bet that interest rates are set to rise significantly for the first time in almost a decade.
In our chocolate bar example, a dollar is not much to lose. Multiply that by 500 billion, and if JP Morgan is wrong, they are set to lose hundreds of billions of dollars. This is what makes Dimon’s comments so significant and marks Wall Street’s first official line in the sand in the inflation debate.
See: Are You Missing Out on Free Money? 80% of Americans Aren’t Taking Advantage of COVID ReliefFind: Prices Surge 5% as Inflation Rises with No End in Sight – May’s Consumer Price Index, By the Numbers
Should interest rates rise, the value of equities will rise as well, thus benefiting those who have the cash to purchase them. These investors then wait to strike at the right time, and price, on assets they believe are currently under or appropriately priced, then wait for them to increase along with interest rates.
For the country’s largest bank by assets, this is an exercise of their specialty. For the average investor, this is more of a wake-up call to potentially begin positioning their own assets for a real inflationary increase.
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