Authored by Thorstein Polleit via The Mises Institute,

On May 4 and 5, 2018, Warren E. Buffett (born 1930) and Charles T. Munger (born 1924), both already legends during their lifetime, held the annual shareholders’ meeting of Berkshire Hathaway Inc. Approximately 42,000 visitors gathered in Omaha, Nebraska, to attend the star investors’ Q&A session.

Peoples’ enthusiasm is understandable: From 1965 to 2017, Buffett’s Berkshire share achieved an annual average return of 20.9 percent (after tax), while the S&P 500 returned only 9.9 percent (before taxes). Had you invested in Berkshire in 1965, today you would be pleased to see a total return of 2,404,784 percent: an investment of USD 1,000 turned into more than USD 24 million (USD 24,048,480, to be exact).

In his introductory words, Buffett pointed out how important the long-term view is to achieving investment success. For example, had you invested USD 10,000 in 1942 (the year Buffett bought his first share) in a broad basket of US equities and had patiently stood by that decision, you would now own stocks with a market value of USD 51 million.

With this example, Buffett also reminded the audience that investments in productive assets such as stocks can considerably gain in value over time; because in a market economy, companies typically generate a positive return on the capital employed. The profits go to the shareholders either as dividends or are reinvested by the company, in which case the shareholder benefits from the compound interest effect.

Buffett compared the investment performance of corporate stocks (productive assets) with that of gold (representing unproductive assets). USD 10,000 invested in gold in 1942 would have appreciated to a mere USD 400,000, Buffett said – considerably less than a stock investment. What do you make of this comparison?

To answer this question, we first need to understand what gold is from the investor’s point of view. Gold can be classified as (I) an asset, (II) a commodity, or (III) money. If you consider gold to be an asset or a commodity, you might indeed raise the question as to whether you should keep the yellow metal in your investment portfolio.

But when gold is seen as a form of money, Buffett’s comparison of the performance of stocks and gold misses the point. To explain, every investor has to make the following decisions: (1) I have investible funds, and I have to decide how much of it I invest (e.g. in stocks, bonds, houses, etc.), and how much of it I keep in liquid assets (cash). (2) Once I have decided to keep X percent in cash, I have to determine which currency to choose: US dollar, euro, Japanese yen, Swiss franc – or “gold money”.

If one agrees with these considerations, one can arrive now at two conclusions:

(1) I do not keep cash, because stocks offer a higher return than cash. However, many people are unlikely to follow such a recommendation. They keep at least some liquidity because they have financial obligations to meet.

People typically also wish to hold liquid means as a back-up for unforeseen events in the form of money. Money is the most liquid, most marketable “good”. Anyone who has money can exchange it at any time – and thus take advantage of investment opportunities that come up along the way.

(2) I decide to keep at least some cash. Anyone who has near-term payment obligations in, for example, US dollar, is well advised to keep sufficient funds in US dollar. Those who opt for holding money for unexpected liquidity requirements, or for longer-term liquidity needs, must decide what type of money is suitable for this purpose. One way to do this is to form an opinion about the respective currency’s purchasing power.

If Buffett shared this view, a comparison between the purchasing power of the US dollar and gold would be in order. This exercise would show that gold – in sharp contrast to the US dollar – has not only preserved its purchasing power over the past decades but even increased it.

The Greenback’s purchasing power has dropped by 84 percent from January 1972 to March 2018. Even taking a short-term interest rate into account, the US dollar’s purchasing power would show an increase of no more than 47 percent. The purchasing power of gold, in contrast, has grown by 394 percent.

The yellow metal has also a remarkable property that has become increasingly important for investors in recent years. The reason? The international fiat money system is getting into increasingly tricky waters – mainly because the world’s already dizzyingly high level of debt continues to rise. An investor is exposed to risks that have not existed in the decades before. Gold can help to deal with these risks.

Unlike fiat money, gold cannot be devalued by central bank monetary policy. It is immune against the printing of ever greater amounts of money. Furthermore, gold does not carry a risk of default, or a counterparty risk: Bank deposits and short-term debt securities may be destroyed by bankruptcies or debt relief. However, none of this applies to gold: its market value cannot drop to zero.

