Transcription
But I do think when we have that cycle, it'll be worse than people expect. We're late in the cycle, a lot late in new entrance. There's some people out there who aren't doing great credit because we see the other side of it. And I'm not talking about private credit. I'm talking about credit in general. That could be insurance companies. It could be private credit. It could be banks. We see some banks doing things that, you know, we probably wouldn't do. So, and the other thing about credit, there's always, if you look at the outcomes, there's always the people did it well. They still have a cycle. And the people did it really badly. So, you know, that's not going to surprise me when we find out who the who's swimming naked when the tide goes out.
That right there is Jamie Diamond. He's the CEO and chairman of JP Morgan Chase, America's largest bank. He's held the role since 2006, oversees more than 300,000 employees and has a personal net worth north of $2 billion. Now, Jaime doesn't usually throw around dramatic language. But in a recent interview at Bloomberg's global leveraged finance conference, he was more blunt than I have ever heard him. And the reason I pay attention when Jaime Diamond speaks is because of his position. The guy has his hand in virtually everything happening in the US and global economy. 60 million customers, operations in dozens of countries, and a direct line to policy makers in Washington. So, when someone with that level of access tells you there's too much complacency in the market and that the next downturn will be worse than people expect, it's worth paying attention. And in this video, I want to walk you through the five big things Jaime Diamond covered in this interview because they're not isolated topics. They're actually all connected. Market complacency, sticky inflation, escalating geopolitics, a looming credit cycle, and what he thinks about AI. And the way these five things link together paints a picture that most people aren't seeing. We're also going to go a lot deeper than what Jaime said. I've pulled actual data, historical parallels, and what other bigname investors like Warren Buffett, Ray Dallio, and Howard Marx are saying about the exact same risks. So, let's get into it.
So, the first thing Jaime Flacked, and he didn't hold back on this one, is market complacency. Here's exactly what he said. You know, my view is that the prices, asset prices are kind of high, credit price are kind of low. It's kind of a lot of complacency in the market.
So, let's actually put some numbers behind that. The Schiller cape ratio, which is basically a smoothed out measure of how expensive the stock market is relative to its earnings, is sitting at roughly 39.8 right now. And for those that don't know, that's the second highest reading in 155 years. The only time it's been higher was right before the dot crash in 2000. The long-term average is about 17. So, we're trading at more than double the historical norm. And then there's credit spreads. For those that don't know, a credit spread is simply the gap between the interest rate on a risky corporate bond and a safe government bond. When spreads are tight, it means investors aren't worried about anything. And right now, high yield spreads are sitting around 280 to 300 basis points. That's in the tightest 5% of all historical readings. And here's what's uncomfortable. The last time credit spreads were this tight was May 2007. 18 months later, Lehman Brothers collapsed. Before that, it was 1999, right before the dot bust. Goldman Sachs actually published a note in August 2025 urging caution specifically because global spreads had hit 2007 lows. And it's not just Jaime sounding the alarm. Warren Buffett has been building a cash pile at Berkshire Hathway that's now sitting at around $381 billion. He's been a net seller of stocks for 12 straight quarters. When the most successful investor in history is dumping stocks and hoarding cash, that is a signal. Ray Dallio said back in November 2025 that the market is, and I'm paraphrasing here, in bubble territory at about 80% of the euphoria we saw before the dot crash. And Howard Marx, the co-founder of Oak Tree Capital, titled his November memo, "Cockroaches in the Coal Mine," warning that good times have bred complacency and carelessness in credit markets. Now, the contrarian case is real. Corporate earnings have been strong. The S&P 500 has delivered six straight quarters of double-digit earnings growth. And unlike the dot era, today's tech companies are spending what they earn, not what they borrow. But the point Jaime is making, and I think it's a fair one, is that everybody seems to be pricing in a perfect outcome. And perfect outcomes are pretty rare.
I mean, no one you talk to has any idea that credit spreads could gap out a lot, and they could just because of sentiment. And so, uh, so yeah, I think there's a little bit of a little more exuberance than I think there should be.
And this brings us to the second thing Jaime talked about, and he had one of the best metaphors I've heard for it. Inflation. I call that's the skunk at the party. So, it's been coming down, but it seems to maybe leveled off around 3%. If things make it go up, and this is only one thing, you know, you could look at medical prices, construction prices, insurance prices, wages for certain things.
