For years now, investments in big tech companies have paid off better than those in big banks. Jamie Dimon, CEO of JPMorgan Chase (NYSE: JPM ), thinks this is about to change and bank stocks should heat up.
He sees the 10-year Treasury note reaching 4% this year, adding "You better be prepared to deal with rates that are 5% or higher."
There are reasons for concern. Rates on 30-year mortgages have already passed 4.5% and building activity has noticeably slowed. But if they can find borrowers, and Dimon thinks they can, this would create big yield spreads for banks, fat profits and, presumably, higher bank stock prices.
The best bank stocks have been doing fine through the recovery, but only in the last two years as interest rates have begun rising have the gains at Morgan or Bank of America (NYSE: BAC ) been beating the NASDAQ average.
Tech Stocks and Inflation
The end of cheap money hasn't been nearly so good for big tech companies, at least those which borrow large amounts of money to fund manufacturing. Intel (NASDAQ: INTC ), for instance, has $25 billion in long-term debt, Micron (NASDAQ: MU ) $9 billion, Broadcom (NASDAQ: AVGO ) over $17 billion.
Over the last three months even the gains in mighty Micron have been no better than those in big bank stocks.
Yet those bank stocks remain cheap compared with the market. Morgan sells at just 15.4 times its trailing year earnings, Bank of America at 16.5 times. They still have room to run.
Except for one small thing, deflation.
What Dimon and most financial analysts still fail to recognize is the deflationary impact of technology on the general economy.
Companies get huge efficiencies from clouds, customers get enormous efficiency from devices, and these lower costs mean deflation is not only constant but accelerating everywhere.
Bank Stocks and Evolving SaaS
When Adobe Systems (NASDAQ: ADBE ) offers its software as a service through the cloud, it gains enormous efficiencies and makes its software a better value for customers as well. When doctors use the cloud for medical records, they get the same efficiency and value.
This has been true for decades, as we've gone from PCs to local networks, from Internet connections to clouds and devices, but the point is that the pace of this change continues to accelerate. Much of that improvement has gone back into the market cap of big tech. That's why the five Cloud Czars are worth nearly $4 trillion.
But we have all changed without noticing it. We assume that Amazon.com (NASDAQ: AMZN ) can deliver us things for less than our cost of going to the store and picking them off a shelf. Add in the cost of our gas and our time and they can, because of cloud-based ordering, cloud-based back-ends, and robot-based delivery systems.
We take these life changes for granted. The pace of them is accelerating. But we don't account for them as economic changes, as gains in productivity and efficiency that are putting the thumb down on all sorts of input costs, from energy to labor.
The Bottom Line on Bank Stocks
The economic policies of the Trump Administration have all had one thing in common. They are pushing inflation. Increase the deficit, throw that money at Wall Street and you create enormous inflation over time. Start a trade war, create inefficiencies in the supply chain, and you create inflation. That's what Jamie Dimon sees coming.
Dana Blankenhorn is a financial and technology journalist. His most recent novel is the mystery-thriller, The Reluctant Detective Finds Her Family , available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn . As of this writing he owned shares in AMZN.
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