Power Lunch - CNBC Exclusive: Jamie Dimon 8/2/23

Episode Date: August 2, 2023

On today’s show we have an exclusive discussion with JPMorgan CEO Jamie Dimon. He’s in Montana on a tour of bank branches there. We’ll talk to him about the economy, the Fed, the state of banks, and of course, the downgrade of the United States’ debt by Fitch. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Power Lunch. I'm Kelly Evans and coming up on the show today we've got a discussion with J.P. Morgan CEO Jamie Diamond. He's in Montana touring bank branches. We'll talk to him about the economy, the Fed, and of course the big downgrade of the United States debt by Fitch. And that's one major reason that stocks have been lower all session long. The Dow down about 287 points so we're heading back towards session lows. The SMP, by the way, down 1.3% is on pace for its first down move of more than 1% or move in either direction, I should say, in 47 sessions.

So notable there, the NASDAQ down 2% following the hardest, its biggest down day since February. Let's get right out to Bozeman, where Jamie Diamond is standing by with CNBC Senior Banking Correspondent, Leslie. I don't know.

Leslie? Hey, Kelly, thank you so much and thank you, Jamie, for being here. So you've got a big bus behind you. You are here on your annual bus tour. This year it comprises what you all have dubbed expansion markets in the Northwest, in the Rockies. Why here, what do you see as the opportunity here? So first, we love these bus trips.

It's like 12 years. We try to go off the beaten path. And when we do them, we see clients. I might have to have lunch, which you'll be at with, you know, 100, 150 clients of ours. We go to the branches. We get to talk to our people. On the bus, we sometimes have branch managers and loan officers and small business, tellers. And we ask them, what can we do better?

We give them immunity and beer. actually want to know and makes us a better company. We have a lot of fun. And then we do places we haven't been before. So we've been expanding in Montana, Idaho, Washington State. So we were in Bois, Boise, and now in Bozeman. It's just fun to do and a great time we learn a lot. What have you learned so far this year?

Okay, so this is for folks on CNBC. Leave California and New York. Come visit Montana and Idaho. And you know what? America is alive and well. The innovation is unbelievable. The people get along. It's not all about the polarization you read about. The innovation is everywhere. People think Silicon Valley, but I met with a company here called Bridger Photonics, run by Peter Russon all, that does monitoring of methane gas, and they're doing a lot of work with all the big oil companies about how to improve their emissions and stuff like that.

It's extraordinary, and it's built here. You know, Gibson, guitars are now built here. I met interstate cargo in Boise, and they built a whole big business, a Russian immigrant. That's America. We should be applauding the beauty of America and all the things that it does in free enterprise. Well, let's talk more about America because Fitch, you know, big news today obviously is the downgrade of U.S. debt down to AA plus. What's your take on that decision? Yeah, I'll give you a couple of quick things. It doesn't really matter that much. You know, the markets decide.

It's not the rain agencies who make these big decisions. Number two, they point out some issues which we all knew about, about our debt ceiling crisis and things like that. But number three, most important, the American public, this is the most important. This is the most prosperous nation the planet. It's still the most prosperous nation the planet. It's the most secure nation the planet. I would point out to the rating agency that I could that there are a bunch of countries rated higher than us, like AAA,

but they live under the American enterprise military system. To have them be AAA and not America, it's kind of ridiculous. These are countries like Canada and others. You know, in terms of the actual decision-making behind the downgrade, it had a lot to do with political brinksmanship surrounding the debt, sealing debauching, the deficit itself. I mean, do you agree with any of those? Those are issues. This is the most prosperous nation of the planet.

North America. We have Atlantic in the Pacific, the best military, the best economy the world's ever seen, the most innovation. The credit is sound. It should be the highest rated credit in the world. And yes, there are issues about, you know, they're being raised publicly. I agree with that. We should get rid of the debt ceiling. We should get rid of the debt ceiling. We should get rid of it. It's used by both parties, and it's always used in a way that makes it very very difficult. We need certainty in the world and we should have more of it. Let's talk about your thoughts on the economy because, you know, you've been conservative with your balance sheet for a while

now. You know, you said that a year ago, actually last June at a financial conference that the firm was bracing itself for a hurricane. And then you noted that could be a minor one or super storm sandy. And then you later downgraded that threat to storm clouds. So what's your macro meteorology telling you right now? Yeah. I actually did not downgrade it. I just simply different phraseology that gets overtreated. So again, the big picture of America is resilient, unbelievable, et cetera. And we have today is a little bit of an anomaly. Very strong consumer, low unemployment.

We're growing as a country. Still innovation. The consumer still has more money in their income, and their checking accounts they had pre-COVID. Their home price has gone for 15 years. Asset price is gone for 15 years. It's pretty good. Even if we're going to recession,

they're going in with a very good balance sheet. not a bad one. And business are in good shape. That's the good part. The storm cloud part is still there, which is things, you know, I'm not worried. When I see people who are talking about the worried about this and the worried about that, I don't worry that much. You know, you can get worried about anything you want. I think people do too much of that. And I agree with Warren Buffett about the resiliency of America. But there are two things out there which are giving me heightened concern. One is the fiscal spending and the quantitative tightening. We've never had quantitative tightening. And I do think that might bite at one point. And I'm not, you know, don't want to be surprised about it.

And the second is Ukraine. The humanitarian crisis in Ukraine is extraordinary. The impact on oil and gas and food and migration. It could expand. It's nuclear proliferation. It's nuclear blackmail. This is serious stuff, which we have not really faced in World War II. So I put that in the Corses County.

