JP Morgan Chase 2013 Annual Report Download - page 27

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All the points above are the fuel that drives
all of our businesses. The growth will be
there. The hard part about our businesses
is managing the complexity and the often
volatile and violent swings of moods and
markets, as well as the episodic nature of
some of the businesses. (Not all of our busi-
nesses operate on a convenient annual cycle.)
What we try to do is see through the fog and
noise and the madness of crowds to clearly,
consistently and safely manage our busi-
nesses and invest in our future.
Of course risk and uncertainty remain, but
we need to put it all into perspective
Of course there is risk in the system. There
always was, and there always will be. As
a company, we need to be prepared for
even the unlikely and unpredictable bad
outcomes. But like everything else, it helps
to put risk into perspective. Some of the
common risks spoken about today include
geopolitical risks and what some think are
inflated stock market values (I am not going
to talk about the stock market as I have little
to add to that debate). Probably the most
discussed area of uncertainty is what eect
the reversal of the Fed’s Quantitative Easing
(QE) policy will have on the economy and
markets. I will speak about Fed policy later
in this section. Here I will briefly review
some of the risk issues we see today.
Geopolitical risk is a constant
History teaches us that geopolitical risk is
always there. Some of the risks are well-
known to us such as Afghanistan, Iran,
North Korea, etc. But many of the risks are
not known, and they often are the ones
that create huge problems. For example,
most people did not foresee the events in
the Middle East (the “Arab Spring”), the
start of World War I or the serious issues
in the Eurozone, to name a few. Many of
the changes in the geopolitical world were
hugely positive; for example, the falling of
the Berlin Wall, the re-emergence of China
in the global economy and the spreading of
democracy throughout many parts of the
world. Two years ago, there was deep fear
about the collapse of the Eurozone, which, of
course, hasn’t happened. When I graduated
from business school 30 years ago, the great
fear at the time was that America had seen
its best days and was soon to be surpassed by
a resurgent Japan.
While we are prepared and watchful, we see
nothing that would change our long-term
plans.
There are many positive factors:
• Consumers are in increasingly good nan-
cial shape. Over 6 million more Americans
are working since the depths of the financial
crisis. The amount of consumer income that
they spend to service their debt is the lowest
it has been since it has been recorded,
dating back to 1980. And Americans’ net
worth has been increasing, along with stock
market prices and the value of homes.
• Housing has turned the corner in most
markets. We’ve moved from a buyer’s
market to a seller’s market in four years,
construction of new homes has steadily
improved and home values have increased
nationally more than 19% in the past two
years due to the strengthening economy.
• Capital markets are wide open – credit, for
the most part, is flowing freely. (The only
exception I see here is that it still is too
hard to get a mortgage for many people.)
• Corporations and middle market compa-
nies are in extremely good shape. Corpo-
rate cash balances now are 11.4% of assets,
up from 5.2% in 2000.
• The banking system is almost fully recov-
ered, and banks are better capitalized
than they have been in 60 years. Banks
had average equity to assets of 11.1% in
2013 – the highest it’s been since 1950.
And banks in total have $10 trillion in
deposits vs. $7.6 trillion in loans today –
the lowest loan-to-deposit ratio since 1970.
In addition, banks currently hold HQLA of
approximately $2 trillion.
• Consumers are beneting from abundant
and less costly oil and gas due to techno-
logical advances in extraction.