These two features – protection against currency devaluation and payment default – explain why people have opted, whenever they had the freedom to choose, for gold as their preferred money. Another important aspect at this point: In times of crisis, the holder of gold – if he or she has not bought it at too high a price – can have the hope that the value of gold is likely to increase and he or she can exchange gold for, for instance, shares at a significantly discounted price.

This way, gold can help boost the return on investment. Inspired by Buffett’s return comparison between stocks and gold, and after giving it some further thought, one might have good reasons to come to at least the following conclusion: Gold has proven to be the better money, it has proven itself to be a better store of value than the US dollar or other fiat currencies.

The two-star investors typically do beat around the bush when it comes to critical comments. For instance, Buffett told his audience once again that US Treasury bonds are a terrible investment for long-term investors. With a yield of currently 3 percent for ten-year US Treasury bonds, the return after tax is around 2.5 percent. With consumer price inflation currently around two percent, inflation-adjusted rate of return is just 0.5 percent. Buffett’s message was unequivocal: do not invest, at least not currently, in bonds.

Those who had hoped that the star investor would make further critical comments on the deep-seated problems of the US dollar – which represents a fiat currency with a money supply that can be increased any time in any amount considered politically expedient – had hoped in vain. But it cannot have escaped the star investors that it’s not all sunshine and roses when it comes to the fiat US dollar.

Munger, for example, bluntly stated that central banks’ low interest rate policies, in response to the 2008/2009 financial crisis, have helped boost stock prices and bring shareholders windfall profits. Quote Munger in this context: “We are all a bunch of undeserving people, and I hope we continue to be so”.

Buffett and Munger share a long-term perspective. They keep pointing to the enormous increase in income that has been achieved in the US over the last decades. Compared to Buffett’s childhood days, Americans’ per capita income has increased six-fold – a most remarkable development (especially so if we factor in that the US population has grown from 123 million in 1930 to 323 million in 2016).

From Buffett’s and Munger’s point of view, the US system works, both politically and economically: Everyone has benefited, the wealth growth of Americans has been much more substantial than for people elsewhere, and crises have been overcome. The two investors thus form their assessment – as many do nowadays – on factual findings, based on what the eye can see. Counterfactual outcomes – things that would have happened had a different course of action been chosen – are left out.

If one takes a factual point of view, however, it is rather difficult not to see the dark side of fiat money. For instance, that fiat money fuels an incessant expansion of the state to the detriment of civil liberties; the increase of aggressive interventions around the world, all the wars causing the deaths of millions; the economic and financial crises with their adverse effects on income and living conditions of many people; and last but not least, the socially unjust distribution of income and wealth.

All these bad things would undoubtedly be unthinkable under a gold-backed US dollar, at least to their current extent. The objection that the increase in the wealth of the past few decades would have been impossible without a fiat US dollar does not hold water: Economically speaking, it is wrong to think that an increase in the quantity of money, or a politically motivated lowering of the interest rate, could create prosperity.

If that were the case, why not increase the quantity of money ten-, hundred-, or thousand-fold right now and thereby eradicate poverty worldwide? If zero interest rate could create wealth, why not order central banks to push all interest rates down to zero immediately? Why not enact a new law that requires zero percent interest, or abolishes it altogether?

Buffett and Munger have undoubtedly given their shareholders a great opportunity to escape the vagaries of the fiat money system, to defend themselves against the central bank-induced inflation, and to also become wealthy. Unfortunately, however, the serious economic, social, and political problems that fiat money inflicts upon societies cannot be solved this way.

For that reason, one should deliberately reflect Buffett’s return comparison between stocks and gold – and make oneself aware of the fact that gold can be viewed as a form of money that may even deserve to be called “the ultimate means of payment.” For the investor, there are no convincing economic reasons to discourage holding gold as a form of longer-term liquid funds – especially if the alternative is fiat money.

This timeless insight was already suggested by economist Ludwig von Mises (1881-1973) in 1940: “The gold currency has been criticised for various reasons; it has been reproached for not being perfect. But nobody is in a position to tell us how something more satisfactory couId be put in place of the gold currency.”

All it took was 8 simple words, with little factual backing and no way of enforcement, to send global markets and US equity futures soaring overnight: “We are putting the trade war on hold,“ Treasury Secretary Steven Mnuchin said Sunday, refuting Trump’s prior skepticism, in which the president said he doubts China trade talks will be successful, and sending risk assets across the globe (even as most of Europe was closed due to Whit Monday) higher.

