July 15, 2020
A Weird Recession

“In a normal recession, unemployment goes up, delinquencies go up, charge-offs go up, home prices go down,” Jamie Dimon said yesterday on JPMorgan Chase & Co.'s earnings call.

“None of that's true here.”

We are (obviously) experiencing a recession. But this recession is unlike any we’ve seen before.

“Savings are up, incomes are up, home prices are up,” Dimon continued. “You will see the effect of this recession; you're just not going to see it right away because of all the stimulus.”

JPMorgan’s data shows that 60% to 70% of unemployed people are making more money now than they made when they were working, thanks to the extra $600 in weekly unemployment benefits under the CARES Act that are set to expire at the end of the month.

In June, applications for auto loans reached a record high at JPMorgan, up more than 20% compared to June 2019.

Retail mortgage purchase applications were up, too.

Debit and credit card sales volumes were down, but not significantly so. They’ve been buoyed by a 50% increase in card-not-present transactions — presumably from online sales.

These trends have kept a lid on loan losses. While JPMorgan built its reserves by $8.9 billion, the deterioration in its credit metrics has been modest. In its consumer bank, in fact, credit metrics improved compared to the two preceding quarters.

But loan losses aren’t going away; they’re just delayed. They could release like a coiled spring once the stimulus ends.

This is buying time for banks to prepare for what lies ahead. However, the downside is that there is no transparency into when the tide will turn and how bad it will get.

People love to talk about the fear of uncertainty — as if there’s ever certainty about the future. But the difference now is that the range of outcomes is especially broad.

If an effective vaccine is approved by the end of the year, a business bonanza could ensue. If not, the economy could fall off a cliff — especially if federal stimulus ends.

It follows that all banks should prepare for the worst. Optimism is good from a leadership perspective, but realism needs to carry the day when it comes to financial management.

"Run your business knowing it might be sunny, it might be stormy, or in fact it might be a hurricane,” Dimon said years ago. “And be honest about how bad a hurricane might be."

John J. Maxfield / editor in chief of Bank Director
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