Hopefully that all sort out and the world will be safe again. But I hope people learned the world is not that safe. It will never be that safe. And we have to be very, very careful how we do that. And so how that affects the economy is different. But they are out there. And the consumer is spending their money down. So I don't know if we have a soft landing, a medium landing, or a hard landing.

I'm actually much more concerned about this geopolitical stuff, all things being equal. And, of course, you mentioned QT as well. You know, you've said previously at Investor Day that everyone should be prepared for rates as high as 7%. And there's a narrative out there that June's softer than expected CPI print is indicative of, you know, kind of this mission accomplished. We're all good. Inflation's under control. Do you agree with that? No.

I think people over look at short term data. You know, all that, if you actually dig into the data, you probably wouldn't pay much credence to it. And so it goes up, it goes down. I think you've got to look at a little bit more. And I'm saying 7%. I'm not saying it's going to happen. I'm saying as a business person, there are reasons why it might happen, and you should be prepared

for it. You never want to be in a position and say, I didn't expect oil to go to 120 or 30 or interest rates, go up to 500 base points, and therefore I'm bankrupt. We should all be prepared for those types of things, but there's been a sea change in capital flows around the world. Governments have to sell more debt than ever before. All governments, including the United States. Now some say less than down deficits.

They're not down from pre-COVID. Debt levels are very high. They're selling more debt. Interest rates have gone up. Central banks are selling. They were big buyers, now they have to sell for QT. We've never had QT before. And then also this new economy of ours, the green economy, $4 trillion a year.

IRA, chipsacked, militaries around the world, almost every country is beefing up its military a little bit. These things may be a sea change and we're seeing about capital demand. And I think there's a good chance that you guys, you know, in six months and nine months, we're talking about crowding out. And so we'll find out, you know, the 10-year bond just went to 410. You know, I think it could easily go to 5%. I'm just saying people should be prepared for it. Don't be afraid of it. Just be prepared for it. How do you see that net, you know, playing out? Because you mentioned the fiscal spending side of it, and then that's concurrent with QT. So they're kind of running counter to each other.

They are. Yeah, there are contradictions in raising short rates. We still have a lot of equity. They're taking the liquidity out. But, you know, the curve, a natural curve one day might be, you know, three and a half on the short end and five in the 10 year end. And that's maybe we're going. So what it leads to in the short-end economy, I don't know. I think some of these things can have real problems down the road if we don't deal with them today. You're really better of doing with them today than just letting them, you know, get worse over time. But to your point the consumer has been more resilient than expected. Some of that is...

But more expect, because we spent $5 trillion over the two years of COVID. Right. That is extraordinary money that went to the hands of consumers and small businesses. So the government did the right thing to get us out of this terrible COVID. Remember, unemployment went from 4% to 15% and I remember like three months. But we continue spending and we continue to QT, QE for too long. And we're going to pay, we're paying a price for that and hopefully it won't be too big a price. What do you think the price will ultimately be?

It would be higher interest rates and I don't know what's going to do the economy. In terms of the consumer, do you think they fully absorbed that stimulus yet and absorbed the period of low interest rates we've seen for so long? You know, we ultimately start to see the effect of that, you know, when the tide rolls in. Yeah, that's what I'm talking about. The storm clouds down the road. Or, you know, fiscal spending, QT, higher rates, we haven't had the full effect of that yet. I don't know what that's going to do. I don't want to guess about it.

I don't know. And I think when people spend their time forecast, and a TV, they're mostly wasting their time. Do you think the Fed's done a good job? I think they did a good job early on. I think it's quite obvious. There was too much, it wasn't just their job. They were fiscal spending and monetary spending.

I think they took too long. They've kind of said that. They caught up by going to 5%. They made sense to pause for a while. We're going to see. They may have to go a little higher. I don't know, but they've caught up. I have enormous respect for Jay Powell.

Let's talk about the Fed in terms of regulation. Because last week we saw the Basel 3 endgame, Basel 4. Some people call it increasing capital standards for, especially the largest banks. Is there some way someone can actually quiet that group down over there? Okay, yeah, sorry. Is that a metaphor for? What? I don't know.

Maybe we can, so I have some... You know, higher capital requirements for you all, what do you think is the overall impact from these new rules that have been proposed? rules that have been proposed. You know, first of all, I just want to be blunt. It's hugely disappointing. I think these rules are, I mean, I've always thought G. SIFI was a joke. Now we have operational risk capital, which I think is equally bad based on models, which kind of make no sense to me.

And if I was the Fed, I'd be very careful about saying their models are perfect. Remember, their models didn't show inflation and they didn't show 5% interest rates and stuff like that. They lack transparency. I don't know what they want the outcome to be, but I think they should be saying, here's what we want the outcome to be. And it can't be just safe for banks. We have the best financial system in the world.

I don't think there's a lot of calibration among, you know, we have hundreds of rules. Lots of, you know, very little calibration among the rules. And it can have a real effect on, you know, if they want to push all mortgages and all small business bank and our banks, so be it. They should tell the American public that. And so they, they, and it'll have real effect on consumers.

So just take, I'm gonna say just mortgages. You know, the way that I've read is so far, and more detail to come, you know, It's going to make it much harder to make a small mortgage and a mortgage to a lower FICO person. And I just think that's a huge mistake from a policy point. Now, if that's what they want it to be, so be it. But they should tell the American public, when we do this, it's going to reduce mortgage affordability and raise the cost of X dollars. Because that is exactly what's going to do.

I can say the same thing about small business and a bunch of other impacts. So we're going to adjust to it. I'm not sure it's the right thing for America. And we're still reading all the details. It's 1,000 pages long. I also want to point out, it's 10 years. after the crisis. You know, so this has been going for a long time.