For those who missed it, on Sunday, US Treasury Secretary Mnuchin stated that US and China are putting the trade war on hold, while he added that previously announced tariffs on Chinese steel and aluminium, as well as USD 150bln of tariffs on other Chinese imports, would be placed on hold as discussions with China progress. US Treasury Secretary Mnuchin also stated that President Trump is more interested in obtaining a good deal with NAFTA partners rather than quickly concluding talks in time to be voted by Congress this year. US Trade Representative Lighthizer stated that US may still resort to tariffs and other measures such as restrictions on investment and export regulations unless China makes real structural adjustments to its economy.

At the same time, in a just as hollow vow, Beijing promised to “significantly” increase purchases of U.S. goods and services, without however mentioning a dollar figure, and focusing primarily on the energy sector, i.e., oil and refined products, something the world’s biggest oil importer would have done anyway.

These two hollow promises, which while representing a marked thaw in US-China trade relations, will do little if anything to change the complexion of bilateral trade between the two countries, and as Bloomberg writes this morning, “U.S.-China Trade Truce May Not Last With Differences Unresolved.” For now however, the world is delighted by this unexpected development, and as shown in the chart below, US equity futures spiked higher…

… and global markets are well in the green…

… although that may not even last the day, for one simple reason: recall that in recent months, the key “loophole” the Fed used as a hint it may halt the tightening cycle was fears about trade war. Well, now that “trade war is on hold”, the Fed no longer has an alibi to halt, or even slow the rate hikes, which means a strong dollar, which means higher short rates, which means a potentially catastrophic volatility eruption on the short end, as Deutsche Bank laid out over the weekend in the following flowchart.

And sure enough, while stocks are sharply higher, the FX dynamics continue to deteriorate for the emerging markets, with the Bloomberg Dollar Spot Index building on recent gains following the “trade truce”…

… which has also sent the yen to a four-month low, while lingering concerns over Italian politics push the euro below 1.1720 for the first time since December.

The ongoing dollar spike also pushed the pound to the lowest level since December 28 amid lingering U.K. political uncertainties. Higher U.S. yields also support the greenback during another session in the red for emerging-market currencies, where the relentless rout of the past month continues with another bloodbath in the EM FX screen, with Turkey once again hit the hardest as the Borsa Istanbul 100 Index drops 0.3% in early trading as the Turkish lira weakens to a record low and 10-year bond yields hit an all-time high.

Threatening to spoil today’s party, a somber analysis from Macquarie Bank notes that the greenback will nudge higher against emerging-market currencies from current levels as the U.S. trade policy remains a concern: “There will be some pressure” on EMs from a stronger dollar and rising USTs, although the market is still “quite far away” from calling the selloff a crisis, Nizam Idris, head of strategy for fixed income and currencies in Singapore, told Bloomberg TV. There’s a “significant sigh of relief” among investors in Asia following the trade truce, although “the relief today was very cautious” as it will be “near impossible” for China reduce U.S. trade deficit by $200BN by merely importing more American products.

Meanwhile, speaking of Italy, as we reported on Sunday, the country’s populist leaders are set to propose a cabinet as early as today, with Florence University law professor Giuseppe Conte the pick for Prime Minister. However what the market is more worried about is the risk of Italeave rising now that Rome may implement a parallel currency: indeed, Italian bonds slipped amid “mini-BOTs” speculation, with the 2Y yield soaring while a flight to core European safety meant German bunds were better bid. And while Italy’s FTSE MIB index did fall as much as 2.1%, most of this was the result of about half of the stocks on the 40-member benchmark trading ex-dividend, with an impact of -1.7% at the open.

Yet despite the growing risk of another Italian crisis, European markets are surging, facilitated by the slump in the Euro, which has buoyed exporters. In company-specific news, Ryanair said annual earnings are set to slump for the first time since 2014 after a pilot shortage compelled it to give in to demands for union recognition and sweetened contracts. Elsewhere the FTSE 100 hit record highs with some credit attributed to FX effects. Sectors are all in the green with outperformance in consumer discretionary and underperformance in financials. In stocks specifics, FTSE 100 heavyweight AstraZeneca (+2.3%) shares are higher amid the FDA approving a treatment. Note that European volumes are muted as many European markets including Germany, Switzerland, Denmark and Norway are closed today.