So, is he right? Has inflation actually leveled off around 3%. Well, the latest CPI data from January 2026 came in at 2.4% headline and 2.5% core. So, it's come down a lot from that 9% peak we saw back in 2022. But when you look under the hood at the specific categories Jaime mentioned, the story is quite different. Hospital services are up 6.9%. Auto insurance premiums have surged a cumulative 64% since September 2020. Medical care is running at 3.9%. Wages are still growing at nearly 4% year-over-year. And shelter, which makes up 35% of the entire CPI basket, is still at 3%. And here's the thing economists call the last mile problem. Getting inflation from 9 down to three was the relatively easy part. That came from supply chains normalizing and energy prices cooling off. But getting from three down to the Fed's 2% target, that's the hard part because what's left is the structural stuff. Services, wages, healthare, insurance. Those categories don't respond easily to interest rate hikes. The Cleveland Fed published a paper specifically about this, calling it inflation's last half mile, concluding that the last stretch could take, and I quote, several years. And Jaime isn't the only one worried about this. Larry Summers said after the January 2025 CPI print came in at 3% that the US is now in quote the riskiest period for inflation policy since the early Biden administration. Muhammad Alien has been even more direct, questioning whether the Fed should even be talking about rate cuts at all. Now, the bull case for inflation continuing to fall is shelter. Market rents have already cooled significantly, and because CPI shelter data lags actual rents by about 12 to 18 months, there's a built-in deceleration coming. Goldman's Yan Hotsius believes underlying inflation has already fallen to around 2% once you strip out the lagging shelter effect. So, the truth, as always, is somewhere in the middle. But Jaime's point stands. The risk of sticky inflation hasn't gone away.
And the third risk Jaime talked about is where things get really interesting because it's not theoretical anymore. It's happening right now. You know, this war with Iran, you know, if it is short and oil goes to 80 or 90 or 100, but it is a short time, not prolonged, it probably won't have a major effect. If it becomes prolonged, then all all bets are off the table.
Now, since this interview was recorded, the situation has escalated dramatically. On February 28th, the US and Israel launched major strikes on Iran. Iran's revolutionary guard then threatened to close the Strait of Hormuz. And that's a very big deal. 20 million barrels of oil pass through the Strait of Hormuz every single day. That's roughly 20% of the world's entire petroleum consumption. If that gets disrupted for any extended period, you're looking at an oil price shock that ripples through everything. Gas prices, shipping costs, food prices, manufacturing. Oil has already jumped about 35% in a week with Brent hitting roughly $93 a barrel. And this is actually the exact scenario Jaime specifically referenced from history. you know, Vietnam, you know, did it affect the economy in the very short run? No. It had a 20-year effect after that. So, you you got to look at these things as they're moving plates that'll they can take 5 years to have an effect, but effectively real.
He calls these forces tectonic plates, slowmoving, invisible in the monthly data, but massive in their long-term impact. And the 1973 parallel is uncomfortable. Back then, the Arab oil embargo quadrupled oil prices from $3 to $12 a barrel. US inflation surged from about 3% to over 12%. It triggered a deep recession and the stagflation that followed lasted the better part of a decade. It took Paul Vulkar raising rates to 20% to finally break it. And there's another tectonic plate Jaime mentioned that gets almost no attention. Global deficits. US national debt just hit 38.8 8 trillion, growing at about $8 billion per day. Annual interest payments alone are now $970 billion, nearly triple what they were in 2020. That's now the third largest line item in the entire federal budget, ahead of defense spending. And global military spending hit a record $2.7 trillion in 2024, the steepest annual increase since the end of the Cold War. Ray Dallio has been making a very similar argument. In February 2026, he declared that the world order has officially broken down, comparing it to 1933 when the League of Nations collapsed. He says the US is currently in what he calls stage 5 of empire decline, which is the internal conflict and fiscal strain phase, teetering into stage six, which is the war phase. Now, the contrarian view here is that the US is the world's top oil producer now. And JP Morgan's own private bank analysis of 36 geopolitical events over 80 years found that markets typically recover in about 28 days. But, and this is key, the one exception was 1973 when the oil disruption was prolonged. And that's exactly the scenario unfolding right now.
And all of this brings us to what I think is the most important thing Jaime said in the entire interview. And it's the topic where he was the most specific and the most alarming. But I do think when we have that cycle, it'll be worse than people expect. We're late in the cycle. A lot late new entrance. There's some people out there who aren't doing great credit because we see the other side of it.
So for those that don't know, a credit cycle is basically the natural expansion and contraction of access to borrowing. In good times, banks lend freely, standards loosen, and money flows everywhere. In bad times, defaults spike, banks tighten up, and suddenly companies that could borrow yesterday can't borrow today. And that tightening can turn a slowdown into a full-blown recession. Now Jaime gave some very specific sizing numbers. Private credit leverage lending 1.7 trillion. Banks do 1.7 trillion. The high yield market is 1.7 trillion.
So you're looking at roughly $5 trillion spread across private credit, leverage loans, and high yield bonds. And the data on what's underneath that 5 trillion is pretty concerning. Private credit has grown from $310 billion in 2010 to 1.7 trillion today. That's a 5.5 times increase in 15 years. And according to the IMF, about 40% of private credit borrowers currently have negative free cash flow. In leveraged loans, 91% are now what's called covenant light, meaning the lenders have basically removed their own early warning systems. Back in 2007, only about 10 to 20% of loans were Covenant Light. And in high yield, bonds have been downgraded more than upgraded for 12 consecutive quarters. And there's a wall of debt maturities coming. Corporate debt maturing is expected to jump from about 2 trillion in 2024 to 3 trillion in 2026. Companies that locked in cheap financing at 3 to 4% now have to refinance at nearly double that rate. Jaime also pointed to the historical pattern which is really interesting. The one of the things that's always different is which industries get really badly hurt. Like you may remember in O2 2000 it was uh telecom and utilities. You know the MA stocks they pay dividends in ' 08 it was Warren Buffett stocks media stocks. You know this time it maybe it's software maybe it's not.