We need certainty, policy, that, you know, the stress test clearly didn't work. So we, you know, we do 100 a week. They do one and they act like that's the real stress for the company. I'm far more worried about China and cyber, the name about that stress test. And I just think, and the other thing, we don't have many conversations with it anymore. We should be having conversations with a regular is about what we're worried about, what they're worried about. There's almost none of that.

So it's both lack of transparency and lack of conversation with real practitioners. A lot of people, Ivy Towers, a lot of opinions here, they've never been in the real world. I'd like to see them get into boxing ring one day. Well, speaking of the recent banking turmoil, you said in your letter to shareholders in early April, quote, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. Yeah. Do you think that these new regulations solve for that? No.

I think there are, you know, to some of these folks, you know, to hammer everything's a nail, that's what this is. And a lot of these folks are using every issue that takes place to justify what they already thought. The best advice I ever heard was use your brains to figure out the truth, not to justify what you already think. So look, this will sort out. J.P. Moore will be fine. I don't think it's the way to run a railroad, but we have no choice. They do it. But they also be in cost-benefit analysis.

They're required to do that. They're also required to adjust things for the size of the economy, the size of the bank. And none of that took place. So none of this calibration. And so I wish we did it. I think we'd have a healthier banking system. And by, I thought Dodd-Frank accomplished a lot of stuff. I think this is way beyond that.

What do you think are the repercussions from the banking crisis? Because there are reports out there that you all were directly involved in the Bank of California PAC West deal that was announced last week. You personally received regular briefings as it came together, according to those reports. You advised Bank of California in what some have called the rescue takeover of PAC West. you're buying about $2 billion of mortgages to facilitate the deal, placement agent for $400 million worth of private equity infusion here. Is this the playbook now for potential stress that could arise?

No, I called it a mini-crisis. Only so many banks were off-sides on inter-trade exposure. Remember, some of these things were incented by accounting, incented by regulators, you know, and we were not completely aware of how quickly deposits could we have something like Silicon Valley Bank at First Republic. That didn't happen anywhere. So we were quite clear.

we thought first republic was the last domino. A few others may sort out. Pack West, you know, thank God, you know, it's good for them. I'm glad they did a public type of transaction. So it's over for now. You know, all the banks, you know, we're the biggest bank to community banks and regional banks. I support all of them. And they reported the first quarter.

They reported the second. Most of them did okay. They didn't have runs in the bank. They earned money. They've got plenty of capital. You know, they're preparing, it looks like, for maybe potentially higher rates or, you know, maybe high real estate law, something like that. But it's a sound system. You're going to have failure.

We shouldn't act like every failure is a failure of the whole system. But we should learn from every failure. And I think there are a lot of things we could have learned and done differently. And they're not in the new regs. There's somebody that should have been done slightly differently in other maybe potential requirements. Well, they did lower the threshold to those with $100 billion or more in assets, which would probably be more along the lines of a mid-sized bank. Yeah, I'm not sure that would have made any difference Silicon Valley Bank.

You don't think so? I don't think so. What would have made a difference, do you think? that you don't just stress one thing, but you stress multiple things, and that you look at other things, that you create liquidity. Like liquidity has created so many ways.

Like we have so much liquidity, but when things get bad, I cannot use it because it current rules. I think there are ways that things can be set up, and I won't go bore you all with credit facilities and stuff like that, credit facilities with the, you know, with the FHLB or the Federal Reserve, something like that, where every bank actually has all the liquidity they need

to back up a major run in their bank. And so there are things to fix it. They are not in these new rules. And obviously the funding costs are higher when you do see some sort of run. And so margins for the industry are under pressure as well. Yeah, but some of that is just... Temporary. No, some of that's just people have to pass on more of the earnings to their customers.

That's a normal thing. That isn't because of the crisis. I see. You know, you mentioned First Republic, and part of this best tour is actually, you know, meeting different First Republic legacy places. How's the integration going? Excellent.

You know, Jen Peepzac and Jen Roberts and Marion Lake are doing it. The house of people working on it. But here's the most important thing. They did a lot of great stuff. You know, we were just in all over Bozeman and all the place. A lot of great customers. They did some things very well. We want to incorporate them in how we do things.

But the integration itself, you know, if you get systems, technology, risk, the auto compliance branches. I am going to a branch later today, First Republic branch. got some great people, and we were able to assimilate it, help the people save a lot of jobs, and hedge literally within two days or three days, all the industry exposure. So we didn't add any to our balance you by doing that. And so the system is safer. We save those jobs, and hopefully we're going to do a great job for the clients. Do you have an appetite to do any more deals? Not really. I mean, they don't want us to, which I think is fine. They don't,

they don't want big banks to do other deals to make them bigger, which I think is fine. If you set, again, this goes back to these set regulations, but I also don't think that the the public should know we pay for the FDIC. It's a mutual insurance thing. So Silicon Valley Bank is probably going to cost us $2.5.3 billion. And, you know, so I don't want whatever happens when the next bank comes bid in, I want to make sure that bid is a reasonable bid and not where, you know, $10 billion extra is being given to a small bank. That is not fair to anybody else. So I think they need to set clear rules about how you want to do resolution and recovery. And I also think we made huge mistakes on Silicon Valley Bank. And I hope the regulators

are going to be looking at that one day. What went place? We created a crisis and we created a melting cube that maybe didn't have to happen. What do you think needs to be assessed from a regulatory standpoint there? I'm not going to go through it now, but they should be asking a lot of questions of themselves. Like whenever we make a mistake, we spend a lot of time on what I call the after-action report, the post-mortem. What did we do wrong? What can we do better? How do we make sure we're doing that across our company? We know we're going to make mistakes.