“The continued buoyancy in European markets is being helped in no small part by the weakness in both the euro and the pound against the U.S. dollar, while concerns about an escalation in tensions between China and the U.S. appear to have been deferred in the short term after progress in trade talks at the weekend. This deferral of tensions should see markets in Europe get off to a positive start this morning with the FTSE 100 on course to open at a record high,” wrote CMC Markets chief market analyst Michael Hewson.

Earlier in Asia, market traded mostly positive, with the Nikkei 225 (+0.3%) benefiting from a weaker yen, while the ASX 200 (-0.1%) lagged behind its regional peers with upside capped by weakness in its largest weighted financials sector as the Royal Banking Commission shifts its attention to Westpac’s business lending practices. Shanghai Comp. (+0.6%) and Hang Seng (+0.6%) outperformed with Chinese bourses the main benefactor of the reduced trade tensions following the postponement of US trade war.

In other overnight news, President Trump spoke with South Korean President Moon regarding North Korea in which they agreed to work together for a successful summit, while Moon will be visiting the White House on Tuesday to coordinate on the summit. Iran pledged to adhere to the nuclear agreement if EU helps it offset US sanctions.

Looking at commodities, oil is currently higher with both WTI and Brent +0.3% in-fitting with the broader risk-picture, albeit off best levels alongside fluctuations in the USD. Energy newsflow remains light with the only commentary of note being from IEA’s Birol who stated that he sees initial signs of a slowdown in oil demand and they are ready to act. Elsewhere, gold is at 5 month lows as the USD prints fresh YTD highs with demand for the safe-haven dampened by the risk tone which was also the key factor that propped up copper prices (+0.1%) overnight, especially considering the outperformance in its largest consumer China. Iron ore is currently down 3%, falling for the fourth straight session on restocking delays in steel mills which has also weighed on steel prices, currently down 1%

A handful of companies is set to report earnings, and data on the Chicago Fed national activity index is also expected. Three speakers form the US Federal Reserve crowd the agenda today, and the minutes of the last FOMC meeting will be released on Wednesday.

Bulletin Headline Summary from RanSquawk

• European bourses trading largely positive following an improved risk tone after US/China détente
• Italian/German 10-Year yield spread at widest point in 7 months ahead of Italian Premier announcement
• Looking ahead, highlights include, Fed’s Bostic, Harker and Kashkari

Market Snapshot

• S&P 500 futures up 0.6% to 2,729.00
• STOXX Europe 600 up 0.3% to 395.90
• MXAP down 0.2% to 174.05
• MXAPJ up 0.1% to 567.48
• Nikkei up 0.3% to 23,002.37
• Topix down 0.08% to 1,813.75
• Hang Seng Index up 0.6% to 31,234.35
• Shanghai Composite up 0.6% to 3,213.84
• Sensex down 0.6% to 34,654.35
• Australia S&P/ASX 200 down 0.05% to 6,084.49
• Kospi up 0.2% to 2,465.57
• Brent Futures up 0.3% to $78.71/bbl
• Gold spot down 0.7% to $1,284.69
• U.S. Dollar Index up 0.3% to 93.90
• German 10Y yield fell 2.3 bps to 0.556%
• Euro down 0.3% to $1.1743
• Brent Futures up 0.6% to $78.94/bbl
• Italian 10Y yield rose 11.2 bps to 1.968%
• Spanish 10Y yield rose 2.1 bps to 1.464%

