The leader of America’s biggest bank didn’t pull any punches in his latest shareholder letter.
At 66 pages, and over 35,000 words, JP Morgan’s (JPM) Jamie Dimon basically called on Americans and our government to get our sh*t together.
I love watching political parties get a foot inserted strategically as much as anybody, and this shareholder letter was chock full of ass-kicking for politicians.
But more importantly, it was full of ideas on what needs to happen to our economy.
While some of the letter is nothing more than entertainment, some of it can lead to investable opportunities for smart investors.
Regardless – at a minimum – these letters help us better understand the current economic situation and plan accordingly.
On Renewables…
Dimon calls out the “woke” party for failing to understand that cutting off funding to oil and gas companies would be economically destructive. He is not wrong.
We still use a lot of carbon-based fuels to meet our energy needs, which will be the case for a long time.
And unless you are a fan of $12 gas and a monthly utility bill that is three or more times the current level, we have to keep funding.
You see, there is a reason you are seeing energy assets like Pipeline Storage Facilities pop in the portfolios of Private Equity funds.
The elites of Wall Street are well aware that we will be pumping oil and gas for decades, and that it’s going to produce a ton of cash flow. While pipeline companies are not as cheap as they were last year, these businesses could be smart investments whenever there’s a weak patch in the oil market.
While Dimon and his bank want more oil & gas funding, they weren’t afraid to show their appreciation for renewable energy.
He reminded us that there are exciting new companies focusing on renewable energy springing to life every day.
Renewable energy companies should, without a doubt, be kept on your radar. Some of the best growth-oriented hedge funds I follow are uncovering exciting new renewable energy companies. Following their lead could help us uncover enormous profits as renewable technology and efficiency improves over the next few decades.
On Banking…
Dimon also talks at length about the rise of shadow banking and how uneven the regulatory field is for the banking industry.
Shadow banks, like Business Development Companies (BDCs), do not have to follow the same rules as banks when it comes to raising capital and making loans. Banks pay fees shadow banks do not have to pay, and endure reams of regulations that shadow banks don’t have to worry about.
That creates a potential opportunity for us as investors.
The fact that many smaller banks are not going to be able to keep up with the rising competition from shadow banks and fintech companies is key.
The increased cost of keeping up with rapid technology changes from fintech companies will destroy the bottom line at many small regional and community banks. They will need to look for a larger bank to buy them to gain the scale necessary to compete.
Several hedge funds specialize in bank stock investing and activism. I know who these folks are and love stealing their ideas. The takeover rate of a portfolio of small banks is spectacular. It’s why I’ll be releasing my very own small banking letter and portfolio to you in the near future (If you are interested, email me at info@thunderclapresearch.com and let me know).
Bonds
Dimon talks about what he sees in the bond market right now, suggesting that:
“Conversely, in this boom scenario it’s hard to justify the price of U.S. debt (most people consider the 10-year bond as the key reference point for U.S. debt). This is because of two factors: first, the huge supply of debt that needs to be absorbed; and second, the not-unreasonable possibility that an increase in inflation will not be just temporary.”
I think he’s spot on.
Buying bonds now is like signing a pitching deal with the Baltimore Orioles. There is just no way in hell it works out for you.
Dimon admits that there is the possibility of a Goldilocks moment in the economy: “fast and sustained growth, inflation that moves up gently (but not too much) and interest rates that rise (but not too much).”
We might see a flood of stimulus money push the economy up to over 6% GDP growth without triggering higher inflation.
That would be lovely for the stock market.
If, however, a flood of cash and the reopening of the economy combines to fuel inflation, that will be far less lovely for stock prices.
As discussed in previous market updates, everyone should be closely monitoring inflation as we swim in uncharted waters.
Letter Rip
I love to pay attention to what bankers are pitching on their conference calls and in their shareholder letters.
Dimon’s bank, for example, sees pretty much every dollar that moves through the U.S. economy at some point, so his insights can help investors make a ton of money.
As for the rest of the banking industry, it’s okay if you don’t want to spend the time to study their sentiments.
That’s why I’m here…
Small banks are one of the most overlooked areas of the market that can make investors serious money with very little risk.
While small bank investing may sound boring, the end result is quite the opposite. The strategy has consistently produced winners for readers of my Takeover Targets portfolio – 53 out of 53, to be exact – for the past 6 years.
Soon, I’ll be opening the doors for new subscribers who would like to join us. If you are interested, simply email me at info@thunderclapresearch.com to be put on the waiting list.
Best,
Tim