I don't think we should treat every mistake like because it's a violation of morality or something like that. but I think they should be doing a little bit of that, a little soul searching. Do you think there is an appetite among regulators and an appetite among the C-suite to do more consolidation in the industry? I think the companies, some companies need to. And I think, again, I hear consolidation, et cetera. It's a dynamic system. It's not a static system. They say there's 4,000.

They merge. They're all getting bigger. There are a lot of big companies that have gotten smaller because they didn't do a good job. There are a lot of new companies, markets, Ally Bank, PayPal, Apple, basically as a bank today. You know, there are a lot of startup. I just drove by a bank. You know, that here, I'm sure it's a startup bank.

And some middle-sized banks and small banks want to merge because they can do a better job for their customers or diversify their base more. It's a dynamic system. Let it happen. And it's a great system. America has the best financial system in the world. And the other thing I should say about regulations

is, I really do mean this. Hedge funds and private equity are dancing the streets because they're just going to pick up a lot of business because of this. But we do have the best system in the world, including private equity. hedge funds, venture capital, middle market companies. It's extraordinary. That strength is part of the strength of America.

And part of what America, free enterprise is the most important part, it's not the money, it's the people. It's people starting things and growing things and moving place and having dreams and being allowed to further those dreams, which has risk. Sometimes you make a loan has risk. We want to make some risky loans. We want to help bridge our photonic accomplish our goals and serve their clients. And yeah, sometimes, you know, we make a mistake or something like that, though.

that's a great company. I'm not referring to them. Well, what kind of music do you think they're going to be dancing to? Because, you know, that is the big criticism of increasing capital requirements, is that it's going to send business to the non-bank financials, the unregulated sector of the economy. Yeah, so that's not always bad. I'm not against competition, but the mortgage business is now 80% outside of banks. Okay, and that, I don't know what's going to do with the rest of that. It makes it hard to do small business loans. It makes it hard to do some risky loans. And obviously, a lot of that's going to go to the non-banking system.

That may not be all bad, but again, people should be analyzing the consequences and saying, we want that to happen because it's better for America and the citizens of America. I've never heard that statement. I think a lot of these things are done without any forethought about the ultimate consequences, and very little calibration. We really need to be very thought about how we're doing things. So the banking system has been, you know, this has been going now for 15 years. You know, and maybe we should take a deep breath and analyze and think about it.

If you look at a regulatory system, it's not to, I have this chart. I was going to have it. I was going to show it to, yeah, can you hand it to me? Thank you. I made this chart and people made fun of me about our regulatory citizens for banks. And I don't know if you can see it up close. There are so many people involved, there's cross responsibilities, no one's really responsible, and I'm not showing this because of banks. I'm showing this because we're doing this for building bridges, opening schools, building roads, starting companies, starting small businesses. We shouldn't be crippling America of this stuff.

We don't recalibrate regulations all the time. What we really should be doing is, what's the best thing that works, acknowledging flaws, making modifications. We don't do it. And I believe that some of this stuff has slowed down the growth of America. I wrote in my chairman's letter,

for 20 years we've gone to 1.7%. It had we gone to 3%, which is definitely what we could get done, we'd have 15,000 more per person GDP, which, by the way, is the GDP per person of China. China. Our is 80, theirs is 15. We would have been 95 today had we done stuff. I think this stuff has really slowed it down. Bad policy making, bad regulations, thoughtless type of stuff. It's easy to pile more stuff on people. George McGovern, the most liberal guy who ever ran for

president, wrote an op-ed, I think of the Wall Street Journal, after he ran for president, after he was a senator, he bought a small inn somewhere, and I think it was entitled, if I'd only known how much these things hurt my ability to build. He spoke about OSHA and litigation and the ability to hire kids and all these things. You know, maybe a bunch of people, she asked their question. What do I need to know to understand the impact of these things on America? And the reason you want to grow America is because it is the foundation of helping our lower-paid citizens too.

You know, and so I think we should do a better job taking care of lower-paid individuals. I would double the income tax credit. But a healthy economy is the foundation of everything, including a stronger military. And so I think we've got to spend a little more time about how do we grow the economy and make it better for everybody. And, you know, unfortunately, there are a lot of policy issues in D.C. Have, you know, people look at J.P. Moore and Chase, we're not the reason that inner city schools are failing.

And I think people should be a little more thought about what they actually want to accomplish and how you can lift up. So I think if you fix inner city schools, and by that, I mean kids should graduate with a livelihood. Paying $55,000 a year, I think that's doable. If you do that, change in earnings a tax credit, I would tax-carried interest, too. You can fix America. And that's exactly what we should be doing. I think some people wonder, is policymaker Jamie in the cards for the future?

No. I think companies should be involved in policymaking. So we do a lot of things to lift up society, which I'm very, very proud of. But getting policy right in D.C. is more important than individual corporate efforts. So you say education, immigration, regulation, health care, affordable housing, mortgages. If we get those policies right, that'll lift up society far more than any one company can possibly do. What about the deal environment? We talked a bit about consolidation. What about the overall picture for dealmaking right now? Are you seeing any green shoots on that front? Yes, but I could care less about that. You know, those things kind of, they're like accordions. They're open and close for, you know, sentiment, people, opportunities, regulations, FTC. It'll be fine in the long run.