Top Overnight News

• Italy’s two populist parties agreed on a prime minister, sealing a government deal amid a warning by France to avoid putting the euro area’s stability at risk. The Corriere della Sera newspaper reported that it’ll be Giuseppe Conte, a 54-year-old law professor at Florence University
• The newly-declared economic truce between the U.S. and China will prove temporary if the world’s two largest economies fail to deliver on vague commitments to rebalance trade. “We’re putting the trade war on hold,” Treasury Secretary Steven Mnuchin said Sunday. “Right now, we have agreed to put the tariffs on hold while we execute the framework.”
• Brexit supporters “fearing betrayal” over a new customs plan should trust Prime Minister Theresa May to deliver on her promises as the U.K. prepares to leave the European Union, Foreign Secretary Boris Johnson said
• President Nicolas Maduro won another six-year term as millions of Venezuelans boycotted the widely derided election, a victory that hands him sole ownership of the nation’s crushing economic crisis.
• London remains a weak spot in the slowing U.K. housing market as Brexit clouds the outlook, reports Monday showed. The capital had an annual price decline of 0.2 percent in May, property website Rightmove said on Monday
• Northern Europe’s claim for a turn at leading euro-area monetary policy in the era after Mario Draghi advanced over the weekend as two of its contenders dropped hints that they’re waiting to be asked
• Indonesia’s central bank pledged to continue its intervention in the currency and bonds market to ease volatility, and said it will boost forex liquidity as the rupiah slumped to a fresh 31-month low

Asian equity markets traded mostly positive with sentiment underpinned following the conclusion of the 2nd round of US-China trade talks in which China agreed to purchase more goods to avoid a trade war but stopped short of indicating an actual amount it plans to reduce the deficit by. More importantly, US Treasury Secretary Mnuchin announced that tariffs on China would be placed on hold as discussions progress, which eased trade concerns and saw the E-mini S&P gap higher by 0.6% while DJIA futures gained over 200 points. Nikkei 225 (+0.3%) benefitted from a weaker currency, while ASX 200 (-0.1%) lagged behind its regional peers with upside capped by weakness in its largest weighted financials sector as the Royal Banking Commission shifts its attention to Westpac’s business lending practices. Shanghai Comp. (+0.6%) and Hang Seng (+0.6%) outperformed with Chinese bourses the main benefactor of the reduced trade tensions following the postponement of US trade war. Finally, 10yr JGBs were subdued amid gains in stocks and early pressure in T-notes at the open as participants reacted to the trade-related developments, although the latter has since recovered amid reports of block buying from intraday lows.

Top Asian News

• Malaysia Brings Back Old Graft Fighters for 1MDB Task Force
• UltraTech Cement, Bajaj Finance Options See Greater Demand
• Indonesia to Step Up Intervention as Currency, Bonds Slide
• Hitachi Willing to Buy Elliott’s Stake in Ansaldo STS: Corriere
• Hyundai Shelves $8.8 Billion Deal After Elliott Pressure

European equities trade higher (FTSE 100 +0.8%, CAC 40 +0.7% and IBEX +0.3%) with the absence of German and Swiss stocks in light of Whit Monday. Italy is in focus as the populist leaders agreed on a choice of Premier and cabinet for a coalition  government. The party leaders are to meet with Italian President Mattarella this afternoon. Recent reports state that the President does no see any obstacles to a Giuseppe Conte Premiership. Elsewhere the FTSE 100 hit record highs with some credit attributed to FX effects. Sectors are all in the green with outperformance in consumer discretionary and underperformance in financials. In stocks specifics, FTSE 100 heavyweight AstraZeneca (+2.3%) shares are higher amid the FDA approving a treatment.

Top European News

• Ryanair Warns Rising Fuel Costs Will Lead to Shakeout
• London Housing Slump Deepens as Brexit Slows U.K. Property
• Italy President to Meet Five Star, League Leaders This Afternoon
• Front- End BTPs Slump Amid Speculation of ‘Mini-BOT’ Issuance
• Pound Slides to This Year’s Low as Brexit to Italy Risks Weigh

In FX, the index has now crossed over 94.000 amidst broad Usd gains on the back of a semi-successful conclusion to the latest trade talks between the US and China. In short, concessions have been made on either side and a truce called on tariffs pending further discussions to reach a mutual agreement and ultimately rebalance the lop-sided trade accounts. For the record, 94.064 is the fresh multi-month DXY high and chart-wise 94.200-219 is the next upside target (Fib level), as latest CFTC data reveal a further reduction in short vs all counterparts aside from the Jpy and Cad. JPY Stops have finally been tripped at 111.20 vs the Dollar and the obvious nearest bullish objective is 111.50 vs a circa 111.39 peak so far where barrier option offers are reported. 111.00 now becomes support. JPY: Stops have finally been tripped at 111.20 vs the Dollar and the obvious nearest bullish objective is 111.50 vs a circa 111.39 peak so far where barrier option offers are reported. 111.00 now becomes support. EM: No respite for the likes of the Lira, as Usd/Try jumps to just shy of 4.5600 and the Turkish authorities only offer words to address the situation and little tangible to arrest the currency’s slide. Many market observers are now eyeing even more record lows for the Lira unless the CBRT takes decisive/dramatic policy action on June 7.

