Hello there,

A wonderful weekend to you as markets are as mixed and muddled as ever and investors drifting rudderless from one datapoint to the next.

In brief (TL:DR)

• U.S. stocks closed mostly flat on Friday with the Dow Jones Industrial Average (+0.03%) and S&P 500 (+0.01%) up marginally at the close while the Nasdaq Composite (-0.30%) was down.

• Asian stocks pushed higher Friday, shrugging off modest losses on Wall Street Thursday driven in large part by Chinese measures.

• Benchmark U.S. 10-year Treasury slipped to 2.79% (yields fall when bond prices rise) as appetite for bonds firmed up.

• The dollar trimmed its biggest one-day drop since 2020.

• Oil firmed with June 2022 contracts for WTI Crude Oil (Nymex) (+0.35%) at US$110.28.

• Gold was flat with June 2022 contracts for Gold (Comex) (+0.03%) at US$1,848.40.

• Bitcoin (+0.16%) rose to US$29,311 (at the midpoint of the weekend) with neither bulls nor bears taking control of the cryptocurrency at the moment - key bullish resistance sits at US$30,500, which Bitcoin has failed to retake, while bears need to see Bitcoin collapse below US$28,400.

In today's issue...

1. Inflation Wipes Out an Entire Gen Z's Aspirations

2. Nobody Knows Where the Market Goes

3. Burned by LUNA, Novogratz Warns Against Calling Bottom for Bitcoin

Market Overview

U.S. markets closed Friday just as confused as they started Monday, with key indices ending more or less unchanged but sharply down for the week as a last minute bout of buying activity narrowly prevented entry into a bear market.

The Dow Jones Industrial Average and S&P 500 eked out a miniscule gain as an 11th hour flurry of buying saved markets from oblivion, while the tech-heavy Nasdaq Composite still rubbed out a small loss.

Investors are having to contend with an investing environment that is more complicated than ever, with a seemingly endless flow of start-stop information that could push sentiment in either direction.

Asian markets closed higher Friday on the prospect of stronger stimulus from China with Tokyo's Nikkei 225 (+1.27%), Sydney’s ASX 200 (+1.15%), Seoul's Kospi Index (+1.81%) and Hong Kong's Hang Seng Index (+2.96%) all higher into the weekend.

1. Inflation Wipes Out an Entire Gen Z's Aspirations

• Gen Z entering the work force facing higher living costs and real estate prices with fewer options and thin asset balance sheets.

• Effects of inflation and elevated real estate prices could affect long-term consumption patters for Gen Z as they delay marriage and buying a first home - with demographic shifts that could affect specific sectors more heavily than others (e.g. childcare providers).

How you fair in life often has as much to do with when you started, as it does where you started.

And for Gen Z, those born between 1981 and 1996 and are just coming into their earning years, inflation is pushing their economic lives backwards, while their forebears enjoy rising asset prices.

Just as they’re graduating from college, moving out on their own and starting their first jobs, Gen Z is being hammered with soaring real estate prices and a cost of living that is surging at the fastest pace in four decades.

It’s no wonder then that Gen Z have taken to investing in everything that their seniors would be hesitant to touch – from cryptocurrencies to meme stocks – in the hopes of gaining a leg up.

Unlike Millennials, Gen X and Baby Boomers, Gen Z don’t necessarily own the assets that will help their personal balance sheets keep pace with inflation.

More Gen Z are staying with their parents or delaying marriage and consumption and purchasing power is also significantly lower than their parents’ generation.

Around 34% of Americans aged between 18 to 29 are also holding student loans, according to the Education Data Initiative, at a time when borrowing costs are expected to rise.

Making matters worse, what little stocks that Gen Z may have purchased in the pandemic-era pump in asset prices are likely all underwater now, possibly delaying the use of those assets that could have gone towards buying a first property or getting married.

Timing is everything –those who put money in the S&P 500 at its pandemic depths, would still be up by around 80%, but those who invested at the start of this year, would be staring at paper losses of 18.7%.

Financial advisors suggest that although the drop in stocks this year has come as a surprise and inflation is squeezing budgets, the pain is likely temporary.

The U.S. Federal Reserve seems to believe that price pressures should plateau towards the end of this year, as supply chains become smoothed and with the Russian invasion of Ukraine likely to wind down.

China is also expected to eventually overcome its zero-Covid policies, and its factories and ports should be pumping out products again for consumers everywhere.

But that rosy scenario could also be overly optimistic.

For starters, even if Russia’s conflict with Ukraine degenerates into a long-drawn out skirmish that is confined to the country’s Donbas region, major Ukrainian ports remain out of reach, and it will take time for its battered agricultural sector to heal and export again.

More economists are also predicting stagflation, a period of slow growth and high inflation, which will make the experience of Gen Z even more challenging.

And worst still, austerity for Gen Z could affect long-term consumption patterns, especially at this generation eventually enters into its peak earning years over the next few decades.

2. Nobody Knows Where the Market Goes

• Wall Street more divided than ever on the outlook for stocks.

• Simply too many variables for accurate prediction on central bank policy, inflation, invasion and the effect of China's zero-Covid policy.

When your car breaks down, you see a mechanic. When you fall ill, you see a doctor.

For all that makes modern life bearable, there’s usually some expert out there who knows how to fix it.

But what about when your portfolio gets hammered?

Wall Street is more divided than ever on where equities could go next, with seven straight weeks of losses for American stocks narrowly avoiding a bear market and wild swings in either direction making it hard to say what happens next.