Companies will find a million ways to row and expand and do deals. And yes, it's getting better today than was six months ago, but I'm not. We don't run the company that way. We run the company, we know there's going to be bad weather. We know there's going to be mild recessions, hard recessions. I call that the weather. We try to run the company that we serve those clients over there day in and day out regardless of the weather. We want to be a fortress for you, and including NBC Universal and Comcast.

That's what we try to do. You know, earnings will go up and down. I have to ask you, because there have been some headlines recently, regarding Jeffrey Epstein and the ongoing litigation there, has it impacted your brand equity at all? A little bit sometimes, but we banked Jeffrey Epstein, and I'm so sorry that we did it. I wish we hadn't. Had we known then, we know today, we obviously wouldn't have. And so... Have you changed the vetting of potential clients? Yes, because, you know, we have to be very careful.

kick out people based on allegations. But yes, I think we can do more, particularly around a whole bunch of things. And I think the banking system, by the way, sets the highest standards of know your customer, AML, protecting people. And yes, we make terrible mistakes sometimes, and we apologize for it.

I want to ask you about artificial intelligence, because going back to that letter, you said you already have 300 use cases in production today for the firm. And your chief information officer, Lori Beers, said AI delivered over $320 million in benefit through personalization and deepening client relationships. Are you positive about this technology?

Are you worried about some of the unintended consequences that could arise from such a powerful technology? Yeah, so first of all, we've put a person on the management committee reported Daniel Pinto and me who does data analytics and ML. That's how important we think it is. It is a game-changing. Now, it doesn't mean it's going to change it tomorrow. It may take a while to build in, and it can do wonderful things.

And we also, just so that your public knows, we have an AI ethics department, an AI explain, we have to explain it to regulators, political leaders, and stuff like that, in addition to running through programs, and there's machine learning, there's AI, there's large language models, we kind of do all those various things. It is a game changer.

And yes, it needs to be done right. And it can be hard to regulate. I do worry about it because bad guys are gonna use it too. You've had people like Henry Kissinger and Eric Schmidt, who I have deep respect for worrying about if it's ever used in military, you know, it can lose control. But yeah, there could be downsides. Remember, there were downsides to cars.

pharmaceuticals, airplanes, but you live a lot longer, you have a far better life. And the other thing I think in society, you know, people, we went from working six and a half days a week, 60, 70 years ago, to five now. You know, my view is in 30 years, your kids will probably be working three and a half days a week. They'll probably live to 100, and they probably wouldn't have cancer. Those are good. So technology drives all that. That's fabulous.

If it causes too much, you know, job loss and stuff like that, then we, society can step in with relocation, retraining, income assistance, all those various things. So there are a lot of solutions, again, if we get policy right. If we get policy right. Jamie Diamond, thank you so much for sitting down wide-ranging discussion today. An important day for the markets, the economy, the banking industry as a whole. We really appreciate it. Thank you.

Everyone out there, keep the faith. This wonderful country of ours. Support-free enterprise. Thank you. Thanks, Jamie. Kelly, I'll send it back to you. Leslie, thank you very much. Our Leslie Picker, an extraordinary interview with Jamie Diamond there,

probably one of the most abullient interviews I've seen him conduct in some time. That said, take a quick look at the markets. We are at fresh session lows right now with the Dow down about 308 points. The S&P is down 57. Its first decline of more than 1% or move of 1% in either direction

in quite a while. And the NASDAQ is down about 2%. Let's bring in Aaron Klein, Brookings Institute's Economic Studies Fellow. Chris Katowski is senior research analyst covering banks with Oppenheimer and James Pethakukas is AEI's economic policy analyst at a CNBC contributor. I want to just get some reaction. Welcome, everybody.

Aaron, to you first. And let's start with what you heard Jamie Diamond say about the importance or lack thereof of Fitch's downgrading of the U.S. credit. Yeah, no, look, I think he's right. I mean, credit rating agencies are overly relied on by investors, by government, by regulators. They're just folks offering opinions. This kind of comes out of left field, and I don't think has much value. Look, when I was at the Treasury Department in 2011, we got downgraded by S&P and Treasuries rallied that. same day. So I think Diamond's optimism about the economy was kind of my big takeaway.

Yeah. So we'll kind of circle back to that in a second. I just want to get Chris your reaction as well. Would there be implications from the downgrade that were missing for, for instance, the major U.S. banks? No, I don't think so. I kind of think that's noise. And it's silly. You know, we're the world's reserve currency still. You know, in effect, the Fed could always print more more money. So, you know, the risk of default is really not really there, in my opinion. Well, so Jimmy, I turn to you because, as I said, a very optimistic or upbeat, I guess I should say, discussion there with the major, probably the most important bank CEO in the country telling us the downgrade doesn't matter and so on. And not to, you know, make too much of it. But, you know,

the markets are sinking to session lows as we speak here. So didn't quite get at least the immediate lift that some might have hoped. Yeah. Well, first of all, I like the Jamie Diamond theory that if America's not AAA, then basically nobody should triple A since they all depend on us for everything. Their defense, the innovation, that's kind of an interesting point. But I think it's always a good time, whether it's from a rating agency or anybody else, to remind the American public and remind policymakers that we are on an unsustainable debt path. and there is no plan from Democrats or Republicans to do anything about it. It's not fun. It's not as fun as talking about an AI productivity boom or anything like that.

But that's still the reality. And I'm glad Fitch reminded us. I hope other rating agencies remind us. I hope policymakers remind us. Yeah, no, I'd rather the three and a half day work week, the cancer free. All of those sound sounded great to me. I like Jamie Diamond the futurist. That's great.