And the historical data on those cycles is sobering. The 2000 telecom bust destroyed over $2 trillion in market value. Companies had invested more than $500 billion into fiber optic cable mostly debt financed. And by 2002, less than 3% of it was actually being used. WorldCom went down with 103 billion in assets and 30 billion in debt. In 2008, the speculative grade default rate surged to 13.1%. High yield spreads blew out from about 300 basis points to over 2,000. Total household wealth fell by 11 to13 trillion and nearly 9 million jobs were lost. And here's where Howard Marx comes in. In his November 2025 memo, he wrote something that perfectly captures the situation. He said, "The worst of loans are made in the best of times." He warned that $2 trillion flowing into private credit has created competition that has inevitably reduced lender protections. When the cycle turns, those loans made in the good times are the ones that blow up." Now, the contrarian case here is that banks are far better capitalized than they were in 2008. Basel 3 and DoddFrank have forced them to hold more capital. Corporate cash flows are at record levels and companies have been proactively refinancing. So even if the cycle comes, the system is better built to absorb it. And I think there's real merit to that argument. But Jaime's point is that the cycle itself will still be painful and the people who've been stretching for yield in private credit and covenant light loans are the ones who will be exposed. And when Jaime says swimming naked when the tide goes out, by the way, he's directly quoting Warren Buffett. Buffett first wrote that line in his 2001 Berkshire Hathaway shareholder letter and used it again in 2007, writing, and I love this. You only learn who has been swimming naked when the tide goes out. And what we are witnessing at some of our largest financial institutions is an ugly sight. That was written in February 2008, 7 months before Lehman collapsed.
Now, it wasn't all doom and gloom. Jaime also talked about AI. And this is where he got genuinely optimistic. Maybe in 30 or 40 years, your kids, you have two kids, right? Are going to be working four hours, four days a week, maybe three and a half days a week, living to 120. A lot of cancers will be cured. A lot of disease will be cured. Food will be safer. Cars will be safer. It will be a wonderful thing.
Now, that sounds utopian, but the numbers inside JP Morgan suggest he's putting real money behind it. The bank's total tech budget is $18 billion for 2025, the largest in the financial industry. They have 600 AI use cases in production and 160,000 employees using their internal AI tools every single week, reportedly saving about 4 hours per person. And this 4-day work week idea isn't as far-fetched as it sounds. The UK ran the world's biggest 4-day week trial in 2022 with 61 companies. Revenue rose 1.4% on average. Staff turnover dropped 57% and 92% of companies kept the policy permanently. Iceland ran an even larger trial covering over 1% of their workforce and productivity stayed the same or improved. Now there is a catch and it's a big one. Robert Solo famously wrote back in 1987 that you can see the computer age everywhere but in the productivity statistics and right now the same thing seems to be happening with AI. An NBER survey of 6,000 CEOs found nearly 90% said AI has had zero measurable impact on productivity so far. The gains are real at the task level but aren't showing up in the macro data yet. But here's the interesting twist. If AI does eventually deliver on its productivity promise, it could actually be the most powerful deflationary force in decades. Goldman Sachs estimates AI could boost global GDP by 7% and lift US productivity by 1.5 percentage points per year. That would directly address the inflation problem Jaime spent the first half of the interview worrying about. So the one thing that might solve the skunk at the party might just be AI. But Jaime himself was pretty cleareyed about the timeline.
So it isn't like you're going to have a permanent advantage. You have temporary advantages and if you can stay ahead temporarily, you have an advantage, but I don't I don't think you'd have a win or take all thing.
So stepping back, here's the picture Jamie Diamond is painting. Asset prices are at historical extremes. Inflation is stickier than headlines suggest. Geopolitical tectonic plates are shifting in real time. And sitting underneath all of it is 5 trillion plus dollars in credit that's been extended during the good times with fewer protections than ever before. Any one of these could be manageable on its own. But Jaime's point, and I think it's the most important one, is that they're all connected. A prolonged oil shock feeds inflation. Inflation prevents rate cuts. Higher rates pressure refinancing. Refinancing pressure triggers defaults. And defaults in Covenant light loans mean less recovery when things go wrong. It's a chain. AI offers genuine long-term hope, but even Jaime puts that timeline at 30 to 40 years. So in the near term, the risks are real. They're interconnected and as Jaime said, the odds of things not ending up fine are higher than most people think. But with that said, guys, that's Jamie Diamond's latest take on the state of the US economy. If you found this breakdown useful and you want to see more deep dives like this, please take the two seconds to subscribe. It really does mean a lot and helps us keep making these videos. Also, drop a like if you enjoyed it, and I'll see you guys in the next one.