A New Era of Investing Begins 1672488719

EYE ON THE MARKET OUTLOOK 2023
The End of the Affair

The affair with the market catalysts of the last decade is over now,
and a new era of investing begins.
By Michael Cembalest
Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management
MARY CALLAHAN ERDOES
J.P. Morgan Asset & Wealth Management
For the past 20 years, my investment partner Michael Cembalest has kicked off the new year with
our best
How thinking
do youto summarize
help investorsa better position
year that was portfolios. What we value
in many respects most is his
indefinable? Onindependent,
one
and often
hand,non-consensus,
the Europeanopinions
sovereignon many
debt topics—The
crisis, contracting Affair is no
End of thehousing exception.
markets and high
unemployment weighed heavy on all of our minds. But at the same time, record
corporate profits and strong emerging markets growth left reason for optimism.
On behalf of all my partners at J.P. Morgan, thank you for your continued trust and confidence in all
of us.So
Werather
are privileged to serve
than look back,aswe’d
yourlike
trusted advisor.
to look ahead. Because if there’s one thing that
we’ve learned from the past few years, it’s that while we can’t predict the future,
Most we can certainly help you prepare for it.
sincerely,
To help guide you in the coming year, our Chief Investment Oﬃcer Michael
Cembalest has spent the past several months working with our investment
leadership across Asset Management worldwide to build a comprehensive view
of the macroeconomic landscape. In doing so, we’ve uncovered some potentially
exciting investment opportunities, as well as some areas where we see reason to
proceed with caution.
Sharing these perspectives and opportunities is part of our deep commitment to

you and what we focus on each and every day. We are grateful for your continued
trust and confidence, and look forward to working with you in 2011.
Most sincerely,
2023 EYE ON THE MARKET OUTLOOK • MICHAEL CEMBALEST • J.P. MORGAN
Access our 2022 energy paper here J a n ua r y 1 , 2 0 2 3

It was nice while it lasted. The tattered posters on the cover show the remnants of some equity market catalysts
over much of the last decade and in particular 2020-2021: profitless innovation, the Fed’s quantitative easing,
the discredited Western conceit of “geopolitical change through trade”, the cocktail napkin appeal of Modern
Monetary Theory and massive fiscal stimulus, unsustainable negative real interest rates and “TINA” (there is no
alternative to equities), the dream sequence of a rapid transition to renewable energy, the Potemkin village of
many metaverse/fintech narratives and the pseudo-libertarian gibberish of unregulated crypto.
The largest combined monetary and fiscal experiment in history is ending now, and a major growth slowdown
is coming to the US and Europe. But: avoid the trap of becoming more bearish the lower the market gets, and
be prepared to take advantage of selloffs when/if they occur. As shown below, in the history of US recessions
(with the exception of the dot-com collapse of 2001), equity markets bottomed well before the bottom in GDP,
payrolls, S&P 500 earnings and housing starts and the peak in household/corporate delinquencies. The ISM
survey has been the most reliable coincident indicator of a bottom in equities, which is why we pay so much
attention to it. If history is any guide, the equity bottom would also coincide with the end of Fed hikes. I expect
equity markets to bottom sometime in the first half of next year, and for the October 2022 lows to hold.
Our outlook begins with a discussion of leading indicators and what equity markets are pricing in already. The
sections that follow examine US inflation which we believe will cool enough for the Fed to pause at 5% in the
spring; the decline in globalization and implications for investors; how the end of negative real rates may usher
in a period of improved stock picking by value-oriented managers; how a regulatory wave is coming to the
Fintech/crypto world; where we see value in global fixed income now that Central Bank financial repression is
ending; and the latest news on mRNA vaccines and the 1969 moon landing.
Michael Cembalest
JP Morgan Asset Management
When recessions occur, the ISM survey has been the best coincident indicator of a bottom in equities
S&P 500 indexed at 100 at start of each period, dots show when each indicator bottomed
S&P 500 index ISM GDP Payrolls S&P Earnings Housing starts RE delinquencies
130
120
110
100
90
80
ISM,
70 payrolls &
housing
60 starts
Eisenhower Stagflation Double dip recession S&L recession DotCom collapse GFC COVID
50
6/1957
4/1958
9/1958
2/1959
7/1959
9/1973
2/1974
7/1974
5/1975
3/1976
8/1976
2/1981
7/1981
5/1982
3/1983
8/1983
2/1990
7/1990
5/1991
3/1992
3/2000
8/2000
1/2001
6/2001
4/2002
9/2002
2/2003
7/2003
5/2007
3/2008
8/2008
1/2009
6/2009
4/2010
9/2010
2/2011
1/2020
6/2020
11/1957
12/1959
12/1974
10/1975
12/1981
10/1982
12/1990
10/1991
11/2001
12/2003
10/2007
11/2009
11/2020
Source: BEA, Census, NAR, Shiller, Bloomberg, S&P Dow Jones, JPMAM. 2022.
INVESTMENT PRODUCTS ARE: ● NOT FDIC INSURED ● NOT A DEPOSIT OR OTHER OBLIGATION OF,
OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES ● SUBJECT TO 1
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
A quick look at declining leading indicators and US banking system resilience

Leading indicators suggest that a major growth slowdown is coming to the US and Europe. Whether a recession
technically occurs or not is beside the point; for equity investors, the slowdown ahead is likely to drag corporate
profits down with it. We track manufacturing surveys closely since they’re good coincident indicators of a
bottom in equity markets when recessions do occur. The first two charts predict where these surveys are
headed given rising inventories and falling new orders. We expect a bottom in these manufacturing surveys in
Q1/Q2 of 2023, and at levels that are above 2008 and 2020. In other words, if there is a recession, we expect it
to be a milder one than the last two. The third chart projects the decline in S&P 500 earnings1; our best guess
is a 10%-15% y/y decline in S&P earnings in 2023.
In Europe, consumer spending is declining as energy crowds out other forms of consumption. While European
governments are shielding consumers from peak gas and electricity prices (p.14), households will still face
substantial energy bill increases in 2023, negatively impacting employment, housing and production. Core
inflation in Europe is still running at 5%, forcing the ECB to tighten into economic weakness.
US new orders less inventories predicting ISM downturn EU new orders less inventories predicting PMI downturn
Index (50+ = expansion) Index, 3 month average Index (50+ = expansion) Index, 3 month average
70 30 70 30
ISM manufacturing PMI composite index (lhs) EU manufacturing PMI composite index (lhs)
65 ISM new orders less inventories (3 month lead, rhs) 65 EU new orders less inventories (3 month lead, rhs)
20
20
60 60
10
55 10 55
50 50 0
45 0 45
-10
40 40
-10
-20
35 35
30 -20 30 -30
1983 1988 1993 1998 2003 2008 2013 2018 2023 1997 2002 2007 2012 2017 2022
Source: Bloomberg, JPMAM. November 2022. Source: Bloomberg, JPMAM. November 2022.
Leading earnings indicators point to S&P 500 earnings Europe's energy bill goes off the rails
decline, Percent Net exports of energy products, % of GDP
60% 1%
Trailing S&P 500 earnings, y/y
Net exports US EU
50% Earnings leading indicator: model 1
Earnings leading indicator: model 2 0%
40%
30% -1%
20%
-2%
14%
10%
0% -3%
-10% -4%
-20% Net imports
-5%
-30%
1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022
2001 2004 2007 2010 2013 2016 2019 2022
Source: Morgan Stanley US Equity Strategy. October 2022. Source: BEA, European Statistical Office, JPMAM. Q3 2022.
1
The first model includes the manufacturing PMI, business surveys, credit spreads and housing starts. The
second includes business surveys, supplier deliveries, wage trackers, inflation and a cyclical GDP indicator.
2
Whenever growth slows materially, we examine the effects on the banking system since that’s where losses are
magnified due to leverage and depositor risks. To us, the situation looks much better than 2008. US bank tier
1 capital ratios have risen substantially; a lot of risky lending migrated from banks to capital markets and private
credit lenders; US bank wholesale funding is now 7.5% of bank liabilities, down from 17.5% in 2000; and loan-
to-deposit ratios fell from 1.00x in 2008 to ~0.65x, the most liquid the US banks have been since the 1970’s.
Here’s the “but”. Due to rising rates, a lot of deposits fund high-quality bonds that trade below par, designated
as “Available for Sale” or “Hold to Maturity”. According to the FDIC, unrealized losses on these securities at US
banks have ballooned to ~$700 billion. As a result, we also look at loan-to-deposit ratios by adding these
securities to loans, and compare the ratios by bank to the “stickier” retail share of its total deposits (first chart).
US bank loan-to-deposit ratios Fed assets and liabilities
Retail deposits share of total deposits US$, trillions US$, trillions
80% $9.5 $4.0
Lower Risk CFG HBAN
70% RF WFC PNC Fed assets
Deposit Base KEY
60% $3.5
TFC $9.0
MTB FITB
50% JPM BAC ZION
USB Bank reserves $3.0
40%
CMA $8.5
30%
$2.5
20% Overnight
Higher Risk $8.0 reverse repo
10% C Deposit Base $2.0
0%
70% 80% 90% 100% 110% 120%
Loans plus securities as a % of deposits $7.5 $1.5
Source: JPMAM. Securities include Hold to Maturity and Available for Sale Jan 22 Jul 22 Jan 23 Jul 23
categories. Q3 2022. Source: FRB, J.P. Morgan Equity Research. November 2022.
US bank tier 1 capital ratios US loan-to-deposit ratio, all commercial banks

Tier 1 capital as a % of risk-weighted assets Ratio, loans / deposits
15% 1.05x
1.00x
14%
0.95x
13% 0.90x
0.85x
12%
0.80x
11% 0.75x
10% 0.70x
0.65x
9%
0.60x
8% 0.55x
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
Source: FDIC, Bloomberg, JPMAM. Q3 2022. Source: St. Louis Fed, Bloomberg, JPMAM. December 14, 2022.
FDIC Q3 unrealized bank losses on investment securities