Yes. But, Jimmy, I'm surprised to hear your level of concern, because frankly, there's not a lot of voices out there who are really taking this quite seriously. We did speak to Dan Clifton last hour, who was highlighting some of the dynamics you sound worried about. What's the forefront in your mind? I think the forefront of my mind is that no one's interested in it. Listen, we're going to have the two probable presidential candidates have no interest in reforming Medicare and Social Security. It's just not even on the table.

So there is no plan. And if we don't want to wait to the point where markets, not the ratings agencies, but when markets say, guess what, your time is up, then it really is up. Because we've already should have had those plans in the works, and they're not in the works, and they're not even close. So we're going to have to wait until there's a market shock, I fear, before Washington really acts. Erin, you want to respond to that? Yeah, look, I mean, the Republican Party has structurally become the party of tax cuts for every purpose.

So the only plan the Republican Party has had really now, you know, since the last fiscally responsible Republican president, which was Bush 41, has just been cutting taxes, solves everything. And so there's a little bit of a harsh reality where you have a political situation where large majorities of the American public actually want wealthier people and corporations to pay their fair share. And you have one political party that's entrenched kind of over their dead body. And that makes a unsustainable. And you begin to understand where Fitch and other rating agencies come from. But the reality, and I thought Diamond was very strong on this, is the models have done a poor job. of predicting where things would happen.

The fact that the markets have taken the huge amount of debt that has been issued by this country for a long time with very, very low interest rates is not something that textbooks said would have happened 30 years ago. And Jimmy, I'll just let you respond. Yeah. What, I'm sorry, what is the Biden entitlement reform plan?

What is the Medicare reform plan? What is the Social Security reform plan? I think both parties have zero interest in it. Maybe that's because voters at the moment have zero interest in it, but this is a bipartisan abdication of responsibility. All right. Full stop. With those fighting words, everybody stick around.

We're going to sneak in a quick break. We'll come back, discuss a lot more from the Jamie Diamond interview on the other side of this quick break here on Power Lunch. Welcome back to Power Lunch. Just wrapping up our exclusive interview with Jamie Diamond. If you didn't catch it, here were his remarks about, or his reaction, I should say, when asked to do about Fitch's downgrade of the U.S. credit rating. Listen, in just a moment. Let's turn back to the panel. Aaron Klein, Chris Katowski, James Pethakukas are all with us. Chris, let me start with you as we kind of turn to some of the nitty-gritty as well about the banks.

He had a lot of sharp comments to make about these proposed capital requirements, really trying to tell regulators that could do more harm than good here. What would you say could be the fallout if we do move forward with this, economically speaking? Well, I totally agree with him on this. And in addition to covering the banks, I covered the alternative asset managers. So the Black Stones, Apollos, and that ilk. And, you know, if you go back to 2006, between them, the companies I cover, had about $10 billion of credit assets.

Today, that number is over a trillion. And most of those assets used to live in the banking system. And, you know, the regulations that are the rules proposal that came out last week, basically just pulls on that capital lever again. And it's really perverse, if you think about it, the regulators always had this thing they called the camel's score, and that stands for capital, asset quality, management, earnings, liquidity, and sensitivity to securities risk.

And if you think about Silicon Valley, what sunk Silicon Valley was the liquidity and the sensitivity to securities risk. And so apparently, then the answer is, oh, and it was a small bank. So instead, we're going to come out with a rules proposal that raises the capital that pulls the C lever one more time for the big banks. And I think he's right. It's just, you know, I cover the, again, I cover the alternatives.

They're all very happy. They're all getting increased opportunities from this. Chris, at some point, would they face increased scrutiny and rulemaking as well? Or would that take a crisis first? Yeah, I mean, it's hard, right? Because if you think about who goes into these credit vehicles, I mean, generally it's accredited institutional investors who have their own teams of lawyers and so on and so forth, voluntarily in an arm's-length transaction giving money to Apollo and Blackstone and KKR to manage for

them. So it's a, you know, arm's-length transaction among sophisticated parties that has driven this for the most part. And so, you know, at some point, is there regulation? Yeah, but I'm not sure exactly, you know, what angle they would take to get into the middle of all that. Yeah, and Aaron, this kind of has big implications, right? Are we moving in the right direction or in the wrong one in terms of general credit

availability to the economy and especially to those who might be most vulnerable to it? Yeah, no, look, don't forget about the M in Chris's Camel's management. The management at Silicon Valley Bank was totally mistaken. And there were some pretty structural conflicts of interest with their CEO on the board of the San Francisco Fed who regulated them. I thought Jamie Diamond was spot on when he showed that chart. We have way too many bank regulators. I've called on moving bank regulation out of the Federal Reserve. Let them focus on monetary policy, which really is their core zeitgeist.

And so I think that you have too many regulators fighting amongst each other, often trying to solve for the last crisis and not looking forward. And Diamond was right that the ramifications of the Silicon Valley Bank bailout and the other bailouts from March reverberating in through the entire full banking industry. But more than that, the banks pass them on to their customers. And particularly research shows lower income customers who are a little less rate sensitive, shopped their bank a little bit less. And so I have real concerns that when you get regulation wrong, the fallout and consequences are on essentially the people who ought to bear the least. Sure, Jimmy. I've even seen research that says, you know, things like the senior loan officer survey leading indicator, you know, closely watch metric, don't even matter as much as they used to because so much of the credit extension is happening in the kind of in the private space. Right. So I sense what Jamie Diamond was saying is that for regulators, it is always October of 2008. And they are not concerned enough about tradeoffs and unexpected consequences. like moving a lot of this into, moving this money into a different sector.

