The turmoil, triggered after the value of U.K. gilts nosedived in reaction to fiscal spending announcements, forced the country’s central bank into a series of interventions to prop up its markets. That averted disaster for pension funds using leverage to juice returns, which were said to be within hours of collapse.
“I was surprised to see how much leverage there was in some of those pension plans,” Dimon told analysts Friday in a conference call to discuss third-quarter results. “My experience in life has been when you have things like what we’re going through today, there are going to be other surprises.”
The Federal Reserve’s campaign to subdue high inflation here in the U.S. has been felt around the world. A historic surge in the value of the dollar has pushed down overseas currencies and sovereign debt, and complicated other countries’ battle with inflation.
The upshot: Leverage that had been hiding in unexpected places, like U.K. pension funds, will continue to unwind, according to Dimon.
“Someone is going to be off-sides,” Dimon said. “We don’t see anything that looks systemic, but there is leverage in certain credit portfolios, there’s leverage in certain companies, so you’re probably going to see some of that.”
Dimon added that while the U.S. banking system was “extraordinarily strong,” thanks mostly to post-2008 financial crisis reforms, markets will continue to be volatile so long as the Fed is boosting rates and shrinking its massive balance sheet.
Markets have become more fragile in the last decade after banks were forced to hold much more capital to trade assets, making them far less active during volatile times.
Mishaps could manifest in emerging markets or at hedge funds with high leverage, Dimon said.
Analysts and investors have warned that the Fed is at risk of upsetting market stability as it boosts interest rates; the central bank has little choice, however, as it views inflation as the more pernicious threat.