US$, billions
$150
$75
$0
-$75
-$150
-$225 Available-for-Sale Securities
-$300
-$375 Held-to-Maturity Securities
-$450
-$525
-$600
-$675
-$750
2008 2010 2012 2014 2016 2018 2020 2022
Source: FDIC. Q3 2022.
3
Table of Contents
Topic #1: Tracking the repricing of financial assets ................................................................................................5
The latest valuations in US equities; the decline of the YUCs and the MUCs; deep value pricing and the China
reopening; the mysterious stability of leverage loan prices after a decade of collapsing covenant protection and
rising leverage
Topic #2: Tracking the Fed, and where inflation goes from here .......................................................................... 10
There's enough evidence in the pipeline for the Fed to pause at ~5% but there's little room for easing in 2023; the
long term inflationary impact of the renewable transition and reshoring of critical supply chains; Europe tackles
energy inflation through price caps in power markets
Topic #3: Tracking the gradual decline of globalization ........................................................................................ 15
The unwinding of maximum globalization is underway, driven in part by intensifying US restrictions on China.
Regional trade and cross-border investment is alive and well, and some industrial processes like semiconductors will
be difficult to dislodge from existing producers
Topic #4: Tracking the performance of active managers ...................................................................................... 20
Negative real rates collapsed risk premia and created difficult stock-picking conditions for value oriented portfolio
managers. Higher real interest rates could increase asset price dispersion and be a tailwind for stock picking
Topic #5: Tracking the regulatory wave coming to Fintech/crypto, and JP Morgan’s crypto footprint ................... 21
The Treasury and SEC are ramping up efforts to address Fintech/crypto customer protections, regulatory arbitrage,
pricing transparency and financial stability; comments on JP Morgan, blockchain and crypto
Topic #6: Tracking global fixed income for yield oriented investors ..................................................................... 23
Focus on intermediate duration US municipals, conforming mortgage bonds, US-Europe-China government bonds,
asset backed paper, floating rate notes/CP, Mexico local bonds and high-quality US/European preferred stock
Topic #7: Just the Vax and nothing but the Vax ................................................................................................... 25
Closing thoughts on mRNA vaccines, the CDC and the 1969 moon landing
The end of an era: the largest peacetime monetary and fiscal experiment in US history is ending now
Lowest real yields on cash since 1830, other than during US budget deficits (surpluses)
wartime, T-bill/Funds rate less inflation, 5-year average Percent of GDP
15% 30% WWII
25% Great
10% Depression
20%
5% WWI COVID-19
15% Pandemic
0% 10% Civil War GFC

Civil
-5% War 5%
WW I WW II 0%
-10%
-5%
1830
1840
1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020
Source: FRB, Robert Shiller, GFD, BLS, JPMAM. 2020. Source: Peterson Foundation, CBO projections, JPMAM. 2021.
4
Topic #1: Tracking the repricing of financial assets

The extraordinary gap between asset yields and policy rates is finally closing. This was the catalyst for the
repricing of profitless innovation, and which then spread broadly to the entire equity market. As 2023 begins
some public valuations are back to pre-COVID levels, while many private equity and private credit markets have
yet to reprice. I suspect we will see a modest correction early in 2023 that brings valuations closer to long-term
averages as the growth slowdown gets closer. Other trends we expect to continue: physical assets outpacing
digital assets, and traditional energy outpacing renewable energy. Also: Fintech returns have now given up their
entire outperformance vs traditional banks since 2019 (see p.21).
Gap between asset yields and short rates is finally closing Dumb and Dumber
Percent Index (100 = Jan 2019)
17.5% 500
15.0% 450 Metaverse, Hydrogen,
Fintech, SPACs, crypto and
12.5%
400 other profitless innovation
10.0% (software, e-commerce and
350
7.5%
Developed world asset yields biotech), 2019-2022
300
5.0%
250
2.5%
200
0.0%
Developed world short rates 150 NASDAQ 100, 1998-2003
-2.5%
adjusted for quantitative easing
-5.0% 100
1960 1970 1980 1990 2000 2010 2020 2019 2020 2021 2022
Source: Bridgewater. December 7, 2022. Source: Bloomberg, JPMAM. December 27, 2022.
Forward PE ratios: Russell 1000, growth & value S&P 500 price to earnings ratio
Price / consensus 12 month forward earnings per share Price / 12 month forward earnings
50 26x
Megacap 8
45 Russell 1000 Growth Index 24x
40 Russell 1000 Index
Russell 1000 Value Index 22x
35
20x
30
25 18x
Average 16.7x
20 16x
15
14x
10
12x
5
2006 2008 2010 2012 2014 2016 2018 2020 2022 10x
Source: Bloomberg, JPMAM. December 27, 2022. Megacap 8 includes 1990 1995 2000 2005 2010 2015 2020
GOOGL, AMZN, AAPL, FB, MSFT, NFLX, NVDA, TSLA. Source: Bloomberg, JPMAM. December 27, 2022.
The Tortoise and the Hare "Reports of my death were greatly exaggerated"
Index (100 = Dec 2016) Index (100 = Dec 2018)
900 500
ARK Innovation ETF Renewables composite
800 450
(equal weighted)
400
700 Old economy basket: farm
equipment, industrial REITs and 350
600 NASDAQ Clean Edge
office cleaning supplies / uniforms 300 Wilderhill Clean Energy
FTSE Renew/Alt Energy
500 250 S&P Global Clean Energy
MAC Global Solar
400 200
150
300
100
200 MSCI World Energy Index
50
(oil, gas and pipelines)
100 0
2017 2018 2019 2020 2021 2022 2018 2020 2021 2022 2023
Source: Bloomberg, JPMAM. December 27, 2022. Source: Bloomberg, JPMAM. December 27, 2022.
5
I began writing about the YUCs (young unprofitable companies) early in 2020 2 when their valuations started to
soar. After last year’s selloff, we’re much closer to the end of the YUC/MUC repricing than the beginning. By
the time Peloton is priced at 1x sales rather than its peak level of 19x sales at the end of 2020, it’s time to start
thinking about whether unprofitable companies like Peloton, Carvana, Shopify, DoorDash, Spotify, Roku and
Roblox can become profitable or not.
Many unprofitable companies are in that position since the market did not require them to be profitable. With
the benefit of ample pre- and post-IPO capital, they forged ahead with enormous customer acquisition costs in
an effort to gain scale. Many cannot do that anymore, but some will figure out how to become profitable in
this new era. The aftermath of the 2000-2002 dot-com crash is interesting in this regard:
 The third chart shows performance of tech companies from 2000 to 2004 based on their initial and
subsequent profitability. Companies that remained unprofitable continued to languish
 However, unprofitable companies that became profitable by 2004 rallied sharply, catching up to companies
that had been profitable all along
 This chart of course incorporates the benefit of perfect hindsight; still, it does indicate that for stock pickers
that sift through the wreckage to try and identify survivors, there may be attractive opportunities. The size
of this unprofitable-> profitable cohort was roughly 50% of the “unprofitable in 2000” universe
The YUCs: Young Unprofitable Companies The MUCs: Megavalued (P/E >50x) or Unprofitable
% of equity market capitalization Companies, % of total US market capitalization
5% 45%
Young unprofitable company:
● Negative net income in 2 of last 3 years 40%
4% ● Less than 5 years since IPO
● Annual revenues growing > 15% 35%
30%
3%
25%
2% 20%
15%
1%
10%
0% 5%
1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020
Source: Factset, JPMAM. December 27, 2022. Source: Factset, JPMAM. December 27, 2022.
The survivors: some companies will figure it out The price for profitless revenue growth
Index of equal weighted large cap tech stock returns (100 = Jan 2000) Price to sales ratio
175 30x
From unprofitable in 2000
150 to profitable in 2004 25x 36 profitless
growth stocks
125 (mkt-cap wtd)
Profitable in 2000 and 2004 20x
100
15x 36 profitless growth
75
stocks (equal wtd)
50 10x
25 Unprofitable in
5x
2000 and 2004
0 Russell 1000 Growth Index
2000 2001 2002 2003 2004 0x
Source: Factset, JPMAM. 2022. Profitability measured as positive or negative Dec-20 Apr-21 Aug-21 Dec-21 Apr-22 Aug-22 Dec-22
net income in Q1 2000 and Q4 2004. Stocks with market cap > $400mm. Source: Bloomberg, JPMAM. December 23, 2022.
2
I followed up in Feb 2021 with a “Hydraulic Spacking” Eye on the Market that was published at the peak of the
SPAC boom. The piece highlighted how management estimates were shown to investors instead of actual
earnings, the unequal distribution of returns by investor class, the disastrous post-merger returns of most SPAC
targets and the increasingly poor quality of companies being brought public via SPACs.
6
China equities. Pandemic restrictions, falling consumer spending and a collapsing property market have hit
China hard. This year is expected to be the first time in three decades that most Asian economies will grow faster
than China. I remain puzzled as to why China never made an arrangement with Moderna or Pfizer for their
mRNA vaccines, which have higher efficacy (see p.25) than China’s attenuated virus vaccines. China reportedly
informed Moderna that they would only arrange a distribution license if Moderna provided China with its
vaccine intellectual property, which Moderna refused to do3. As of December 2022, one-third of China’s 267
million people over age 60 hadn’t received their third Sinovac or Sinopharm vaccine booster dose. In any case,
China is now reopening4 and accepting greater health risks in the process. An issue that may have affected the
decision to reopen: the collapse in Chinese births and implications for future growth, illustrated below.
A recovery cannot come soon enough for investors in China. After years of market-friendly policies, MSCI
increased China’s weight in the Emerging Markets Equity Index to 40% by 2020, which drew in more foreign
capital. Shortly thereafter, Xi’s “progressive authoritarianism” campaign began, ushering in the largest
underperformance of Chinese vs world equities on record (-50%). Despite China’s underperformance vs world
markets, the “overweight US/Emerging Markets, and underweight Europe/Japan” equity barbell we have been
writing about for over a decade is still thriving.
China total births China working age population projections
Millions of births Millions of people ages 15 to 64
35 1,100
1,000
30
900
25 800 2019
700 estimates
20 600
500
15 2022
400 estimates
10 300
1950 1960 1970 1980 1990 2000 2010 2020 1950 1970 1990 2010 2030 2050 2070 2090
Source: United Nations. 2022. Dot represents 2022 estimate. Source: United Nations, BCA Research. 2022.
China’s index weight, performance and policy changes Overweight US & EM, underweight Europe & Japan
China outperformance, 28 day smooth China index wt 3-year rolling out (under) performance vs MSCI All World Index
350% 45% 10%
Rolling 3 yr performance of
300% China vs World equities (lhs) 40% 8%
250% China weight in MSCI EM (rhs) 35%
6%
200% 30%
4%
150% 25%
2%
100% Xi's progressive 20%
0%
50% authoritarianism begins 15%
-2%
0% 10%
-4%
-50% 5% 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021
-100% 0% Source: Bloomberg, JPMAM. December 2022. All equity portfolio, rebalanced
2005 2007 2009 2011 2013 2015 2017 2019 2021 quarterly. 10% OW to US, 10% UW to Europe, 5% OW to EM, 5% UW to
Japan. Assumes no currency hedging.
Source: Bloomberg, JPMAM. December 27, 2022.
3
“Moderna refused China request to reveal vaccine technology”, Reuters, October 1, 2022
4
On December 26, 2022 China accelerated its reopening by removing quarantine for domestic infections,
abandoning contact tracing and risk district classification systems, eliminating frequent testing/quarantine for
inbound travelers and allowing people that test positive to go to work.
7
China was close to deep value pricing by November of last year. Equity earnings yields ranged from 11%-12%
(close to Global Financial Crisis levels), and China banks still trade at less than 0.5x book value. On property
markets, there’s an enormous amount of bad news priced in as shown in the fourth chart: only 5%-10% of
China’s high yield property bond universe is priced above 60% of par value, and a startling 85% of the universe
is trading at or was exchanged at less than 20% of par value. I began my career at JP Morgan in 1987 in emerging
markets and worked on the Brady bond exchanges; I don’t remember any default or restructuring episode as
bad as this across an entire sector.
Once markets reach the “how much worse can it get” phase, marginal improvements in policy or macro can
lead to a sharp improvement in asset prices. The latest measures for the Chinese property market include a
central bank relending program and the lifting of restrictions on equity market and shadow finance fundraising.
And while the connection between household conditions and spending is not as clear as in the US, Chinese
households are flush with cash: deposits are up 60% vs pre-COVID levels, and mortgage rates are back down to
where they last were in 2017. In other words, the US-EM equity barbell may outperform again next year if
China recovers after the intense COVID wave it is now experiencing.
Equity index drawdowns: China vs World China earnings yields
%, decline from prior peak Percent, 12 month forward earnings yield
0% 14%
MSCI
-10% 13% Hang Seng
World
-18% 12% Index
-20%
11%
-30% 10%
9%
-40% 9%
MSCI China -49% 8%
-50% 8%
7%
-60%
6%
-70% 5%
MSCI China
-80% 4%
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2006 2008 2010 2012 2014 2016 2018 2020 2022
Source: Bloomberg, JPMAM. Dec 27, 2022. Dot represents latest drawdown. Source: Bloomberg, JPMAM. December 27, 2022.
Chinese bank valuations China property high-yield bond price distribution

