Somebody will disrupt the market! Why JPMorgan CEO Jamie Dimon is raising alarm over high leverage

As global financial markets continue to see sharp upswings and downswings, JPMorgan Chase CEO Jamie Dimon raised the alarm over elevated leverage, adding that investors should be mindful that hidden borrowing could worsen market disruptions.

"Margin debt is the highest it has ever been. There is a lot of margin debt you don't see because it is not called margin debt. It is called other things. It is that kind of leverage, some hidden, some public," he said during an interview with CNBC, explaining that this massive amount of borrowed money in markets can lead to even a single investor or fund triggering broad volatility.

"When you have that, you do have a higher chance that somebody will disrupt the market in a quick way, and people get rattled over it," he said. The CEO of one of Wall Street's top banks pointed to borrowing through prime brokerages, hedge funds, exchange-traded funds and Treasury arbitrage strategies, adding that market leverage is pretty high.

Jamie Dimon on the Situational Awareness

Leopold Aschenbrenner, the former OpenAI researcher who once positioned himself as a prophet for the coming age of artificial super intelligence, is now being forced to wind down his hedge fund Situational Awareness’ positions amid a global downturn in AI stocks.

Situational Awareness’ prime brokers including Bank of America, Goldman Sachs and JPMorgan Chase have been rushing to raise cash in order to meet margin requirements, CNBC reported, citing people familiar with the matter. Speaking about this, JPMorgan Chase CEO Jamie Dimon said the episode demonstrated that markets can absorb its failure without broader disruption.

Also read | AI bubble gone bust? Once a billionaire, how AI investor Leopold Aschenbrenner lost most of his hedge fund’s fortune in days

He however did not call the high leverage a systemic threat, noting that markets have generally been able to absorb isolated failures. "I am not going to say it is systemic high, it is going to cause a disaster, but it is high," he said during his interview with CNBC.

Dimon says today's market environment not same as 2008 financial crisis

While several analysts sound the alarm over today's market environment resembling those of previous historic financial crises, Dimon holds a different view. He distinguished today’s market environment from the 2008 financial crisis, arguing that leverage alone does not necessarily cause systemic stress.

"The worst thing is if you have actual losses in the marketplace. It was not the leverage. It was the amount of losses that were going to be realized on mortgages," he said. The JPMorgan CEO noted that banks would continue adjusting collateral requirements in tandem with the changing market conditions. "When volatility goes up, clearing houses and banks generally ask for more collateral. So you will probably see a little bit of that," he told CNBC.

Remilitarization of the world would be inflationary, says Dimon

Jamie Dimon, however, warned that the structural demand for capital could reignite inflationary pressures, highlighting rising government deficits, infrastructure and global rearmament. "The remilitarization of the world would be inflationary," he said.

As the Middle East crisis continues to spook investors, Dimon last month said investors are underestimating geopolitical and fiscal risks that could eventually rattle stock markets, adding that he would not buy either equities or bonds at the current prices.

"I do think those risks are probably bigger than other people think," Dimon said during an interview with Wilfred Frost, highlighting the wars in Ukraine and the Middle East, along with rising tensions between US-China, leading to rising military spending at a time when government deficits are escalating.

Also read | Bigger crash ahead? JPMorgan CEO Dimon says he won't buy stocks at current prices, says markets underestimating risks

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