And I thought that was a great point he made that, you know, listen, better policy means a wealthier America. That if we don't, if we tamp down on risk too much, we get less growth. And I think the number he said, where he could be a $95,000 per capita country instead of an $80,000 per capita country. Like that makes a difference. And you need regulators to think about tradeoffs and consequences, even if they don't mean them to happen.

All right. And again, he tried to bat down any idea that. he himself might enter the policy race, the presidential one, certainly. Gentlemen, thank you for your time today. Aaron, Chris Jim, we appreciate it. Bond yields are moving higher after Fitch's downgrade of the U.S. We'll head live to the CBO, Florida here what the traders are saying about that next. Welcome back. Stocks are falling today. In fact, the Dow down 331 points is right around session lows, as we've seen a renewed selling pressure this afternoon.

After the Fitch downgraded the United States debt rating, bond yields are higher as well, the tenure at its highest level since. November. Let's get to Rick Santelli out in Chicago with more. Hi, Rick. Hi, Kelly. Yes, there are a lot of moving parts in the marketplace today. Look at that 24-hour chart of twos and tens. 815 Eastern ADP better than expect. It doesn't include government hiring. We see rates climb. And of course, when you pointed out the 10 year, it needs to close above 407, which it barely is now, to be the highest yield since November. But technicians aren't worried about 23. They're worried about four and a quarter from October. And as you look at a 30-year on top of crude oil, another influence that

takes me back to the old days in the pits. Long-dated treasuries like to pay attention to higher energy prices. That's another reason to make sure you pay attention. Now, let's remember we had a record by volume drop in inventories. That's significant. Let's find a trader. Hey, Dave. My man. All right, let's talk about the issues of the day. We had strong ADP. Tomorrow's initial claims, Friday. jobs jobs jobs what do you think and how the market's acting considering we've seen such a huge dropping crude well i mean it used to all years ago was all about the it was all about the jobs report for a long time it dried up nobody cared about jobs report now they're caring again now it's a big deal could it be something that reverses the fed from the standpoint that you

have some like a ghouls beyond the fed who continue to talk that well we need more evidence before we truly advertise we're done. Do you think they're ever going to truly advertise they're done? They have an agenda. They don't care about anything. They don't care about. Numbers, they have an agenda. It's whatever fits their agenda.

That's what they're going to do. So they might telegraph it. They might try to lay along. They have an agenda. That's all they care about. Why do you think stocks are down today? And it's almost a question I'm embarrassed to ask because they've been on a tear to the upside.

What do you think? Do you see the fits report? They got downgraded? They downgraded the U.S. debt. I mean, that's a huge deal. Yes, earlier we rallied when they had. some good numbers, but this is a big deal. It's a big deal.

Well, what do you, what's been to talk about the Fitch downgrade? Because I actually remember, I remember 2011 when Barack Obama was in office, and of course we saw S&P down greatest and notch. Now another administration of Democrats that like to spend. And I'm not saying it's a horrible thing. Sometimes they spend it on good things. Sometimes they don't. But it is about spending because we're spending other people's money.

It's always a waste. And any time the government's in charge, it's a waste. They don't know how to run anything efficient. Look at them. So do you think traders believe that the impact of Fitch, unlike 2011, which it was hardly noticeable? You think it's having an effect on Treasury? I do. I do. I think it's a big deal.

I really do. Well, one thing I can say is we're all boiling frogs. And in the end, I'm not going to comment about why they downgraded or the substance of the downgrade or how all the emperors men are saying what a great wardrobe the naked emperor has. But I'll tell you, if you have kids or grandkids and you're awake, We have too much debt. It's like Russ. Our economy's Rustyne.

They need to do something about it. Preach on. You're 100% spot on. And hey, where's Moody's? You know, Oh my God, you're a fourth person that asked me that today. Exactly. Kelly, back to you.

And we'll see if they follow suit. Everyone's fired up out there, Rick. Thank you. That's the bond market take. How are stock investors dealing with the downgrade news? That's next with the Dowdown 32 points. Welcome back to Power. our lunch, stocks continuing to drop on the back of the U.S. credit rating downgrade from Fitch.

The Dow and S&P both near session lows. The NASDAQ down more than 2%. For more on what it does mean for the market, we turn to CNBC contributor, Michael Farr, CEO and founder of Farr Miller and Washington. Michael, it's good to see you. And what do you want, do you think the market's overreacting or underreacting? I think it's probably pretty much in line, Kelly, and thanks for having me with you. You know, a downgrade of the debt, that's never going to be looked for. Fitch is a little bit weird. A year ago, they upgraded the U.S. debt rating. It was already AAA, and it went from negative to stable a year ago. Arguably, the last four or five months, we've seen better economic data. It's a weird time to be, I think, lowering it. But, you know, overall, it's a shot

across the bow for the economy, and I think particularly for Washington, because they cited sort of unstable governance, as they looked at the erosion of governance was the term they used. Right. I mean, listen, everyone's sort of rolling their eyes and saying we have the printing press, but we did push it to, again, kind of the last minute on the debt ceiling a couple of times. You know, Jamie Diamond says we need to get rid of it, but I don't really know if that's in the cards either. So if we're going to keep pushing it to this point, isn't this a response to be expected from Fitch? And do you think Moody's could be next? Yeah, I think Moody's is probably going to keep its mouth shut.

I mean, we got a response from Janet Yellen, and then we heard us. sort of echoed from Jamie Diamond. That sounded like the administration's response, we've got to have faith in the U.S. dollar and the U.S. debt. But I think the point that what I think was made earlier with you from Stratagas was it probably brings that sort of debt ceiling debate back in and makes it more less likely that they'll get through that easily again in the fall. There's a problem, right? We're spending more money than we bring in. And the debt's increasing and the cost of servicing that debt's going higher. It doesn't take it. It doesn't take, you know, a rocket scientist or a Harvard MBA to say that's probably not sustainable.