Average price to book ratio Bond price, % of par value
2.0x 100%
Banks included: Industrial and Commercial
1.8x Bank of China, China Construction Bank, 90% Defaulted bonds
Agricultural Bank of China, Bank of China 80% Exchanged bonds
1.6x
70% Undefaulted and unexchanged bonds
1.4x 60%
50%
1.2x
40%
1.0x 30%
0.8x 20%
10%
0.6x
0%
0.4x 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
2010 2012 2014 2016 2018 2020 2022 Cumulative % of notional outstanding
Source: Bloomberg, JPMAM. December 27, 2022. Source: GS. November 10, 2022.
8
One concern as we head into a possible recession: the minimal repricing of leveraged loans after a decade of
declining investor protections and rising leverage. I first wrote about this in July 2019. Areas of deterioration
include a laundry list of measures designed to prevent issuers and their counsel5 from diminishing lender rights
and protections (see box). Loan investors have surrendered at a record pace, a sacrifice I would hold the Fed
partially accountable as financial repression caused people to lose their investment bearings. Many of the same
concerns relate to the private credit market, which at $1.2 trillion is the same size as US high yield.
Lender surrender. Loan investors relaxed criteria regarding leverage and interest coverage maintenance tests, most-
favored-nation provisions, mandatory prepayments from asset sales, exceptions to negative covenant restrictions,
restricted payments clauses, definition and scope of allowable EBITDA adjustments, leakage of assets from the collateral
pool, caps on investments in or transfers to unrestricted subsidiaries and affiliates, the ability to add senior pari-passu
or priority debt, lien dilution by non-guarantor subsidiaries, etc. EBITDA adjustments refer to the practice of companies
adding back non-recurring expenses and assumed merger synergies/cost savings to earnings, thereby enhancing
coverage ratios. According to S&P, the use of EBITDA add-backs increased from 10% of all deals to ~30% by 2019. In
terms of magnitude, S&P reports that such add-backs range from 10%-15% of unadjusted EBITDA. However, according
to Moody’s, some deals allow add-backs up to 20%-30% of unadjusted EBITDA, and some deals have no caps at all.
Loan covenant quality scores: 2007 vs 2019-2020

5 = weakest covenant quality
5
2007 2019-20
4
0
covenants
investments
liens & structural
Overall
Restricted
incurrence
Asset sales &

payments
assignments
Financial
score
Subordination:
mandatory
Voting &
prepays
Debt
Risky
Source: Moody's. 2020.
Leveraged loan issuance by debt-to-EBITDA ratio Risky credit not pricing in recession
Percent Percent Index
100% 20% 105
> 7x Leveraged loan price index
90%
18% 100
80% 6x - 6.9x 16% 95
70%
14% 90
60%
5x - 5.9x 12% 85
50% US high yield spread
10% 80
40%
8% 75
30% 4x - 4.9x
6% 70
20% Higher credit quality
4% 65
10% < 4x
2% 60
0%
1988 1992 1996 2000 2004 2008 2012 2016 2020
2008 2010 2012 2014 2016 2018 2020 2022
Source: DB Research, IMF. November 17, 2022. Source: Bloomberg, JPMAM. December 27, 2022.
5
One reason for declining protections: on some transactions, financial sponsors instruct banks arranging their
syndicated leveraged loans as to which law firm the bank should use as its own counsel, a practice known as
“sponsor-designated counsel”. You get what you pay for.
9
Topic #2: Tracking the Fed, and where inflation goes from here
I expect inflation pressures to subside in 2023 and allow the Fed to pause at 5% to see where things go from
there, and expect the 10 year US Treasury to remain below 4%. Inflation expectations derived from 10 year TIPS
markets are back down at 2.25% from their 3% peak, so the Fed should be able to claim victory on that front
after the fastest tightening cycle on record. If inflation cools as much as markets expect, it would be quite
unusual: as shown in the second chart, the average developed market inflation spike takes longer to recede.
The challenge for the Fed is more related to wages than prices. By some measures, the US has been facing the
tightest labor market on record: the highest job shortages in the post-war era, the lowest “job fill” rate, the
largest premium for job switchers vs job remainers, etc. Wage growth is beginning to roll over based on
measures we look at6. So far, the largest layoffs have been in tech and homebuilding; layoffs ex-tech and
homebuilding are still at the lowest level in 20 years [according to Challenger data].
Fed tightening cycles, 1958-2022 Developed market inflation episodes since 1970
Basis points, change since start of tightening cycle Percent, y/y inflation change
800 16%
Historic median
700 14% Historic 3rd quartile
Current US cycle
600 12% Current Eurozone cycle
500 2022
10%
400
8%
300
200 6%
100 4% Historic 1st
0 2% quartile
-100
0%
-200 -60 -40 -20 0 20 40 60
-36 -30 -24 -18 -12 -6 0 6 12 18 24 30 36 Months since inflation rose above 8%
Months since first Fed tightening action Source: Jim Reid, Deutsche Bank, Bloomberg, JPMAM. November 2022.
Source: Bloomberg, Factset, Fed, JPMAM. December 2022. Dotted lines indicate Bloomberg consensus.
Largest worker shortage in the post-war era Wage growth measures

Job openings plus employment as % of labor force Percent Index
5% 7% 70
Atlanta Fed Tracker (y/y change, 3 month avg, lhs)
More jobs than workers 6% Employment Cost Index (q/q, ann., lhs) 60
Monthly wage survey average (rhs)
0% 5% 50
4% 40
-5% 3% 30
2% 20
-10% 1% 10
0% 0
-15% -1% -10