On the one hand, the U.S. Federal Reserve is looking to tighten monetary policy, which all other things being equal, would signal investors to sell, especially where valuations have gotten stretched.

But on the other hand, the Russian invasion of Ukraine, snarled supply chains, soaring inflation and a strong correlation in performance between stocks and bonds, has made it difficult to find safe places for money.

Stocks have historically outperformed inflation, but valuations are stretched at a time when the Fed is looking to raise borrowing costs.

Bonds are falling and yields are soaring as interest rates look set to keep rising and inflation will also eat at the attractiveness of bonds regardless.

Real estate looks dicey given how mortgages become more expensive at a time when fewer tenants will be able to stomach higher rental costs.

Against this backdrop, it’s no wonder that the gap between the highest and lowest projections for the S&P 500 this year is around 37% - the highest over the past decade save for one other time – March 2020, at the height of pandemic panic.

To demonstrate how difficult things are to predict – Cathie Wood’s flagship ARKK Innovation ETF, which invests heavily in technology and disruptive companies, swung wildly between gains and losses for five straight days last week.

But value stock investors weren’t spared either, with consumer staple stalwarts like Walmart, plunging more than 8% this week and undermining the industry’s reputation as a haven during market turmoil.

Depending on which timeline investors pick to be on, this could be either the beginning of the end, or the end of the beginning.

In March 2009, bears who believed that the global economy had more to fall before righting itself, would have missed out on the prolonged bull market that’s lasted to this day.

And the Fed has previously increased interest rates in 1994, while still successfully avoiding a recession.

But, these are dramatically different times.

For starters, the Fed isn’t just raising borrowing costs, it’s running off its balance sheet and won’t be there to buy more U.S. Treasuries.

Inflation was nowhere near as high as it was in 2009 and 1994, compared to where it is today.

And finally, the Fed wasn’t having to deal with a multitude of variables to meet its policy objectives in the past, it could deal with one problem at a time, many of which were within its control.

China’s Covid-zero policies and the ongoing Russian invasion of Ukraine are not really things within the Fed’s control – raising rates won’t suddenly free up Ukraine’s wheat for export or lift lockdowns in Chinese cities and factories.

Which is what makes the job of forecasting all the more difficult and why investors may need to sit tight for clearer signals before making the next move.

3. Burned by LUNA, Novogratz Warns Against Calling Bottom for Bitcoin

• Billionaire hedge fund manager Mike Novogratz cautions investors for calling a bottom to cryptocurrencies and to scale down carefully.

• Cryptocurrency markets are more intertwined than ever with financial markets, making it impossible to ignore macro considerations. Asset class has also never lived through a recession or policy tightening.

Months before TerraUSD and its associated LUNA token imploded, billionaire hedge fund manager and CEO of Galaxy Digital Holdings, Mike Novogratz had a LUNA-inspired tattoo emblazoned on his upper arm, which he proudly broadcast over Twitter.

Today, Novogratz, who was a self-declared “Lunatic” (someone who supports the LUNA token) will have a painful and somewhat public reminder of the rough and tumble world of cryptocurrencies, that remains exceedingly unpredictable.

But even with the cryptocurrency markets reeling from the fallout of the collapse of TerraUSD and LUNA, Novogratz is warning that it’s too soon to call a bottom.

Noticeably silent after the collapse of TerraUSD, Novogratz this week came out to publicly concede that LUNA was an ambitious project that had failed.

Perhaps burned from that experience, Novogratz is now warning that even though altcoins are down 80% from their all-time-highs, should their losses accelerate to the same degree that they did in 2018, these tokens could stand to lose a further 70%.

Going on Twitter, Novogratz warned that “picking bottoms is dangerous,” advising traders to “scale in slowly.”

With financial markets facing a mass of macro headwinds, cryptocurrencies have slid alongside tech stocks, an asset class that it continues to share a strong correlation with, but the collapse of TerraUSD and LUNA plummeting to zero, have made matters worse.

Stalwart cryptocurrencies like Bitcoin and Ether are now down by over half from their peak last November, while mainstay cryptocurrencies like XRP and Solana have lost around 70%.

Meme cryptocurrencies like Dogecoin and Shiba Inu have pushed losses closing in on 80%.

NFTs or non-fungible token sales, once the hot new sector in cryptocurrencies, have seen trading volumes plunge, along with prices.

To be sure, the cryptocurrency world has seen conditions just like this before, only to rise up from those ashes in a spectacular way.

Nevertheless, Fed tightening and the selloff in stocks and bonds has seen cryptocurrencies slide alongside the broader market.

Somewhat surprisingly though, some investors at least are using this opportunity to “buy the dip.”

Last week, some US$255 million flowed into Bitcoin-centric products, and spot volumes remain elevated, a sign that seller fatigue may soon be setting in.

But assessing the cryptocurrency market in isolation is dangerous.

Unlike in 2018, the cryptocurrency crash was mainly isolated and affecting those involved in the industry, but since then, the sector has grown substantially and there are worries of contagion risk from the failure of a systemically important stablecoin such as Tether.

Investors looking at charts and the past are also hamstrung because back then, cryptocurrencies just weren’t as big an asset class as they are today and the sector has never had to live through a recession or tighter monetary policy.

In 2009, Bitcoin was created in response to the profligate money-printing by central banks in response to the financial crisis, but what happens when policymakers turn off the tap and reverse course?