So normally when we start talking about government shutdowns, you know, not as big of a market impact as something like the debt ceiling, but also usually not that bullish or maybe I'm misremembering. I mean, at the same, I noticed from Brian Reynolds this morning, though, he thinks a lot of institutions are still chasing this market higher and that as they continue to do so, that you could still see stocks generally moving to the upside. You know, path of lease resistance continues to be higher. The financial system's sound. Housing is sound.

Consumer spending is still sound. Now, the consumer may be running out a wallet vis-a-vis inflation, but even those data are coming down a little bit, that that inflation is beginning to moderate. So, you know, there's signs of a soft landing. Certainly with the market near all-time highs, you have to be cautious. But companies are still earning money.

The U.S. economy is still expanding. we're not in a crisis, but this is a, we shouldn't ignore it. We've got to pay attention to this, Kelly. We can't keep racking up the debt on and on without a plan here. And it seems like both sides of the aisle are intent upon doing just that. J&J, Microsoft, couple of names. If people are looking to kind of hide from all the drama. AAA rated, AAA rated. Exactly. They'll be the new benchmark. Michael, thank you so much. We'll check in soon. Michael Far. Thanks, Kelly. Meanwhile, losing its edge. Solar Edge shares, sinking 18%, weak guidance, thanks to canceled orders and elevated inventory. Why is the U.S. solar market so weak right now?

We've got the details next. Welcome back to Power Lunch, a down day for the market and a really down day for Solar Edge. Shares are down almost 18%. Pippa Stevens has more of the details on weak U.S. solar market. What's going on, Pippa? Yeah, so the shares are at their lowest since October, and Solar Edge posted a mixed quarter, but today's drop is thanks to the Q3. revenue guidance, which missed estimates. And the company is the latest to warn about weakness

in the U.S. market. CFO Ronan Fyre telling me, quote, in the U.S., there's a real slowdown. The U.S. market is not growing this year, and I don't see any resolution next year. He said the picture is better in Europe, while distributors are pulling back on product purchases as they work through excess supply, it's not a demand-side issue like it is in the U.S. residential market. The slowdown in part because of higher rates, which increase. the payback period for a solar system. Now, Solar Edge gets about 20% of its revenue from the U.S., while about 60% of competitor Enfaces revenue is domestic.

Enfei's CEO, Badji Kuthandar Amon, told me the market has changed quickly, saying last year it was all about not enough supply, while this year there's not enough demand. But utility scale projects are less sensitive, and so demand is still robust in those markets, names like for solar, shoals, and next tracker, all high over the last three months. but the turnaround here has been very fast and very steep.

Not enough demand, higher rates, as you say, Pippa, close things out with me, if you will, while we're here. Well, let's hit closing time. We've got about three minutes left and a couple more headlines we want to run through. Starting with Ford seeing its U.S. sales jumped nearly 6% in July from the year earlier, despite a major slump for its electric vehicles. The F-series trucks were up 8%, but the F-150 lightning down 28% from a year ago. And that unit is expected to lose $4.5 billion this year as they spend heavily to ramp up production for next year and beyond.

They say part of the decline was kind of a temporary shutdown in some of these production lines, but we know there are bigger issues here. Yeah, so they're saying that it was because those factories were offline for a period. But I think that there are still issues with consumers. We still have range anxiety, maybe not the same extent that we did a couple years ago. But people are still worried about that. Also, the prices, if you are a little bit more sensitive with your spending. Absolutely.

Are you going to shell out? Right. Not sure. Good thing for consumers are starting to come down. but another headwind for Ford. Meantime, have you heard about this? The nation of Iran is instituting a two-day shutdown as they grapple with unprecedented heat.

Government offices, schools, banks will be closed till Friday. According to state-run media, they've seen a triple-digit heat wave for days. July, of course, was estimated to be the hottest month on record around the globe. Maybe Phoenix is next week-long shutdown. I hope there's no more of these. And I think some great concerns as well,

are they actually able to supply? But this is becoming more and more of an economic issue. It is. The Lancet said 470 billion labor hours were lost back in 2021 because of climate. So it starts to, you know, have a real impact across the economy. And the bills are adding up. I see people, you know, complaining about how their cooling costs are going to be $400 a month. And that's with the cost relatively tame, as you know.

It could be way worse. China finally is trying to do what millions of parents, no comment, around the world, have failed at. They're considering a two-hour-per-day limit for people under the age of 18 on, what do we call this, kind of technology, smart social media. Smart phones have to have a minor mode now to help parents manage their kids' screen time.

If this becomes law, it's bad news for some of China's own biggest companies like Tencent and Bight Dance. And the fact that they would choose to do this now at a period of economic vulnerability is to me pretty shocking. Yeah, I mean, I think it's a big statement. I think there's a lot of issues around

how do you actually enforce it. Also, a crackdown on the social side, maybe some content limiting from foreign nations. Yes. But I think a lot of parents are interested in how you actually do this. You know, Pippa, you turned out pretty well. What was the Pippa Stevens household approach, you know, to, I don't take it you were a big video gamer? You know, I was a big cartoon network.

So weren't we all? Watcher and, you know, I think they helped me along the way. That's how I learned socialization, I think, is from Looney Tunes. I'm Pippa. Thank you very much today. Appreciate it. Tyler's back tomorrow. Thanks for watching Power Lunch, everybody.