1951 1961 1971 1981 1991 2001 2011 2021 2008 2010 2012 2014 2016 2018 2020 2022
Source: BLS, JPMAM. October 2022. Source: Bloomberg, BLS, NFIB, regional Federal Reserves. November 2022.
6
You may be used to seeing charts on Average Hourly Earnings. Since COVID, we have been monitoring other
wage measures since AHE can be heavily impacted and distorted by changes in the composition of the labor
force (i.e., when a disproportionate number of low wage workers are furloughed).
10
As we’ve discussed before, the labor shortage is a consequence of COVID, above-average rates of retirement
and a slowdown in immigration. Labor force participation rates are actually back to pre-COVID levels for people
under the age of 55. It’s mostly the 60+ cohort that hasn’t come back to work, and there are few signs that they
are planning to return. On immigration: while there was an increase in visa issuance in late 2022, the US
economy is still affected by the trough in immigration that occurred during COVID.
The goods inflation picture has improved dramatically: supply chain pressures in warehousing and transport
have cooled, and used car prices have further to fall. After surging to 15% y/y increases during COVID, US
durable goods inflation is now roughly 0% with the potential for deflation in early 2023. US new car inventories
reached 1.6 mm units in December 2022 according to Cox Automotive, up ~80% from 0.9 mm units in September
2021 but still well below the 2019 average of ~3.7 mm.
We also expect the household demand impact on inflation to slow given further depletion of US excess savings,
which peaked at ~$2.1 trillion in the middle of 2021. These savings have been drawn down to around $1.1
trillion, and should be fully depleted by mid-year7.
Labor force participation rate Retirement rate for workers 55-74 years old
Percent Percent %, 55-74 retired population as a share of population
41.0% 83.5% 40%
Over 54 83.0%
40.5% 39%
82.5%
40.0% 38%
82.0%
37%
39.5% 81.5%
81.0% 36%
39.0% 25-54
80.5% 35%
38.5%
80.0%
34%
38.0% 79.5% 2010 2012 2014 2016 2018 2020 2022
2010 2012 2014 2016 2018 2020 2022 Source: Schwartz Center. November 2022. Dotted line indicates pre-pandemic
Source: BLS, JPMAM. November 2022. (April 2020) trend.
US Immigrant Visa issuance Supply chains cooling, used car prices falling
Index (100 = Dec 2016) %, 6-mo change ann. Index (50+ = slower deliveries)
125 70% 85
Used vehicle value (lhs)
60% 80
Supplier delivery times (rhs)
100 50% 75
40% 70
75
30% 65
20% 60
50
10% 55
25 0% 50
-10% 45
0 -20% 40
2000 2004 2008 2012 2016 2020 2000 2004 2008 2012 2016 2020
Source: US Dept of State, CATO, JPMAM. October 2022. Source: Bloomberg, Manheim, JPMAM. November 2022.
7
See “Pandemic savings cushion looks less cushy”, Dan Silver, JP Morgan North America Economic Research,
October 7, 2022 and “Excess savings during the COVID pandemic”, Federal Reserve Notes, October 21, 2022
11
The elephant in the room on inflation in the short term is housing, which represents the largest component of core
inflation. Housing costs in the CPI data are lagged: home price and rental increases of the last couple of years are
showing up now in the CPI data. However, current measures such as apartment asking rents are slowing significantly.
This makes sense given the sharp rise in mortgage rates and the largest percentage increase in multifamily units
coming online since the 1970’s. In other words, the collapse in housing (whose speed now rivals the housing decline
during the double dip recession of the 1980’s) should dampen inflation substantially in 2023.
Bottom line: inflation should cool enough for the Fed to pause at 5%. Remember, it’s not just the policy rate that’s
changing; the Fed’s balance sheet is shrinking as well. The SF Fed computes a “proxy rate” that takes into account
the impact of QE unwinding and related market impacts. This proxy rate is now higher than the Funds rate by the
highest margin on record (fifth chart), another reason why we believe that inflation will slow meaningfully in 2023.
US new rents Multifamily units under construction relative to rental stock
Percent, annualized Percent, annualized Percent
10% 40% 4.0%
CPI rent of primary res., q/q (lhs)
9% Apt. List asking rents, q/q (rhs) 35%
3.5%
8% RealPage asking rents, m/m (rhs) 30%
25% 3.0%
7%
20% 2.5%
6%
15%
5% 2.0%
10%
4%
5% 1.5%
3% 0%
1.0%
2% -5%
1% -10% 0.5%
0% -15% 0.0%
2018 2019 2020 2021 2022 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: Apartment List, RealPage, Bloomberg, JPMAM. November 2022. Source: Census Bureau, JPMAM. Q3 2022.
Annual mortgage cost as a percentage of household Housing activity decline mirrors GFC and Double Dip
income, Percent recession so far, Existing home sales, Index = 100
55% 130
50% 120
45%
45% 110 COVID
40% Dotcom
100
35%
90 S&L
30% Stagflation
80
GFC
25% Current
70
20% Double
60 Dip
15% 0 2 4 6 8 10 12 14 16
1948 1958 1968 1978 1988 1998 2008 2018 Months
Source: Census, Shiller, Freddie Mac, Bloomberg, JPMAM. November 2022. Source: National Association of Realtors, JPMAM. 2022.
Federal funds rate vs proxy funds rate US consumer price inflation measures
Percent, annualized Percent, 3 month annualized change
7% 9%
Cleveland Fed median CPI
6% SF Fed proxy funds rate 8% Atlanta Fed sticky CPI
Federal funds rate 7% Cleveland Fed trimmed mean CPI
5%
4% 6%
3% 5%
2% 4%
1% 3%
0% 2%
-1% 1%
-2% 0%
2000 2003 2006 2009 2012 2015 2018 2021 1985 1990 1995 2000 2005 2010 2015 2020
Source: SF Fed, FRED. November 2022. Source: Bloomberg, JPMAM. November 2022.
12
The longer-term elephant in the room: the impact of the energy transition on inflation. We’ll go through the
details in our 2023 energy paper in May, but for now consider this:
 As wind and solar penetration rises, a lot of capital will still need to be spent building and maintaining backup
thermal power plants and utility-scale energy storage. The first chart shows that 1 MW of additional wind
and solar capacity results in the decommissioning of just 0.1 to 0.3 MW of natural gas
 A lot of capital will also need to be spent on the transmission grid since wind and solar capacity is generally
located further away from demand centers (second chart)
 It will be expensive to replicate the many renewable supply chains that China now dominates (third chart)
 Electric vehicles are more semiconductor-intensive than internal combustion engine cars, and the reshoring
of semiconductor supply chains may increase chip component prices by 50% or more (fourth chart)
Bottom line: the energy8, CHIPs and infrastructure bills are all part of a new US industrial policy, which on the
margin will increase inflation and put upward pressure on real and nominal interest rates in the long run.
How much natural gas capacity can be reduced per MW of Distance required for power generation facilities to reach 2
new wind and solar power? million people, Kilometers, MW-weighted average
%, computed for 2021, assuming new wind and solar = 10% of demand 160
100%
Due to wind/solar intermittency, backup thermal power 140
90%
and/or storage is needed in high renewable systems. The
80% 120
figures below show how much nat gas capacity can be
70% eliminated when adding new wind/solar based on existing 100
Subbituminous coal
60% generation resources.
80
ISNE (New Engl)
PJM (Mid Altan)
Bituminous coal
50%
SOCO (S East)
SPP (Midwest)
ERCOT (Tex)
MISO (Upper
40% 60
CAISO (Cal)
NYISO (NY)
Geothermal
Midwest)
Natural gas
30%
40
Nuclear
20%
Hydro
Solar
Wind
20
10%
0% 0
Source: EIA data, JPMAM computations. 2022. Source: EIA, Census Bureau, JPMAM computations. 2022.
Renewable supply chains go through China, for now Semiconductor content by power train
Solar module shipments US$ per vehicle
Solar cell prod. $900
Solar module prod.
Solar polysilicon prod. $800 Other EV uses
Solar wafers prod. Power train
Wind turbine order book $700
Wind raw materials Non-power train
$600
LiOn battery manuf.
EV mineral processing $500
EV cathodes/anodes
Copper production $400
Copper refining
Rare earth production $300
Graphite production $200
Lithium production
Manganese production China US EU $100
Cobalt production
Strontium production $0
Internal Combustion Engine PHEV / BEV
0% 20% 40% 60% 80% 100%
Share in total production Source: SIA, Infineon. 2021. Note: power train includes voltage regulators and
Source: IEA, BNEF, S&P, USGS, EC, Benchmark Mineral Intelligence, 2021. integrated circuits; "other" includes sensors, motor control units, and memory.
8
On that nuclear fusion experiment which generated more energy than it consumed: technically speaking it did, with 2 MJ
of energy in, and 3 MJ of energy out. But it took 300 MJ of energy to power the lasers used to produce the 2 MJ of energy
inputs. Another “fine print” caveat that clarifies how far away we are from commercialized nuclear fusion. The experiment
also required equipment housed in a building that’s the size of three football fields, and generated enough energy to boil
a tea kettle. Energy Secretary Granholm stated a goal of commercial fusion reactors in the next decade; yet another
unrealistic energy target from the Biden administration.
13
As for Europe, energy inflation dynamics are a bit different. Europe is paying the price for its pre-war energy
reliance on Russia, and for a pricing mechanism in which wind, solar, hydro and nuclear power producers are
paid the same price for electricity as power producers relying on natural gas. The problem: fossil fuel power
producers set marginal prices most of the time in Europe (see table), and when natural gas input prices soar,
that marginal price for electricity gets paid to all power producers. Europe is trying to sort this out with
household subsidies and caps on prices paid to non-gas power producers that could offset around 60% of the
price shock. Electricity price caps per MWh on solar/wind/hydro/etc: UK €245, Germany €150, France €100,
Italy & Spain €67, compared to uncapped December 2022 prices that have ranged from €100 - €350 per MWh.
More on inflation: Germany just completed its first of five LNG import regasification facilities, and the combined
cost estimate has tripled from the original budget to around $10 billion. On top of that, France’s nuclear power
industry has been operating at ~50% of capacity. If this continues through the winter, additional gas and
electricity price strains may appear in France and surrounding countries reliant on its nuclear power exports.
As for the price spikes in California shown in the bottom charts, what do you expect from a state that shut down
PG&E natural gas storage, shut down nuclear power, is experiencing urban outmigration to rural and suburban
areas with greater per capita energy demand, is experiencing pipeline maintenance delays and will be facing
greater competition for natural gas in the future due to Canadian and Mexican exports?
Euro Area energy inflation How marginal electricity prices are set in Europe
Percent, y/y change % of all hours
50%
Country Fossil fuel Non-fossil Imports
40% Germany 91% 7% 2%
Denmark 25% 13% 62%
30%
Spain 89% 6% 5%
20% France 7% 93% 0%
10% Ireland 61% 1% 38%
Italy 86% 11% 3%
0%
Greece 77% 0% 23%
-10% Portugal 87% 13% 0%
UK 84% 1% 15%
-20%
1997 2002 2007 2012 2017 2022 Source: "Energy Transitions in Europe - Role of Natural Gas in Elec tric ity
Source: Bloomberg, JPMAM. November 2022. Pric es", Zakeri et al. July 23, 2022.
The US-Europe natural gas gap The US-Europe electricity gap

Wholesale natural gas price, US$ per MMBTU Wholesale electricity price, US$/MWh, 7 day average
$90 $500
$80 $450
$70 $400
$350
$60
$300 Germany, Spain
$50 & France avg
$250
$40 Calif., $38 $200
$30 Europe $150
$20 (TTF), $26 $100 US: Calif.
$10 US Henry $50
Hub, $5 US: PJM
$0 $0
Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23
Source: Bloomberg, JPMAM. Dec 27, 2022. Dots represent latest daily price. Source: Bloomberg, JPMAM. Dec 27, 2022.
14
Topic #3: Tracking the gradual decline of globalization

Globalization isn’t collapsing, although it has receded from its peak. Globalization includes trade, foreign direct
investment and cross-border portfolio flows. Trade and FDI rebounded after COVID, and within trade, services
have room to recover with a resumption of global travel. Furthermore, part of the traded goods decline reflects
declining commodity prices from 2011 to 2020 rather than declining trade volumes; only 40% of the decline in
traded goods values since peak levels might be the result of reshoring international supply chains 9.
Global exports of goods and services as a Global foreign direct investment flows as a Global portfolio equity flows as a percent of
percent of world GDP, Percent, FY 2021 percent of world GDP, Percent, Q1 2022 world GDP, Percent, FY 2021
25% 6% 2.0%
20% 5% 1.5%
Goods
4%
15% 1.0%
3%
10% 0.5%
2%
5% Services 0.0%
1%
0% 0% -0.5%
1970 1980 1990 2000 2010 2020 1970 1980 1990 2000 2010 2020 1970 1980 1990 2000 2010 2020
Source: World Bank. 2021. Source: IMF, World Bank, OECD. Q1 2022. Source: IMF, World Bank. 2021.
What is collapsing: the US and European conceit of “Change through Trade” or “Constructive Engagement”.
On page 19, we show Europe’s financial and energy embargo on Russia now that its “Ostpolitik” approach has
failed. Below, we show China’s declining share of US imports, the collapse in new OECD direct investments into
China, the increase in CFIUS investigations (Congressional oversight of foreign direct investment in the US), and
the decline in portfolio flows into China. In October, we wrote in detail about US restrictions placed on artificial
intelligence chip, equipment and component exports to certain Chinese entities. In late December, the US
increased the number of Chinese companies on this restricted list to 500, including China’s flagship flash
memory producer. Some of these entities are also subject to the US Foreign Direct Product Rule, which means
that the US will try and apply its export restrictions to non-US companies purchasing US semiconductors or IP.
In AmCham’s 2022 China survey, US companies now cite rising US-China tensions as their biggest problem. Next
up: restrictions on US FDI into China10, to mirror restrictions on inbound FDI from China.
Trade war impact on US import counterparties OECD retreating from China
Share of US imports, 6 month average Greenfield capital spending, Index (100 = Jan 2012)
28% 220 OECD
investments
Europe 200
24%
into EU
180
160 OECD
20% China investments
140
into US
16% 120
Mexico
100
12% Canada 80
Korea, Vietnam & Taiwan 60 OECD

