The Digest #16

Published on April 8, 2020

In Today’s Issue:

  • Jamie Dimon’s Annual Letter
  • The World Has No Pause Button
  • Upside for Automobile Insurers?
  • Vienna State Opera – Free Livestreams

To read last week’s newsletter covering coronavirus business interruption claims, Jony Ive’s contributions to Apple, and Thomas Jefferson’s debts, please click here.

Jamie Dimon’s Annual Letter

Warren Buffett has often spoken highly of Jamie Dimon, the Chairman and CEO of JP Morgan Chase. Todd Combs, one of Berkshire’s investment managers, was elected as a director of JP Morgan Chase in 2016. In 2018 Berkshire took a significant stake in the bank.

Perhaps in an attempt to emulate Warren Buffett, Dimon also writes an unusually long and candid letter to his shareholders every year and his 2019 annual letter, released on April 6, was no exception. However, due to the ongoing Coronavirus pandemic, Dimon dispensed with his usual format to focus entirely on the crisis and its impact on the bank and the overall economy.

JPMorgan Chase stock has not been spared damage during the current bear market and currently trades at approximately 35% below its record high of $141 reached on the first trading day of the year. Dimon has a reputation for intelligent use of capital to repurchase stock (in fact, Buffett specifically commended Dimon on his buyback policy several years ago). However, Dimon has halted buybacks due to current economic conditions:

We stopped buying back our stock: We have always held the position that the highest and best use of our equity is to reinvest it in our own business and, of course, to be able to withstand tough times. Halting buybacks was simply a very prudent action – we don’t know exactly what the future will hold – but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008. Our bank cannot be immune to the effects of this kind of stress.

Shareholders might find it unfortunate that the company is no longer repurchasing shares in light of the steep recent drop in the stock price which recently traded at around $91, or 1.5x 2019 yearend tangible book value.

Dimon goes on to explain that even under an “extremely adverse scenario” that results in a GDP drop of 35% in Q2 and persists until the end of the year, the bank would still enter 2021 with ample liquidity. He positions halting repurchases and a potential suspension of the dividend, should the “extremely adverse scenario” occur, as prudent steps to maintain his “fortress” balance sheet.

The fact that the economy is in a deep recession is clear and Dimon suggests that the stress might be “similar to the global financial crisis of 2008”. If so, the bank could be exposed to billions of dollars of credit losses. The comparison to 2008 could be an understatement if the bank’s “extremely adverse scenario” of a 35% GDP contraction proves to be accurate.

Dimon closes by outlining steps that he believes should be taken to plan for a return to work and to adequately prepare for the next pandemic. The overall tone of the letter could be described as “guardedly optimistic” about the long term future of the economy. 

Click here to read Jamie Dimon’s 2019 Annual Letter

The World Has No Pause Button

Modern medicine can put a patient into a medically induced coma in order to better treat a serious underlying condition. While the patient’s consciousness is suspended during the coma, time itself never ceases and keeps marching on with short and long term consequences.

In order to “flatten the curve” of the coronavirus pandemic and avoid further overwhelming the medical system, governments across the world have imposed historic shutdowns of economic activity that are the equivalent of imposing a medically induced coma on a complex human system. The situation is unprecedented and the consequences are unknown. Although palliative measures have been taken to ease the blow to individuals and businesses, restarting will not be as simple as flipping a switch. Individual actors within the economic system are driven by what J.M. Keynes referred to as “animal spirits”, and the events of the past few months will leave unavoidable scars. 

This topic is explored in more detail in a new article on The Rational Walk. While the outcome of the current crisis cannot be predicted, it seems plausible to believe that our best chance for a “V” shaped recovery is sustain our current “medically induced coma” until we can be sure that a second wave of infections will not result by restarting prematurely. If we restart too soon and suffer a relapse in the fall, followed by a second round of shut downs, the effect on animal spirits could be catastrophic.

Click here to read The World Has No Pause Button

Upside for Automobile Insurers?

As of April 6, 43 states have implemented some form of a “stay at home” order and this has resulted in a dramatic reduction in vehicle use. With many people no longer commuting to work and only leaving their homes for trips to the grocery store or pharmacy, the number of miles driven has naturally plummeted along with the number of traffic accidents. 

While most “surprises” in the insurance industry are of the unpleasant variety (think of a massive earthquake on the San Andreas fault, for example), the coronavirus pandemic has been a positive surprise for automobile insurers. The premiums currently in effect were priced based on an assumption that vehicle mileage would remain relatively constant from levels seen in 2019. In normal times, mileage would tend to increase slowly over time. Of course, the opposite has happened.

The Wall Street Journal reported this week that Allstate and American Family Mutual Insurance Co. would return hundreds of millions of dollars of premiums to customers in the form of “shelter-in-place payback credits”. Most Allstate customers will receive credits of 15% of their monthly payments in April and May and American Family customers will receive $50 per insured vehicle.

There is certain to be pressure on Progressive and Berkshire Hathaway’s GEICO unit to match Allstate’s policy and return some money to customers. This development highlights the intensely competitive nature of the automobile insurance industry.

Although public relations departments will play this for all it is worth, these companies are not returning money because they are acting philanthropically in hard times. They are doing so in order to ensure that customers do not defect to other insurers who might begin to price policies more aggressively in light of the reduced short term risks. 

Auto insurers may still see some upside as a result of the pandemic, but most of the upside is likely to be quickly competed away.

Vienna State Opera – Free Livestreams

The Vienna State Opera, like performance venues everywhere, was forced to halt live performances due to the coronavirus pandemic. However, free daily livestreams of past performances are now available on a daily basis through April 13.

Was this email forwarded to you by a friend or colleague? Sign up here to receive Rational Reflections directly every week.

Copyright and Disclosures

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC. 

The Digest #16