Hello there, A fantastic Friday to you, as U.S. equities floundered again on Thursday but Asian stocks provided a bright spot ahead of the long Lunar New Year holiday next week. In brief (TL:DR)

• U.S. stocks were lower across the board on Friday with the Dow Jones Industrial Average (-0.02%), the S&P 500 (-0.54%) and the Nasdaq Composite (-1.40%) all lower as investors continued to remain bearish on the prospect of a tightening Fed.

• Asian stocks rebounded on Friday ahead of the Lunar New Year holiday on Apple's (-0.29%) stellar fourth quarter earnings lifting sentiment that silver linings remain outside of Fed policy tightening.

• Benchmark U.S. 10-year Treasury yields fell to 1.819% (yields fall when bond prices rise) as the yield curve started to flatten out, a possible sign of worries over the U.S. economic outlook even as the Fed dials back support.

• The dollar held on to gains.

• Oil gained with March 2022 contracts for WTI Crude Oil (Nymex) (+0.59%) at US$87.12.

• Gold nursed losses with April 2022 contracts for Gold (Comex) (+0.22%) at US$1,799.00, slipping below US$1,800 for the first time in weeks as the dollar strengthened.

• Bitcoin (+3.53%) rebounded to US$37,145 in Asian trading, momentarily moving opposite the Nasdaq Composite and proving yet again how unpredictable movements in the benchmark cryptocurrency can be.

In today's issue...

1. The Liquidity Assumption of Investing

2. Investors Pile into Gold to Sit the Round Out

3. Crypto's Biggest Whales Make a Splash in U.S. Real Estate Industry

Market Overview

It's probably preferable that the markets overestimate rate hikes and price those in accordingly, rather than underestimate and be caught blindsided.

Or at least that's what money markets appear to be doing, pricing in nearly five Fed rate hikes this year, following U.S. Federal Reserve Chairman Jerome Powell's hawkish tone after this week's policy meeting.

The prospect of receding Fed monetary stimulus has thus far whipsawed markets, with global stocks collectively losing US$7 trillion this month alone.

In Asia, markets finished fairer Friday morning with Tokyo's Nikkei 225 (+2.15%), Seoul's Kospi Index (+1.42%) and Sydney’s ASX 200 (+1.97%) all rebounding sharply, while Hong Kong's Hang Seng (-0.84%) was dragged down by Chinese tech stocks.

1. The Liquidity Assumption of Investing

• Investors are spurred on by the assumption that if things get bad enough, even the most profligate risktakers will get rescued by the U.S. Federal Reserve

• Fed policy flexibility has meant that markets will remain more volatile as bets are taken on both sides of the coin, for and against intervention

As any seasoned cryptocurrency trader will tell you, what matters most is liquidity. But with stocks being whipsawed from conflicting narratives, more traditional investors are starting to question what liquidity means in a time when the direction of the market is less certain. Erasing gains and clocking fresh ones appears to be par for the course in U.S. equities this past week. With the U.S. Federal Reserve’s Chairman Jerome Powell pledging to keep the central bank nimble in formulating monetary policy, investors have been left guessing what that means for risk assets and traders have been run ragged trying to figure out which way markets will land. Twice in two days, the benchmark S&P 500 has erased gains of roughly 2% to close each session lower, with intraday volatility hammering traders. Not that history provides any real guide, but the last time this happened, where streaks of big back-to-back downside reversals occurred was in October 2008, at the precipice of the Financial Crisis. But what’s the difference this time? Bearing in mind that in 2008, it wasn’t at all clear what would happen next – recall that this was the time before the Fed’s “infinite put” to backstop losses and shore up credit markets, was assumed. Fast forward to our present epoch and the circumstances are dramatically different – investors assume that a calamitous crash in asset prices across the board would have a deleterious effect on the economy and prompt the Fed to intervene. And this has led some investors at least to poke their heads out of their shells and nibble at assets each time they have dipped. Because even if liquidity in the markets should dry up, the Fed is assumed to swoop in with liquidity to prevent the worse of times becoming the present time. Where that turning point is however is somewhat less clear, with estimates ranging from as low as 10% to over 20% because the argument is that policymakers have little reason to halt a selloff that has savaged the most speculative stocks and spurred indices to a 12-month high. Rescuing risktakers is unlikely to be a significant motivation for policymakers who are staring down the fastest pace of inflation in four decades. With asset prices elevated by injections of excess liquidity, now that the Fed is removing the pinch bowl, there may not be enough buyers to make up the difference.