8%
40 investments
Japan into China
4% 20
2015 2016 2017 2018 2019 2020 2021 2022 2012 2014 2016 2018 2020 2022
Source: US Census Bureau. October 2022. Source: fDi Markets. 2021.
9
Richard Baldwin, University of Oxford, “Peak Globalization Myths, Part 2”, September 2022
10
In November 2022, US Secretary of Commerce Raimondo mentioned the need to mitigate risks to US national
security from outbound US investment in critical technology. As an example, Raimondo cited the prohibition
on companies receiving CHIPs funding from investing in advanced technology facilities in China for ten years.
15
From Jake Sullivan, US National Security Advisor

“The basic mistake of engagement was to assume that it could bring about fundamental changes to China’s political
system, economy, and foreign policy. Washington risks making a similar mistake today, by assuming that competition
can succeed in transforming China where engagement failed.” [Foreign Affairs Magazine, Oct 2019]
“China is the only competitor with both the intent to reshape the international order and the growing capacity to do
it…This is a decisive decade for shaping the terms of competition, especially with the PRC”. On foundational
technology, “the fence has to be high, because our strategic competitors should not be able to exploit American and
allied technologies to undermine American and allied security.” [White House National Security Briefing, Oct 2022]
Geopolitics and changing domestic policies are not abstract concepts for investors. Note in the first chart how
semiconductor stocks have been negatively impacted by US export control policies. The big picture: supply
chains will no longer be optimized solely by cost. A 2022 EBRD Transition Report survey found that 75% of all
firms have taken steps to make supply chains more resilient, either by increasing inventories from just-in-time
to just-in-case, and by diversifying suppliers. On the margin, this increases costs and reduces profits.
One interesting aspect of the US-China relationship: it’s not as one-sided as it seems. Over the last decade,
US companies made large investments in Chinese subsidiaries. As of 2020, the US trade deficit with China
disappeared once sales of in-country subsidiaries were included. In other words, US companies were doing
almost the same amount of business in China as Chinese companies were doing in the US, but through local
subsidiary sales rather than exports. In addition to exports of rare earth elements, China has leverage regarding
its domestic policies that affect large and profitable US multinational firms operating there.
Global investors impacted by changing export policies Deal notices received by the Committee on Foreign
Percent, price change since September 2021 Investment in the US, Number of notices
50% 300
NVIDIA
40% Advanced Micro Devices
30% PHL Semiconductor Index 250
FS China Semiconductor Index
20%
200
10%
0% 150
-10%
100
-20%
-30% 50
-40%
0
-50%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Sep-2021 Dec-2021 Mar-2022 Jun-2022 Sep-2022 Dec-2022
Source: Bloomberg, JPMAM. December 27, 2022. Source: Treasury Department. 2021.
Foreign portfolio investment in Chinese stocks and bonds The US does a lot of business in China, but through its in-
RMB, trillions country subsidiaries rather than via exports, US$, billions
8 $0
7 -$50
-$100
6 US - China trade balance plus
Stocks -$150
5 in-country sales of subsidiaries
-$200
4 -$250
-$300
3
-$350 US - China trade
2 balance as reported
Bonds -$400
1 -$450
0 -$500
2013 2014 2015 2016 2017 2018 2019 2020 2021 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
Source: People's Bank of China. September 2022. Source: Deutsche Bank, Census, JPMAM. 2021.
16
Semiconductor stickiness: onshoring will take a very long time. Try as they might, both the US and China face
separate challenges on the road to semiconductor self-sufficiency. The next two pages explain why, and are a
proxy for the slow pace of industrial reshoring even when incentives and subsidies are provided. Bottom line:
it’s not that easy to unwind 30 years of specialization in complex industrial manufacturing.
Semiconductor stickiness, Part 1: the US and the CHIPs bill
 When fully deployed, the $50-$60 billion in the US CHIPs bill would only bring the US to ~15% semiconductor
self-sufficiency as per an analysis from BCG
 The Arizona-based plant that TSMC expects to open in 2024 to produce 4 nanometer chips may already be
2-4 years behind leading-edge technology that TSMC deploys in Taiwan. The first iPhone to substantially
rely on US-made chips could be the iPhone 1811
 TSMC has cited high operating costs, lack of trained personnel and construction snags in its efforts to
bring the Arizona plant online12. TSMC mentioned that the same plant would be less capital intensive to
build in Taiwan, and that the all-in cost of its US chip production could be 50% higher than in Taiwan. TSMC
also had to ship clean room and chip-making equipment from Taiwan since American suppliers cost more
or aren’t available. On personnel, TSMC sends US engineers to Taiwan for 18 months of required retraining
 TSMC’s US-based foundries are likely to require real-time supply and operational connections to Taiwan; if
so, they might not really represent a milestone in US semiconductor independence. Similarly, these US-
based foundries might not be designed to produce the multitude of chips that the US needs, and might
focus more narrowly on production for Apple, Nvidia and AMD
 From a geopolitical perspective, one could speculate that TSMC agreed to produce chips at lower margins
and at lower efficiencies in the US in order to boost US support for Taiwan itself
Semiconductor manufacturing capacity Semiconductor bill spending and estimated amounts

% of global capacity required for US self-sufficiency, US$, billions
45%
Taiwan $600
40% South Korea
China $500
35%
Japan
30% US $400
Europe
25%
$300
20%
15% $200
10% $100
5%
$0
0% CHIPs bill Estimated amount needed for US
1990 1995 2000 2005 2010 2015 2020 semiconductor self-sufficiency
Source: SIA, Bloomberg. February 2021. Source: BCG, JPMAM. April 2021.
11
“TSMC in Arizona, Arizona Challenges, Realities and Motivations”, Stratechery Research, Dec 7, 2022
12
“TSMC’s Arizona Chip Plant, Awaiting Biden Visit, Faces Birthing Pains”, WSJ, Dec 5, 2022
17
Semiconductor stickiness, Part 2: China, Taiwan and Faberge eggs

Only 10% of Chinese semiconductor demand is met via Chinese domestic production. The other 90% is met
through imports and foreign firms producing chips in China. As of 2021, Taiwan accounted for a 70% share of
Chinese chip consumption: TSMC produces 10% of China’s chips in its factories in Nanjing and Shanghai, and
exports the remaining 60% from Taiwan. There may be no example anywhere in the world of one country so
reliant on another for a specific high-value import; China’s 70% reliance on Taiwan dwarfs Europe’s pre-war
reliance on Russian energy. Most Chinese foundries are working on 14-28 nanometer chips while the global
leaders like TSMC are already producing at 5-7 nanometers.
Over the last decade, China’s National Integrated Circuit Investment Fund supported national champions
through direct stakes and commingled investment funds. There are successes, such as SMIC (7 nm chips), YMTC
(competitor to Samsung), San’an Optoelectronics (device manufacturer), AMEC (fabrication equipment) and
JCET (assembly, testing & packaging). However, others filed for bankruptcy (Tsinghua, Wuhan Hongxin, Quanxin
Circuits), leading to a series of investigations and arrests. As things stand now, China has fallen short of its
domestic semiconductor production goals.
Regional reliance for critical goods TSMC semiconductor capabilities
Percent Nanometers
80% 3,000
70%
2,500
60%
50% 2,000
1,500
40%
1,200
1,500
1,000
30%
800
20% 1,000
600
500
350
10%
300
250
500 180
130
90
0%
65
45
40
28
20
16
10
7
5
Chinese semiconductor Pre-war European reliance on
0
consumption sourced from Taiwan Russian energy
1987 1992 1997 2002 2007 2012 2017 2022
Source: Stimson Center, BP Statistical Review of World Energy. 2022. Source: TSMC. 2022.
Bottom line for the US and China: semiconductors are among the most complex industrial products on earth 13
The most advanced and profitable chips of 10, 7, 5, and 3 nanometers are difficult and costly to fabricate and
can only be made by machines designed and built by ASML (Netherlands) using extreme ultraviolet photo-
lithography. Because of their complexity, ASML only produces 45-55 such machines per year. Advanced chip
foundries require clean rooms that are 10,000x cleaner than a hospital surgical room. The chip etching process,
parts of which are done in a pure nitrogen environment, can take weeks operating 24 hours a day and involve
700 separate steps, many of them repeated. Completing all necessary steps in the value chain may involve
multiple air flights back and forth over thousands of miles to sites with specialized capabilities. These foundries
require exotic chemicals, gasses, rare metals, materials and components from thousands of companies and
dozens of countries. In other words, advanced semiconductors are the Faberge eggs of industrial complexity.
13
“Semiconductors and Taiwan’s Silicon Shield”, Dr. Richard Cronin, Stimson Center, August 2022
18
US and China spheres of influence and the Western financial/energy embargo on Russia
UK researchers aggregated public opinion surveys across 137 countries regarding views of China/Russia and the
US, and used this data to illustrate spheres of influence. The lines connect China and the US with the countries
whose populations are much more aligned with it than the other. While some countries straddle the middle,
they are migrating away from the diameter: the researchers found an increasingly inverse relationship between
positive perceptions of the US and of China/Russia.
This chart might explain the speed with which Chinese banks replaced falling bank lending from the West after
Russia’s invasion of Crimea in 2014, and the more recent rise in Chinese purchases of Russian energy (see bottom
two charts). These are components of the “no-limits” partnership announced by Russia and China just before
the invasion of Ukraine.
The structure of global public allegiances
Based on nationally-representative public opinion surveys
100%
Russia Turkmen
Uzbek
90% Serbia
Laos Mau Bots
Pakis Timor
CHINA Bela EswCuba
Bang
80% Brunei
Positive View of China and Russia (averaged)
Kyr Burk Gui CaboV