In commodities, oil is currently up with both WTI and Brent +0.3% in-fitting with the broader risk-picture, albeit off best levels alongside fluctuations in the USD. Energy newsflow remains light with the only commentary of note being from IEA’s Birol who stated that he sees initial signs of a slowdown in oil demand and they are ready to act. Elsewhere, gold is at 5 month lows as the USD prints fresh YTD highs with demand for the safe-haven dampened by the risk tone which was also the key factor that propped up copper prices (+0.1%) overnight, especially considering the outperformance in its largest consumer China. Iron ore is currently down 3%, falling for the fourth straight session on restocking delays in steel mills which has also weighed on steel prices, currently down 1%

Looking at today’s calendar, it is a fairly quiet start to the week with the main highlights being the afternoon and evening Fedspeak when Bostic, Harker and Kashkari all speak separately. Datawise, the April Chicago Fed national activity index in the US is due. Elsewhere, the ECB’s Nowotny and Riksbank’s Jansson are also due to speak.

US Event Calendar

• 8:30am: Chicago Fed Nat Activity Index, est. 0.5, prior 0.1
• 12:15pm: Fed’s Bostic Speaks to Atlanta Economics Club
• 2:05pm: Fed’s Harker Speaks in New York
• 5:30pm: Fed’s Kashkari Speaks at Moderated Q&A in Escanaba, MI

DB’s Jim Reid concludes the overnight wrap

It looks like many of the tariffs agreed by the US and China could be ripped up too after this weekend’s positive joint announcement, although it seems that the US may be keeping some glue handy in case they decide that China is not meeting its obligations. The statement highlighted a consensus to “substantially  reduce the US trade deficit in goods with China”. China promised to “significantly increase purchases of US goods and services”. There was no numerical target nor  timeline though. One specific was that China promised to buy more agricultural and energy products. However as our Chinese economists pointed out, China’s imports of these products from the US were USD 26bn in 2017. The bilateral trade deficit was 375bn. The head of Chinese delegation, Mr Liu He, said in an interview that both sides agreed not to fight in a trade war, and stop imposing incremental tariffs on each other. The US response was a little more guarded with Trump’s advisor Kudlow not confirming that tariffs were on hold but Treasury Secretary Mnuchin later said that “We’ve decided to put the trade war on hold. So right now, we have agreed to put the tariffs on hold while we execute a framework”. He also added the US expects an increase of 35-40% in agricultural exports this year to China and a doubling of energy exports over the next 3-5 years.

Overall, our Chinese economists think that the trade war may be suspended for now, but doubt it has ended. Their future direction may depend on non-economic issues such as geopolitical risk in the Korean peninsula and the US midterm election. Overall while positive they think there remains a lot of unanswered questions. See the link for more.

This morning in Asia, markets are broadly higher with gains from the Hang Seng (+1.23%), Nikkei (+0.37%) and Kospi (+0.26%) while the ASX 200 is marginally lower. Elsewhere, futures on the S&P are also up c0.5% following the more reassuring comments from Secretary Mnuchin while UST 10y yields are up c1bp. Datawise, Japan’s April trade surplus was above expectations at JPY626bn (US $5.6bn vs. JPY440bn expected) as exports outpaced a weaker than expected growth in imports (5.9% yoy vs. 9.8% expected).

The other big weekend story was the latest developments in Italy. The head of League Party Mr Salvini said “we closed the deal (with 5SM) this morning on the candidate for Premier and Ministers, so we’re ready to get started”. He added the government will include “unexpected” external figures, to which Bloomberg reported that Florence University law professor Giuseppe Conte may emerge as the Premier and the cabinet make up to be revealed as early as today. Elsewhere, French Finance Minister Bruno Le Maire warned that “if the new (Italian) government took the risk of not respecting its commitments on debt, the deficit…the financial stability of the entire Euro zone will be threatened”. Subsequently, the League’s Salvini tweeted the warning from France was “unacceptable” interference and added “Italian first!” So still lots bubbling along. As a reminder the spread between 10y BTPs and Bunds is now at 165bp, the highest since mid-October.