2. Investors Pile into Gold to Sit the Round Out

• Record inflows in SPDR Gold Shares as investors sit this round of volatility out

• Rising yields put upside cap on gold outside of the immediate geopolitical uncertainty - settlement of Russia-Ukraine tensions could see sharp drop

While many investors were happy to abandon gold despite its alleged inflation-hedging properties for the most part of the pandemic, preferring Bitcoin instead, interest in the precious metal has been rising again. From the prospect of a Russian invasion of Ukraine and a major slide in U.S. equities, investors are rushing into the haven metal, used since Mesopotamian times to hedge against uncertainty. Last Friday, investors poured in a record US$1.6 billion into SPDR Gold Shares (-1.29%), the world’s largest physically-backed gold exchange traded fund, according to Dow Jones Market Data. As tensions between Russia and Ukraine simmered last week, investors flocked to gold as they have done traditional during periods of geopolitical uncertainty, expecting the precious metal to at the very minimum hold value even as other asset struggle. Adding to that uncertainty is the U.S. Federal Reserve’s fresh determination towards “nimbleness” in its monetary policy. Although the Fed appears to be committed to combating inflation by hiking interest rates, keeping the backdoor open to be flexible on its monetary policy introduces uncertainty – there’s always the risk that the Fed could reverse course on a dime. Whether it’s asset markets which have crashed or economic data that misses the mark, any number of possible scenarios could catch investors off guard, whether long or short, ushering in the prospect that it may just be safer to stay in cash or even gold. Alongside Bitcoin, gold hit a high last November, but unlike its cryptocurrency counterpart, has traded within a relatively tight range this year. Bets that the Fed will act aggressively to curb inflation helped pull back some of the speculative froth in gold, but just like Bitcoin, hasn’t seen prices of the precious metal collapse altogether. Unfortunately for investors, the outlook is more uncertainty, not less – flexible monetary policy, despite the Fed’s alleged commitment to fight inflation means that should inflation start to subside, will the Fed revert back to its loose monetary policies? And that’s why investors are having to brace themselves for the shorter-term volatility and those who can’t, are going into gold. Further declines in the equity market could also bolster the investment case for gold, especially given that Bitcoin’s correlation with the S&P 500 and Nasdaq Composite are at their highest levels since 2011, undermining the cryptocurrency’s supposed “hedge” quality. Nonetheless, any major move into gold may yet prove premature, especially given that soaring yields could put a cap on any prolonged upside. For now, gold may really be acting as a halfway house akin to the dollar, as investors absorb the unavoidable interim volatility.

3. Crypto's Biggest Whales Make a Splash in U.S. Real Estate Industry

• Cryptocurrency wealth generated over the pandemic has encouraged developers to cater to this growing source of buyers of luxury property

• Legions of cryptocurrency "hodlers" have many unwilling to sell their digital assets at any price, preferring instead to take loans on their holdings

As cryptocurrency wealth has soared over the past decade, some of the industry’s earliest pioneers are making waves in the luxury real estate market and developers are jumping through hoops to accept cryptocurrency for payment. Given the surge in cryptocurrency fortunes over the past year, realtors are pulling out all the stops, enticing buyers with everything from NFT parties to organizing cryptocurrency seminars for real estate agents so that they can learn the lingo of the industry. Some U.S. realtors are openly advertising that they are willing to accept crypto in exchange for homes. Cryptocurrencies may be notoriously volatile, but many who got into the industry early are true believers in the future of digital assets, unwilling to sell at any price. A recent study by the U.S. National Bureau of Economic Research found that the top 10,000 individual Bitcoin digital wallet addresses held an aggregate US$232 billion and movement of the benchmark cryptocurrency at these levels is limited, if at all. Many cryptocurrency holders (or “hodlers” to use the proper nomenclature) aren’t looking necessarily to sell their stash but may be wondering what they can do with it. Enter companies like Abra, which manages over US$1 billion in cryptocurrencies and offers loans for down payments that are backed by the borrower’s cryptocurrency holdings. Many are long Bitcoin or Ether and generally are loathe to sell their stakes because they recognize that in the long run, most who have sold have regretted doing so. Even though cryptocurrency prices have been volatile of late, even on a 3% mortgage, many cryptocurrency investors have sufficient buffers and an outlook that is far better than 3%, which would more than cover their payments, even if rates should rise. Some of the longest-term cryptocurrency investors see the current dip in prices as an opportunity to buy, gauging that short-term investors are in a sentiment of “extreme fear.” Recently, PMG became the first U.S. real estate developer to accept preconstruction condo deposits in cryptocurrency and last year the firm partnered with exchange FTX US to accept crypto as down payment for units at two of its buildings, E11EVEN Hotel and Residences, and the ultra-luxurious Waldorf Astoria Residences in Miami. Helping fuel the real estate market, crypto transactions take a fraction of the time to secure deals and operate 24/7, unlike typical transactions. If buyers want to send cryptocurrency to secure a property, they can do it any time, and not just within banking hours.