Mali Cote IArm
Alger Niger Eth Ben
Kazak Mont MozS Leone Les Libe
70% Maurit
Came Ang MalawMoro
Saudi Egy Gam Tog Uga
Indonesia Congo Zim Gha Nigeria
Sen
Boliv Sud Tan
60% Bulg Nam
Malay Gab Thai Sal Vie
Bos Indi Aze
Iraq Slova CambNic Mexic
Leb Par HonDom Ken
50% Tunisia Jord
Iran Latv Pan Mold
Uru Phi
Sing Peru Colom
Libya SAfr UAE Geor
40% Greece
Palestine Venez
Turkey Arg Chl Rom Isr
Cze Lith Alb
30% New Zeal Hung Braz
Esto Fin
Switz Ita Fra
20% Tai
Pol
Ger Nor Spa Nether
UK
Ire Can Port Kos
Aus Austra SKor
10% Denm Swed Jpn USA
0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Positive view of the United States
Source: From “A World Divided: Russia, China and the West.” Cambridge, United Kingdom: Centre for the Future of Democracy,
October 2022, Roberto Foa et al. Lines plotted for all countries with more than a 20% relative public preference.
Cross-border syndicated loans to Russia Chinese vs European purchases of Russian energy

US$, billions US$, billions Million tonnes of oil equivalent / day
$52
Russia $9 0.9
$48
invades 0.8
$44 $8
Crimea
$40 China 0.7
Other $7
$36
$32 Germany European purchases of 0.6
$6
France Russian energy
$28 Italy
0.5
$5
$24 Great Britain 0.4
$20 US $4
$16 Japan 0.3
$3
$12 Chinese purchases 0.2
$8 $2 of Russian energy 0.1
$4
$0 $1 0.0
2010 2012 2014 2016 2018 2020 2022 2019 2020 2021 2022
Source: BIS. Q1 2022. Source: CREA, EIA, GACC, Bloomberg, JPMAM. November 2022.
19
Topic #4: Tracking the performance of active managers

Financial repression by Central Banks began after the 2009 recession and led to collapsing risk premia and falling
relative valuation spreads in equities and risky credit markets. This was particularly true in Europe where the
ECB bought bonds on the edge of junk (split-rated), which narrowed credit spreads between good companies
and bad, and where liquidity in all forms kept insolvent companies alive. By 2018, the BIS had already found
that “zombie” companies in the developed world had risen to 12% of market cap from just 1% in 1990. This
number likely rose further by the beginning of 2021.
It’s therefore no surprise that the average equity manager and hedge fund manager struggled to outperform
during this decade of financial repression. The charts below illustrate this trend: the blue lines in each chart
show the performance of large cap core equity managers and hedge fund managers compared to an S&P 500
benchmark. When the blue lines are declining, active managers are underperforming. On the left, we show
performance vs the real Fed Funds rate, and on the right vs inflation. If we are in fact heading back to a world
of positive real interest rates, value-oriented portfolio managers may be facing more positive stock-picking and
bond-picking conditions than they have seen in some time.
Active equity mgr performance vs real policy rates Active equity mgr performance vs inflation
Index (100 = Jan 1990) %, y/y change, 5 year avg Index (100 = Jan 1990) %, y/y change, 5 year avg
105 4.0% 105 4.5%
103 103
Average US large cap core 3.0% Average US large cap core 4.0%
101 101
manager vs S&P 500 manager vs S&P 500
99 2.0% 99 3.5%
97 1.0% 97 3.0%
95 95
93 0.0% 93 2.5%
91 -1.0% 91 2.0%
89 89
Fed funds rate less core CPI -2.0% Consumer price inflation 1.5%
87 87
85 -3.0% 85 1.0%
1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020
Source: Bloomberg, Lipper, JPMAM. October 2022. Note: US equity large cap Source: Bloomberg, Lipper, JPMAM. October 2022. Note: US equity large cap
core is an equal weighted average. core is an equal weighted average.
Hedge fund mgr performance vs real policy rates Hedge fund mgr performance vs inflation
Index (100 = Dec 1989) %, y/y change, 5 year avg Index (100 = Dec 1989) %, y/y change, 5 year avg
300 4% 300 4.5%
HFRI Equity Hedge HFRI Equity Hedge
Funds vs S&P 500 3% Funds vs S&P 500 4.0%
250 250
2% 3.5%
200 1% 200 3.0%
150 0% 150 2.5%
-1% 2.0%
100 100
Fed funds rate less core CPI -2% Consumer price inflation 1.5%
50 -3% 50 1.0%
1990 1995 2000 2005 2010 2015 2020 1990 1995 2000 2005 2010 2015 2020
Source: Bloomberg, JPMAM. October 2022. Source: Bloomberg, JPMAM. October 2022.
20
Topic #5: Tracking the regulatory wave coming to Fintech/crypto, and JP Morgan’s crypto footprint
There’s a regulatory wave coming to Fintech, which has given back all COVID-era gains vs traditional banks. In
November 2022, the US Treasury released a 128-page report calling for greater oversight and enforcement of
issues related to Fintech regulatory arbitrage, data privacy, risk controls, pricing transparency, mix of commerce
& banking, fraud and predatory pricing. In addition, the OCC will establish a Fintech oversight unit early in 2023.
Fintech vs traditional bank performance
Index (100 = Jan 2019)
240 A renewed focus on Fintech risks and oversight
220 “Assessing the Impact of New Entrant Non-Bank Firms
Solactive
200
Fintech Index
on Competition in Consumer Finance Markets”,
180 US Department of the Treasury Report to the White
160 House Competition Council, November 2022:
140
“While new entrant non-bank firms appear to be
120
contributing to competitive pressures, they are
100 KBW Bank generally not subject to the same oversight for safety
Index
80 and soundness or consumer protection as insured
60 depository institutions, which raises various public
2019 2020 2021 2022
policy considerations” [Executive Summary]
As for crypto, our “Maltese Falcoin” paper from February 2022 identified the risks involved: parallels between
crypto and hydrogen, collateral and hypothecation risks to investors holding crypto on unregulated exchanges,
the mudding of crypto and blockchain value propositions which usually have nothing to do with each other, the
unsustainability of DeFi smart contracts which are almost entirely contingent on crypto prices, etc.
The crypto unraveling we expected is leading to a regulatory wave as well. The SEC press release on the FTX
CEO indictment included an addition from the SEC Chair: a “clarion call to all crypto platforms” to come into
compliance with US laws, to prepare for greater disclosure and regulatory examinations, and a warning that the
SEC’s Enforcement Division is ready to take action. The SEC Enforcement Director reiterated that the “runway
is getting shorter” for exchanges to comply with US securities laws. The crypto winter is about to get colder still.
Hydrogen Economy Index vs cryptocurrency market cap Total value locked in DeFi vs Ethereum prices
Index (100 = Jan 2019) US$, trillions US$, billions US$
450 $3.0 $200 $5,000
Maltese Falcoin Total value locked
Solactive Hydrogen publication $180 $4,500
400 in DeFi (lhs)
Economy Index $2.5
$160 Ethereum price $4,000
350 (rhs)
$2.0 $140 $3,500
300 $120 $3,000
250 $1.5 $100 $2,500
200 $80 $2,000