The focal point data wise this week will likely be the latest global flash PMIs (Wednesday), especially those in Europe. In terms of expectations, the consensus for the Eurozone manufacturing reading is 56, which follows the 56.2 reading in April and a 60.6 high print back in December. The composite print for the Eurozone is expected to be flat mom at 55.1. The PMIs in the US are also expected to be broadly stable mom, with the consensus for the manufacturing print expected to be 56.5 for April. Elsewhere the FOMC minutes on Wednesday evening from the May 2nd meeting will be closely watched. The statement at the time arguably moved us incrementally in a more hawkish direction. It also included use of the word ‘symmetry’ in relation to the 2% inflation objective, so it’ll be interesting to see if this is fleshed out at all. Indeed, our US economists saw the meeting statement as a first step towards altering the balance of risks language and expect to learn more from the minutes. As we know, since the meeting we have had some disappointing inflation readings in the US (CPI and average hourly earnings), however, bond yields have continued to march higher. The rest of the global week ahead is included at the end.

Now recapping other markets performance from Friday. In equities, the Stoxx 600 dipped -0.28% on Friday, but was up for the 8th consecutive week (+0.58%), buoyed by energy stocks over this period. The S&P weakened -0.26% on Friday, weighed down by energy and financial stocks. In FX, the US dollar index firmed for the fifth day (+0.18%) while the Euro and Sterling weakened -0.19% and -0.35% respectively. Elsewhere, precious metals strengthened slightly (Gold +0.17%; Silver +0.06%) while other base metals were mixed but little changed.

Over in government bonds, the yields on UST 10y fell for the first time in six days (-5.5bp) to 3.057% while Bunds (-6.0bp) and Gilts (-6.3bps) also rallied. There wasn’t really an explanation for the sharp reversal after a bearish week for bonds.

Elsewhere, yields on 10y Italian BTPs jumped +11bp on Friday and c36bp for the week, so the flight to safety effect may have also played its part. Now moving onto Iran and the US sanctions. Reuters reported that Iran will join a meeting this Friday with diplomats from the UK, Germany, France, China and Russia to discuss next steps following the US withdrawal from the nuclear accord.

Ahead of this, the German newspaper Welt am Sonntag cited unnamed senior EU officials who noted that the possibility of “….adding a few additional elements (to the accord). Only that will convince President Trump to agree and lift sanctions again”.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. Germany’s April PPI was above market at 2.0% yoy (vs 1.8% expected), while the Euro area’s March trade surplus was marginally higher than expectations at €21.2bln (vs. €21.0bln). Over in Canada, both its core and weighted median April CPI were in line at 1.9% yoy and 2.1% yoy respectively. Overall, the average reading across the measures is now 2.0% – a pace last exceeded in February 2012.

Looking at Monday’s events, it is a fairly quiet start to the week with the main highlights being the afternoon and evening Fedspeak when Bostic, Harker and Kashkari all speak separately. Datawise, the April Chicago Fed national activity index in the US is due. Elsewhere, the ECB’s Nowotny and Riksbank’s Jansson are also due to speak.

Monday Humor…

Emerging markets are crashing, Italian capital markets are imploding, European money-markets are getting anxious, US bonds and the dollar do absolutely nothing… but The Dow spikes 300 points…(thanks to Boeing et al)

….On the basis of Steve Mnuchin proclaiming a ceasefire in the trade war…

Futures show the malarkey better with the insta-lift at the Sunday open, another momo ignition at the US open, a dump at the European close…

Italy stole the headlines in Europe… As Peter Boockvar pointed out so eloquently, the Italian 2 yr yield has given back 3 years of monetary suppression in 6 trading days.

