In my opinion, the biggest shock about Warren Buffett and Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) recent 13F quarterly report was the decision to trim their stake in JPMorgan Chase (NYSE:JPM) by nearly 62%. For a guy who says never to bet against America, Buffett just pulled a lot of his support from America's largest bank. However, I think the question to ask here is whether Buffett is really concerned about JPMorgan or more about the economy in general?

Warren Buffett

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The bigger picture

I can certainly understand some of Buffett's bank reductions in the second quarter. Buffett heavily trimmed his position in regional banks like M&T Bank (NYSE:MTB) and PNC Financial Services Group (NYSE:PNC), which makes a certain amount of sense because the low-rate environment is going to reduce these banks' ability to make interest income on loans -- a heavier part of their business model than it is for larger banks in the U.S. That could make it difficult to offset future reserve builds they may need to cover potential loan losses down the road.

It's also easy to see Buffett trimming his position in Wells Fargo (NYSE:WFC), as the bank has been under heavy regulatory scrutiny after its phony-accounts scandal. The bank has performed poorly since the coronavirus pandemic hit the economy, seeing an 89% annual decline in profits in the first quarter of the year and a $2.4 billion loss in the second quarter, along with a 75% dividend cut.

But Buffett has always complimented JPMorgan and its CEO Jamie Dimon. In January of this year, he said JPMorgan should trade at three times tangible book value, according to Barrons . Obviously, things have changed since then, but JPMorgan has performed extremely well, given the circumstances.

The bank set aside nearly $19 billion to cover future potential loan losses in the first six months of the year and still reported a profit of more than $7.5 billion. That's down by about 60% from the first six months of 2019, but to take that kind of provision for potential loan losses and still turn that kind of profit is pretty impressive. JPMorgan managed to do this because Dimon has truly built a "fortress balance sheet." Despite the bank's struggling consumer, commercial, and corporate banks, JPMorgan's investment bank turned in record-trading revenue to offset some of the pain from the heavy loan loss provision. JPMorgan also performed much better than many of its peers during the Great Recession, so it really has a good track record.

Perhaps the Oracle of Omaha is actually less concerned about America's largest bank and more with the economy in general. Banking is a sector heavily tied to the economy because banks lend to almost every sector, industry, and business type, and JPMorgan is the largest bank in the U.S. It has a huge credit card portfolio, lots of loans to the oil industry, plenty of commercial exposure, and much more. Buffett has acknowledged he is not worried about the banks. If the pandemic is not contained sooner than later, there is no doubt the banks could be in a lot of trouble. They are already bracing for heavy loan losses as it is. Buffett may be so worried about the overall health of the economy that despite his faith in JPMorgan and Dimon, he could not bear to stomach the risk and uncertainty ahead.

Buffett's stance might have already changed

Buffett and Berkshire's quarterly report only shows moves made from April 1 to June 30, so it's already somewhat out of date. Plus, we now know that after maintaining their position in Bank of America (NYSE:BAC) as of June 30, Buffett and Berkshire went on a huge buying spree, pumping more than $2 billion into the stock in July to give the company control of close to 12% of total outstanding shares. We only know this because companies have to disclose all moves on stocks in which they own more than a 10% stake right away.

The buying of Bank of America stock began just four days after the bank reported better-than-expected earnings. While JPMorgan also reported better-than-expected earnings in the second quarter, Bank of America saw fewer projected losses in recent stress testing by the Federal Reserve  and has a stronger capital position relative to its required regulatory capital ratios. Still, considering Bank of America is the second largest bank in the U.S., one would assume that Buffett feels better about the economy if he is going to make such a large move. That's why I wonder if Buffett has already reconsidered his position on JPMorgan, because I can't see anything aside from the deteriorating economy that would sour his outlook on America's largest bank.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.