$1.0
$60 $1,500
150
Crypto market $40 $1,000
$0.5 Maltese Falcoin
100 capitalization $20 $500
publication
50 $0.0 $0 $0
2019 2020 2021 2022 2023 2020 2021 2022 2023
Source: Bloomberg, TradingView, JPMAM. December 27, 2022. Source: DeFiLlama, Bloomberg, JPMAM. December 27, 2022.
What about JP Morgan? A client asked me about JP Morgan’s involvement in crypto, alleging that despite our
CEO’s public comments (Jamie described crypto as pet rocks in an interview last month), that JP Morgan “has
made major crypto investments, which is contradictory”. I sent him the response on the following page.
21
On blockchain vs crypto. There are two nodes of the digital world when it comes to finance: (a) blockchain
technology designed to try and improve efficiency and reduce execution costs in the trading, processing and
custody of existing securities, and (b) “crypto”, which refers to owning, trading, investing and lending in various
speculative “tokens”. JP Morgan has invested a little in the former, and almost none in the latter.
Blockchain
It can take days to settle certain security, currency and loan transactions due to paperwork and counterparty
verification; some lending functions can only be settled at close of day. By digitizing security and counterparty
info on a digital ledger, JP Morgan can now settle certain transactions intraday. This can lead to new processing
capabilities, lower execution costs and less counterparty risk. In these narrow use cases, the blockchain simply
results in an efficiency gain for the financial institutions using it. A critical distinction between the blockchain as
used by JP Morgan and crypto: the former involves a closed, permissioned network with no speculation,
verification rewards or risk related to token values (a $ is always a $, whether digitized or not). And let’s be
clear: there are many applications where using a blockchain doesn’t save any time or money at all 14,15,16.
Crypto trading, investing, lending and speculation
The premise of crypto tokens is either as a store of value (digital gold), a means of exchange (digital alternative
to the US$), or as an “investment” whose token value is based upon how many people use that public blockchain
to transact or invest. A large bank/broker could get involved in the crypto world in four ways I can think of:
1. by investing in tokens for its own account
2. by building a large crypto sales, trading and research function which caters to institutions and individuals
looking to invest either on a short-term or long-term basis
3. by taking crypto-denominated deposits and then lending them out to earn crypto-denominated income,
part of which it would pay in crypto form to depositors
4. by laying the groundwork with its retailer clients for their customers to pay for goods and services with
crypto as a means of exchange
JP Morgan has done very little of these four things. Our asset and wealth management business has over $3
trillion in assets under supervision, and we have historically allowed no more than a handful of clients to trade
crypto funds for their own accounts at their own risk if they choose to do so. JP Morgan’s Commercial Bank
allows a few crypto companies to maintain fiat cash balances with it so that these companies can pay vendors
and employees; each one is of course subject to full KYC/AML inspection.
That’s about it, other than an “Alternative Investments Outlook” report from JP Morgan’s Investment Bank
in May 2022. The authors put a $38k fair value price target on Bitcoin and cited crypto assets as their preferred
alternative asset over private equity, private debt, hedge funds and real estate. Their stated rationale: resilient
venture capital funding for crypto after the Terra-Luna collapse, a bitcoin-to-gold volatility model, favorable
technical conditions and the alleged emergence of crypto as an institutional asset class.
14
Australia’s primary securities exchange announced in Nov 2022 that it will write off $250 mm after a failed
7-year effort to replace its system with blockchain technology. It also may have to reimburse firms that spent
$100 mm on blockchain upgrades. Accenture identified multiple problems with the project including uncertain
timelines, communication issues with vendor Digital Asset and excessive complexity.
15
A Google engineer examined 34 actual blockchain projects. His conclusion was grim: “Looking into all 34, I
found that 13 are already dead (including one killed by the SEC), 6 are only useful within the crypto & NFT
ecosystems and not in the real world and 14 use blockchain in a way where removing it would not impact
functionality at all, or make the product better. The remaining project is Chainalysis, which has real-world
impact by helping law enforcement de-anonymize blockchain users”.
16
In “Case for Blockchain in Financial Services Dented by Failures” on December 30, the Financial Times cited
terminated blockchain projects in insurance (premium and claims settlement: 15 insurance companies), banking
(trade finance: HSBC, UBS, DB) and shipping (supply chains: Maersk and IBM).
22
Topic #6: Tracking global fixed income for yield oriented investors
Given our outlook, the fixed income options below look interesting at the beginning of 2023. Some include
categories whose spreads have widened but are nowhere near 2009 levels. For reasons I’ve written about
before and reiterate on page 3, I don’t think that financial sector solvency and systemic risks are comparable to
2009 even if growth slows more than we expect. While we see value in some fixed income markets, as we
examined last year17, market depth and liquidity are close to the lowest levels on record. As a result, we could
see “flash crash” fixed income volatility in 2023, particularly as the Fed shrinks its balance sheet or if there’s a
replay of the disruptive 1995 & 2011 “GOP House / Democratic President” debt limit negotiations. Congress
appears to have until the fall to raise the debt limit based on budget deficit and tax revenue projections.
US Municipal yields Sovereign bond 10 yr yields 30 year mortgage - 10 year Treasury
Yield, percent Local currency yield, percent Basis points
6% 350
8% Europe China
Long duration munis
7% Municipals 1-17 5%
300
6% 4%
5% 250
3%
4%
2% 200
3%
2% 1%
150
1% 0%
0% -1% 100
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 2005 2010 2015 2020
Source: Bloomberg, JPMAM. December 27, 2022. Source: Bloomberg, JPMAM. December 27, 2022. Source: Bloomberg, JPMAM. December 27, 2022.
AAA asset backed securities spreads Sovereign bond 10 yr yields Floating rate instruments (USD)
Basis points, spread versus Treasury Local currency yield, percent Yield, percent
650 13% 10%
600 Commercial RE South Africa US Inv grade
12% 9%
550 Auto Mexico Corp FRNs
500 11% 8%
Credit cards AA Bank CP
450 10% 7%
400 6%
350 9%
300 5%
8%
250 4%
200 7%
3%
150 6%
2%
100
5% 1%
50
0 4% 0%
'98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 2006 2011 2016 2021 2000 2005 2010 2015 2020
Source: Bloomberg, JPMAM. December 27, 2022. Source: Bloomberg, JPMAM. December 28, 2022. Source: Bloomberg, JPMAM. December 26, 2022.
Preferred option adjusted spread Preferred yields
P0P1 index, basis points vs UST Yield to worst, percent
1,600 10% European Contingent Capital securities
Europe Contingent Capital
1,400 US Investment 9% typically trade at higher yields than US
US HY Preferred
1,200 grade preferred 8% US HG Preferred
preferred stocks. This reflects a lower
stock credit rating of the CoCo market as a
1,000 7%
whole relative to US bank preferred
800 6%
stock, and explicit writedown and
600 5% payment triggers in Contingent Capital
400 4% prospectuses linked to capital ratios.
200 3% The European Contingent Capital series
0 2% shown in the chart also contains 10%-
2000 2005 2010 2015 2020 2010 2015 2020 15% in EM bank securities.
Source: Bloomberg, JPMAM. December 27, 2022. Source: Bloomberg, JPMAM. December 27, 2022.
17
“No Free Lunch: the liquidity tradeoffs resulting from increased capital adequacy and deposit coverage”,
Eye on the Market, June 2022
23
These fixed income categories do not look interesting, since their spreads/yields are too tight relative to our
economic outlook, and/or there’s not enough spread or yield to justify the risk. I don’t think there’s a big
problem laying in wait for investors in high grade corporate bonds; I just don’t think 150 bps is really good value.
I explain more about our concerns on the leveraged loan market at the end of Topic #1 on page 9.
US investment grade corp spreads Emerging markets dollar bonds US high yield bond spreads
JULI index spread vs UST, basis points Spread vs US Treasuries, basis points JPDFHYI index spread vs UST, basis points
600 1,000 1,400
550 900
500 1,200
800
450
700 1,000
400
350 600 800
300 500
250 600
400
200
300 400
150
100 200 HY energy
200
50 100 1995 2000 2005 2010 2015 2020
2000 2005 2010 2015 2020 2002 2007 2012 2017 2022 Source: Bloomberg, J.P. Morgan HY Team.
Source: Bloomberg, JPMAM. December 27, 2022. Source: Bloomberg, JPMAM. December 27, 2022. December 27, 2022.
S&P 500 leveraged loan price index Pan European high yield
SPBDALB index Yield, percent
105 20%
100 18%
95 16%
90 14%
12%
85
10%
80
8%
75
6%
70 4%
65 2%
60 0%
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020
Source: S&P/LSTA, Bloomberg. Dec 27, 2022. Source: Bloomberg, JPMAM. December 23, 2022.
The jury is out on Brazil. Our Emerging Markets Debt portfolio management team is waiting to see the full
impact of the new Lula administration’s fiscal framework before adding to Brazil local bonds. Catalysts include
tax reform and the plans for some large state-owned enterprises. Until there is more clarity on this front they
are being very tactical on Brazil (i.e., not adding to long-term positions), even though Brazil now offers one of
the largest risk premiums among EM local bonds.
Sovereign bond 10 yr yields
Local currency yield, percent
17%
15% Brazil
13%
11%
9%
7%
5% Cautious until we see Lula

spending plans; possible upgrade
3%
2006 2011 2016 2021
24
Topic #7: Just the Vax and nothing but the Vax
Over the last three years, I did a lot of work on COVID. I never wrote anything to clients on the costs and benefits of
lockdowns, testing, social distancing, school opening policy, mask rules, employee spacing standards or government
vaccination requirements. Evaluating these kinds of policies requires assessments of their broader impacts on
employment, small business creation, birth rates, household formation, medical treatment for non-COVID diseases
and mental health. They also take time and require the benefit of hindsight.
I do however have a view on the continued efficacy of mRNA vaccines, particularly for older people:
 The CDC released data for Sep-Nov 2022 on efficacy of the new bivalent mRNA vaccines. For immunocompetent
people over 65, mRNA vaccine efficacy ranges from 73%-84% with respect to the risk of hospitalization, and
when measured against no vaccination or just the original monovalent shot. The lower end of the range refers
to people with no vaccination or the monovalent shot more than a year ago, and the higher end refers to people
with a monovalent shot within the last 2-5 months. This period of time covers variants BA.5, BQ.1 and BQ.11.
 Next step: assessments of how bivalent boosters perform vs the XBB variant, which is now outcompeting
other variants in the Northeast US; see chart below. XBB is the first “recombinant” variant (joining of two
genetically distinct variants rather than the result of individual mutations). Recombinant strains have greater
potential resistance to vaccine or acquired immunity; early indications suggest this is the case with XBB
 According to the CDC, COVID mortality per 100,000 people was ~14x higher for unvaccinated people compared
to fully vaccinated people from April to September of 2022
 However: while 94% of those over 65 in the US completed the original vaccination series, only 36% of those over
65 have received the updated bivalent booster vaccine. That may explain why seniors now comprise the
greatest share of hospitalizations since the pandemic began18
 Despite the continued efficacy of mRNA vaccines, Florida’s governor is now reportedly recommending that
vaccine manufacturers be investigated for fraud/conspiracy and held accountable for false statements 19.
Undermining the confidence in mRNA vaccines seems like an odd position to take as the governor of the state
with the second oldest population in the US (behind Maine)
 One in ten Americans reportedly believe that the 1969 moon landing was faked. So, I would not be surprised to
learn that a large number of people simply do not believe or trust CDC data. But I do, and have vaccinated
accordingly. I also believe the moon landing was real since I watched it live on TV when I was 7
That’s the end of the 2023 Eye on the Market Outlook. I hope to see many of you in person this year.
The XBB variant
Reproductive rate
2.0
XBB.1.5
1.8
BA.5
1.6
BA.4 BA.2.12.1
1.4
BQ.1
1.2
XBB
BA.2
1.0
0 10 20 30 40 50 60 70 80 90
Days
Source: Trevor Bedford (FHCC/BBI) and JP Weiland. December 2022.
Edwin “Buzz” Aldrin Jr. photographed by Neil Armstrong
on the actual moon, July 1969
18
“A quick update on the bivalent boosters”, Eric Topol (Scripps Research), December 16, 2022
19
“DeSantis reverses himself on coronavirus vaccines”, Washington Post, December 17, 2022
25
IMPORTANT INFORMATION
This report uses rigorous security protocols for selected data sourced from Chase credit and debit card transactions to ensure all information is kept confidential
and secure. All selected data is highly aggregated and all unique identifiable information, including names, account numbers, addresses, dates of birth, and Social
Security Numbers, is removed from the data before the report’s author receives it. The data in this report is not representative of Chase’s overall credit and debit
cardholder population.
The views, opinions and estimates expressed herein constitute Michael Cembalest’s judgment based on current market conditions and are subject to change
without notice. Information herein may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research
and should not be treated as such.
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P.
Morgan or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and
strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice.
All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an
investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an
independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any
investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before
making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with
market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators
of current and future results.
Non-affiliated entities mentioned are for informational purposes only and should not be construed as an endorsement or sponsorship of J.P. Morgan Chase & Co.
or its affiliates.
For J.P. Morgan Asset Management Clients:

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.
To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory
obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies
at https://am.jpmorgan.com/global/privacy.
ACCESSIBILITY
For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance.
This communication is issued by the following entities:
In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and
Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be.; in Canada, for institutional clients’
use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and
territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the
United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European
jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which
they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets
(Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No.
197601586K), which this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan)
Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association,
Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number
“Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations
Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended
recipients only.
For J.P. Morgan Private Bank Clients:

ACCESSIBILITY
J.P. Morgan is committed to making our products and services accessible to meet the financial services needs of all our clients. Please direct any accessibility
issues to the Private Bank Client Service Center at 1-866-265-1727.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION

In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member
FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and
custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P.
Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance
agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPM.
Products not available in all states.
In Germany, this material is issued by J.P. Morgan SE, with its registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt am Main, Germany, authorized by
the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the
European Central Bank (ECB). In Luxembourg, this material is issued by J.P. Morgan SE – Luxembourg Branch, with registered office at European Bank and
Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly
supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Luxembourg Branch is also
supervised by the Commission de Surveillance du Secteur Financier (CSSF); registered under R.C.S Luxembourg B255938. In the United Kingdom, this material is
issued by J.P. Morgan SE – London Branch, registered office at 25 Bank Street, Canary Wharf, London E14 5JP, authorized by the Bundesanstalt für
Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank
26
(ECB); J.P. Morgan SE – London Branch is also supervised by the Financial Conduct Authority and Prudential Regulation Authority. In Spain, this material is
distributed by J.P. Morgan SE, Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain, authorized by the Bundesanstalt für
Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank
(ECB); J.P. Morgan SE, Sucursal en España is also supervised by the Spanish Securities Market Commission (CNMV); registered with Bank of Spain as a branch of
J.P. Morgan SE under code 1567. In Italy, this material is distributed by J.P. Morgan SE – Milan Branch, with its registered office at Via Cordusio, n.3, Milan 20123,
Italy, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche
Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Milan Branch is also supervised by Bank of Italy and the Commissione Nazionale per le Società
e la Borsa (CONSOB); registered with Bank of Italy as a branch of J.P. Morgan SE under code 8076; Milan Chamber of Commerce Registered Number: REA MI
2536325. In the Netherlands, this material is distributed by J.P. Morgan SE – Amsterdam Branch, with registered office at World Trade Centre, Tower B,
Strawinskylaan 1135, 1077 XX, Amsterdam, The Netherlands, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by
the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Amsterdam Branch is also supervised by De
Nederlandsche Bank (DNB) and the Autoriteit Financiële Markten (AFM) in the Netherlands. Registered with the Kamer van Koophandel as a branch of J.P. Morgan
SE under registration number 72610220. In Denmark, this material is distributed by J.P. Morgan SE – Copenhagen Branch, filial af J.P. Morgan SE, Tyskland, with
registered office at Kalvebod Brygge 39-41, 1560 København V, Denmark, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly
supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Copenhagen Branch, filial af
J.P. Morgan SE, Tyskland is also supervised by Finanstilsynet (Danish FSA) and is registered with Finanstilsynet as a branch of J.P. Morgan SE under code
29010. In Sweden, this material is distributed by J.P. Morgan SE – Stockholm Bankfilial, with registered office at Hamngatan 15, Stockholm, 11147, Sweden,
authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank)
and the European Central Bank (ECB); J.P. Morgan SE – Stockholm Bankfilial is also supervised by Finansinspektionen (Swedish FSA); registered with
Finansinspektionen as a branch of J.P. Morgan SE. In France, this material is distributed by JPMCB, Paris branch, which is regulated by the French banking
authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers. In Switzerland, this material is distributed by J.P. Morgan
(Suisse) SA, with registered address at rue de la Confédération, 8, 1211, Geneva, Switzerland, which is authorised and supervised by the Swiss Financial Market
Supervisory Authority (FINMA), as a bank and a securities dealer in Switzerland. Please consult the following link to obtain information regarding J.P. Morgan’s
EMEA data protection policy: https://www.jpmorgan.com/privacy.
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the
Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so
request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore.
Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to
you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory
authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any
of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities
and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. JPMorgan Chase Bank, N.A. is
a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or
other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws
of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such
securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to
sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such
securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for
ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American
country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security,
including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission— CVM is completely prohibited. Some products
or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and
the Australian Prudential Regulation
Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the
meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client
at any time in the future.
JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment
Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the
purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if
you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing
requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to
hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the
Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws,
which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not
intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this
paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client
now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
• May contain references to dollar amounts which are not Australian dollars;
• May contain financial information which is not prepared in accordance with Australian law or practices;
• May not address risks associated with investment in foreign currency denominated investments; and
• Does not address Australian tax issues.
© 2023 JPMorgan Chase & Co. All rights reserved.
27
Access our 2022 energy paper here January 1, 2023

MICHAEL CEMBALEST is the Chairman of Market and Investment Strategy for
It was nice while it lasted. The tattered postersAsset
J.P. Morgan on the
& cover
Wealthshow the remnants
Management, of some
a global equity
leader market catalysts
in investment management
over much of the last decade, andand in particular 2020-2021: profitless innovation, the Fed’s quantitative easing, (as
private banking with $3.8 trillion of client assets under management worldwide
the discredited notion of “geopolitical change through
of September 30, 2022).trade”, the cocktailfor
He is responsible napkin appeal
leading of Modern
the strategic Monetary
market and investment
Theory and massive fiscal stimulus, unsustainable negative real interest rates and “TINA” (there is no alternative
insights across the firm’s Institutional, Funds and Private Banking businesses.
to equities), the dream sequence of a rapid transition to renewable energy, the Potemkin village of many
metaverse/fintech narratives andMr. theCembalest
pseudo-libertarian gibberishofofthe
is also a member unregulated
J.P. Morgancrypto.
Asset & Wealth Management
The largest combined monetary and Investment Committeeinand
fiscal experiment previously
history served
is ending now,on thea Investment
and recession isCommittee
coming to for
thethe
J.P. Morgan
US and Europe based on leading indicators weRetirement
follow. But:Plan for the
avoid thefirm’s more
trap of than 256,000
becoming employees.
more bearish the lower
the market gets, and be prepared to take advantage of selloffs when/if they occur. As shown below,
Mr. Cembalest was most recently Chief Investment Officer for the firm’s Global in thePrivate
history of US recessions (with theBank,
exception of the dot-com collapse of 2001), equity markets bottomed well
a role he held for eight years. He was previously head of a fixed income division
before the bottom in GDP, payrolls, S&P 500 earnings and housing starts and the peak in household/corporate
of Investment Management, with responsibility for high grade, high yield, emerging
delinquencies. The ISM survey has been the most reliable coincident indicator of a bottom in equities, which is
markets and municipal bonds.
why we pay so much attention to it. If history is any guide, the equity bottom would also coincide with the end
of Fed hikes and the onset of the actual
Beforerecession.
joining AssetI expect equity markets
Management, to bottom
Mr. Cembalest sometime
served as Headin Strategist
the first half
for
of next year, and for the October Emerging
2022 lowsMarkets
to hold.Fixed Income at J.P. Morgan Securities. Mr. Cembalest joined
J.P.of
Our outlook begins with a discussion Morgan in 1987some
asset prices, as a of
member
which of the firm’s
already Corporate
price Finance
in recession. Thedivision.
sections that
follow examine US inflation dynamics which we earned
Mr. Cembalest believean
willM.A.
coolfrom
enough for the Fed
the Columbia to pause
School rate hikes and
of International at 5%
Public
in the spring; the gradual declineAffairs
in globalization and implications for investors; how
in 1986 and a B.A. from Tufts University in 1984.
the end of negative real
rates may usher in a period of improved stock picking by value-oriented managers; how a regulatory wave is
coming to the Fintech/crypto world; where we see value in global fixed income markets now that Central Bank
financial repression is ending; and some closing comments on mRNA vaccines and the 1969 moon landing.
Michael Cembalest
JP Morgan Asset Management
Watch the ISM survey for signs of a market bottom in recessions
S&P 500 indexed at 100 at start of each period, dots show when each indicator bottomed
S&P 500 index ISM GDP Payrolls S&P Earnings Housing starts RE delinquencies
130
120
110
100
90
80
ISM,
70 payrolls &
housing
60 starts
Eisenhower Stagflation Double dip recession S&L recession DotCom collapse GFC COVID
50
6/1957
4/1958
9/1958
2/1959
7/1959
9/1973
2/1974
7/1974
5/1975
3/1976
8/1976
2/1981
7/1981
5/1982
3/1983
8/1983
2/1990
7/1990
5/1991
3/1992
3/2000
8/2000
1/2001
6/2001
4/2002
9/2002
2/2003
7/2003
5/2007
3/2008
8/2008
1/2009
6/2009
4/2010
9/2010
2/2011
1/2020
6/2020
11/1957
12/1959
12/1974
10/1975
12/1981
10/1982
12/1990
10/1991
11/2001
12/2003
10/2007
11/2009
11/2020
Source: BEA, Census, NAR, Shiller, Bloomberg, S&P Dow Jones, JPMAM. 2022.
INVESTMENT PRODUCTS ARE: ● NOT FDIC INSURED ● NOT A DEPOSIT OR OTHER OBLIGATION OF,
OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES ● SUBJECT TO 1
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

A New Era of Investing Begins 1672488719

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

A New Era of Investing Begins 1672488719

Uploaded by

Copyright:

Available Formats

EYE ON THE MARKET OUTLOOK 2023

The End of the Affair

J.P. Morgan Asset & Wealth Management

Sharing these perspectives and opportunities is part of our deep commitment to

The End of the Affair

A quick look at declining leading indicators and US banking system resilience

US bank tier 1 capital ratios US loan-to-deposit ratio, all commercial banks

FDIC Q3 unrealized bank losses on investment securities

0% 10% Civil War GFC

Topic #1: Tracking the repricing of financial assets

Chinese bank valuations China property high-yield bond price distribution

Loan covenant quality scores: 2007 vs 2019-2020

Asset sales &

Largest worker shortage in the post-war era Wage growth measures

-15% -1% -10

The US-Europe natural gas gap The US-Europe electricity gap

Topic #3: Tracking the gradual decline of globalization

Korea, Vietnam & Taiwan 60 OECD

From Jake Sullivan, US National Security Advisor

Semiconductor manufacturing capacity Semiconductor bill spending and estimated amounts

Semiconductor stickiness, Part 2: China, Taiwan and Faberge eggs

Kyr Burk Gui CaboV

Cross-border syndicated loans to Russia Chinese vs European purchases of Russian energy

Topic #4: Tracking the performance of active managers

150 0% 150 2.5%

200 $80 $2,000

5% Cautious until we see Lula

For J.P. Morgan Asset Management Clients:

For J.P. Morgan Private Bank Clients:

LEGAL ENTITY, BRAND & REGULATORY INFORMATION

© 2023 JPMorgan Chase & Co. All rights reserved.

The End of the Affair

You might also like