JP Morgan’s Wall Street chief talks China, bitcoin, Amazon and is preparing for an inevitable big downturn in stocks
Daniel Pinto has seen his share of booms and busts. An Argentinean who spent much of his early career in volatile emerging markets, Pinto, 55, began at J.P. Morgan Chase in 1983 as a currency trader in Buenos Aires. Thanks to his ability to manage risk in a series of roles, Pinto has climbed the ranks. In 2014, he was named head of the firm's corporate and investment bank, the world's biggest by revenue. In January, he was named co-president of J.P. Morgan. That means he and partner Gordon Smith, who leads the consumer bank, are in line to succeed long-time CEO Jamie Dimon if the need arises within the next few years.
In an exclusive interview at the bank's Park Avenue headquarters and in a follow-up phone conversation, Pinto explains his views on a global economy in the latter stages of expansion, the opportunities he sees and how his bank is preparing for the inevitable downturn. CNBC: You spend a lot of time flying around the world visiting clients, leaders in industries from tech to energy. What are they telling you about the state of the economy? Pinto: Pretty much everyone agrees that the economy is in very good shape. Obviously, there are different dynamics in each of the sectors. For example, this week I was in Houston talking with some of the oil companies. They are quite positive about the economy, about oil prices maintaining a range, and they are quite positive about investments going into the sector. We have all these companies reporting earnings, and overall the results seem fine. The technical aspects of the markets are more balanced than they were late last year, where it was pretty much one view, and that view was that the markets will improve no matter what. So you have a bunch of components, from the technical part, to the economy performing and companies performing, which altogether makes me quite positive on the economy. CNBC: Where are you seeing opportunities now? You recently applied to Chinese regulators for a majority stake in a joint venture to control a business in a rapidly growing part of the world. Pinto: The opportunities in China are huge. You have a country that clearly is headed, in a slow way, towards deregulation, allowing foreign companies to have a majority stake in the financial services industry. It's a massive equity market, a massive bond market. The payments space is evolving extremely fast. So the opportunity is great. It will be a big contribution to J.P. Morgan and we will contribute to the Chinese market as the years go by and we keep growing our presence there. In particular, the joint venture will allow us to participate more deeply in the local equity markets, do underwritings, things like that. CNBC: Will China be your bank's second-biggest national market after the U.S. when it comes to revenue? How long will that take, a decade? Pinto: Yes. I have no doubt it will be, and it will happen a lot faster than 10 years.
CNBC: Are cryptocurrencies another opportunity for you? Your competitors already help trade bitcoin futures and are preparing to get more involved in trading digital currencies. Pinto: We are looking into that space. I have no doubt that in one way or another, the technology will play a role. [Regarding bitcoin], you cannot have something where the business proposition is to be anonymous and to be the currency for unknown activities. That will have a very short life, because people will stop believing in it, or the regulators will kill it. I think the concept is valid, you have many central banks looking into. The tokenization of the economy, for me, is real. Cryptocurrencies are real but not in the current form. If we need to clear futures of bitcoin, can we do it? Yes. Have we done it? No. CNBC: The current economic expansion is nearing a decade in age, double the average length. When does it end? Pinto: Obviously, there will be an end to the economic cycle at some point. I don't think it's coming any time soon. If you asked me when I thought the economy is going to slow down, I'd follow [JPMorgan Chief U.S. economist] Mike Feroli. He says that the probability of a recession is extremely low in 2018, it's higher in 2019, but still low. And it probably starts going up in 2020. CNBC: What would trigger a recession? Pinto: In the U.S., the risk is inflation. Does the Fed have to raise interest rates a lot faster than what the market is expecting or pricing in? For everything we can see, inflation is going up slightly, but in a very moderate way. That's why I think the probability of that happening this year or next year is relatively low. But the Fed will continue to hike, and at some point that hike in rates will slow down the U.S. economy. I don't believe that that is a crisis. It's just a correction at the end of the cycle that will trigger the beginning of the next cycle.
CNBC: You've said that within two or three years, the stock market could see a correction of 30 to 40 percent. How are you preparing the firm for this? Pinto: When you're going towards the end of the cycle, you want to have an extra layer of prudence. [In the investment bank] we're going to start being more careful about the liquidity of the book, about the concentration of illiquid risk, about the correlations, about how the positions will trade through different stress scenarios. You keep modeling the book to something that you hope, when the correction starts happening, you are well positioned to continue to be a player in the market, and you aren't shutting yourself out. The worst-case scenario for any big player is that you end up being massively hammered when the correction happens, and you end up losing money because of your positions. CNBC: Many Wall Street traders today are relatively young because after the financial crisis, firms sought to cut costs by eliminating more experienced, expensive talent. Is that a concern, for the industry, when conditions turn nasty? Pinto: All these people, whether they're senior or junior, lived in a bullish environment for the last 10 years. But I haven't, and many of my managers [have more experience], so we are prepared. CNBC: In the past decade, you've seen the rise of passive investments, the rise of computerized traders like quants, at the same time that regulations have curbed the ability for investment banks to deploy capital in markets. Will that impact the severity of the correction? Pinto: All these electronic, algorithmic traders, they provide a lot of liquidity in calm markets. So today, you can trade as much as you want every day. When the correction happens, these players tend to fall away, which exacerbates the moves. There's not as much smart capital [from investment banks] to really provide that rational support to market levels. That's why when the correction happens, or we have some kind of bad news, the market becomes very volatile and trading volumes shrink massively. We know how to prepare for those times, and over these days, we are slightly more conservative than we would've been a couple of years ago. We try to get through the difficult times as intact as possible to continue to provide liquidity to support the clients. That is in the minds of all the risk managers that we have, all my management team.
CNBC: Let's look a little further out. What about competition from tech firms like Amazon, which is reportedly looking to make a push into consumer banking by offering a checking account? Pinto: We work closely with Amazon. If there are things we can do together, we will try them. That doesn't preclude them from trying to be strong in financial services, to be strong in health care, in whatever they want to be, if they are allowed. The worst thing you can do is ignore it. You have to assume in some way or another, they will get involved. There's only one thing you can do. It's to create services that are as good as possible, and the best client experience, to have a shot. Ultimately, consumers will decide.
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