'Headwinds Are Substantial': Jamie Dimon Just Flagged A Long List Of Serious Dangers To The US Economy — Here Are 3 'Salient' Risks And How To Defend Against Them

JPMorgan Chase recently reported second-quarter results, with both revenue and earnings exceeding Wall Street's expectations. But CEO Jamie Dimon is erring on the side of caution.

"There are still salient risks in the immediate view," he said in the earnings press release.

"Consumers are slowly using up their cash buffers, core inflation has been stubbornly high — increasing the risk that interest rates go higher and stay higher for longer — quantitative tightening of this scale has never occurred, fiscal deficits are large and the war in Ukraine continues, which in addition to the huge humanitarian crisis for Ukrainians, has large potential effects on geopolitics and the global economy."

It's not a rosy picture. In the earnings conference call, Dimon added that "headwinds are substantial and somewhat unprecedented."

So here's a closer look at three key risk factors Dimon highlighted and how investors can hedge against them.

High Core Inflation

In June, the consumer price index (CPI) rose 3% from a year ago, marking the smallest 12-month increase since March 2021. But core CPI — which excludes food and energy — increased 4.8% year over year.

Should core inflation persist at the "stubbornly high" levels Dimon cautioned about, your hard-earned money could progressively lose value because of the eroding effects of inflation.

Legendary investor Jim Rogers recently said that "the best place to be when you have inflation is real assets" like commodities.

Investors can gain exposure to commodities like gold, oil and agricultural products through exchange-traded funds (ETFs) such as SPDR Gold Shares GLD, United States Oil Fund USO and Invesco DB Agriculture Fund DBA.

Real estate is another popular hedge against rising prices. When inflation occurs, the cost of raw materials and labor goes up, so constructing new properties becomes more expensive, which contributes to the appreciation of property values.

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Quantitative Tightening

Quantitative tightening is a monetary policy that central banks use to reduce the money supply. They accomplish this by selling securities such as government bonds. As market participants buy the securities, the amount of money circulating in the economy decreases. This leads to higher interest rates, which can slow down economic activity.

The U.S. Federal Reserve has embraced quantitative tightening to tame rampant inflation. Since March 2022, the federal funds rate has been increased by 500 basis points.

While many businesses fear high-interest rates because they lead to increased borrowing costs and reduced consumer spending, it can be a different story for banks.

Banks make money from the spread between the interest rates at which they borrow and lend. When interest rates rise, it can lead to an expansion of their net interest margins.

JPMorgan's results illustrate this point. In the second quarter, the bank's net interest income surged 44% year over year to $21.9 billion.

Other than considering bank stocks, investors can also check out savings accounts as a way to ride the rate wave. Because of the Federal Reserve's aggressive rate hikes, there are now plenty of high-yield savings accounts to choose from.

War In Ukraine

The Russia-Ukraine war has sent shockwaves across global markets. Geopolitical conflicts could disrupt supply chains, increase energy prices and create widespread uncertainty.

When tensions escalate, investors often turn to safe-haven assets. Gold is a classic example, as it has been considered a store of value in times of crisis.

U.S. Treasury bonds are also worth considering — they are backed by the U.S. government. 

In addition, investors may also want to look into defensive stocks, which usually come from sectors less likely to be affected by economic downturns. Notable examples include consumer staples, utilities and healthcare — sectors where established companies experience consistent demand for their products and services, regardless of economic conditions.

Investors can access these sectors via ETFs such as Consumer Staples Select Sector SPDR Fund XLP, iShares U.S. Utilities ETF IDU and Vanguard Healthcare ETF VHT. Meanwhile, companies included in these ETFs could provide a starting point for further research.

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Photo: Steve Jurvestson via Flickr Creative Commons