And Italian banks are a bloodbath still…

The last month has seen EU banks massively underperform US banks…

Tesla was tumultuous – ripping on Musk’s high-end Model 3 comments, dropping on Consumer Reports and yet another crash… but bonds weren’t buying any of it…

Media types were excited about The Dow breaking 25k…Rescued at the last second…

VIX was pressured each time…

Another day another short squeeze at the open…

Treasury yields traded in a very narrow range going nowhere on the day…

The yield curve extended Friday’s flattening trend…

The Dollar roundtripped to end the day unchanged…

Emerging Market FX actually managed a gain today (but don’t get too excited)

But the Turkish Lira continued its carnage…testing a record low 4.6/USD today

Cryptocurrencies had a decent weekend but Monday morning blues sent them lower…

Gold ended the day unchanged (silver outperformed) but copper and crude rallied (trade hope)

Finally we note that stocks and credit have decoupled again…

Credit and equity protection costs are also decoupled…

Authored by Wolf Richter via WolfStreet.com,

Subprime is calling…

In the first quarter, the delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the 4,788 smaller banks in the US – spiked in to 5.9%. This exceeds the peak during the Financial Crisis. The credit-card charge-off rate at these banks spiked to 8%. This is approaching the peak during the Financial Crisis.

A sobering set of numbers the Federal Reserve Board of Governors releasedthis afternoon.

But overall, across all commercial banks, including the largest banks with the largest credit-card loan balances outstanding, the delinquency rate was 2.54% (not seasonally adjusted). This overall rate was pushed down by the largest 100 banks, whose combined delinquency rate in Q1 was 2.48%.

These large banks have been offering appealing incentives to consumers for years, and they’ve been going after consumers with the higher credit ratings, and they’ve been following good underwriting practices – having not yet forgotten the lesson from the last debacle – and this conservative approach is now helping to keep losses down.

But the thousands of smaller banks couldn’t compete with those offers, and so they got deeply into subprime cloaked in sloppy underwriting. This way, they were able to reel in new credit-card customers that the big banks didn’t want, and those customers needed the money and charged up their new cards in no time, and the interest rates of 25% or 30% looked good on the banks’ income statement and helped maximize executive bonuses, yes even at smaller banks.

But turns out, those banks had reeled in the most fragile customers and had eagerly doused them in irresponsible levels of debt at usurious interest rates – and now what? These customers won’t ever be able to pay off the balances or even pay the interest. For many of them, there’s only one way out. This caused the delinquency rate to spike from 3.81% to 5.90% in just three quarters.

This chart shows delinquency rates for the largest 100 banks (blue line) and for the remaining 4,788 banks (red line):

Credit card balances are deemed “delinquent” when they’re 30 days or more past due. The rate is figured as a percent of total credit card balances. In other words, among the smaller banks, nearly 6% of the outstanding credit card balances are now delinquent.

The bank tries to collect these delinquent loans, and some customers are able to catch up. Others are not. After recovering what it could, the bank moves the remaining delinquent balance out of the delinquency basket and into the charge-off basket. This is when the loan is “charged off” against loan loss reserves.

These charge-offs among the largest 100 banks rose to 3.73% in Q1 (not seasonally adjusted), the highest since the first quarter 2013.

But among the remaining 4,788 banks, the charge-off rate spiked to 7.99%, the highest since Q2 2010. The rate among smaller banks had peaked during the Financial Crisis in Q4 2009 at 8.78%:

Both charts show that the largest 100 banks had suffered massive losses during the Financial Crisis as their credit card loans blew up, and as consumers, many of whom had lost their jobs, could no longer keep up with their credit card debts.

The smaller banks had been more conservative leading up to the Financial Crisis, and their delinquency and charge-off rates had been somewhat less catastrophic.

The difference between then and now is that back then, unemployment was heading toward 10% and millions of people had lost their jobs; now the unemployment rate is near historic lows and the economy is humming. Yet already the smaller banks are booking these losses on their credit card portfolios. What will they do when the economy ever slows down?

That was a rhetorical question.

In the overall scheme of things, these 4,788 smaller banks hold only a small portion of all banking assets, including credit card balances. Of the $1 trillion in credit debt outstanding, these small banks hold only a fraction. So they won’t jeopardize the US financial system. And that’s why the Fed, as banking regulator, is relatively sanguine about these dizzying charge-off rates at the smaller banks.

But the surge in charge-offs at these banks points at something fundamental: Credit problems at the margin. The consumer spending binge in recent years has been funded not by surging incomes at the lower 60% of the wage scale, where real wage stagnation has reigned, but by borrowing – particularly via credit cards and auto loans. Both of them have turned sour at the margins. And these are still the best of times.

Only about half of retail is under attack from e-commerce, but that half is getting crushed. Read… Brick & Mortar Meltdown Pummels These Stores the Most