Hat tip to Marketfolly who did a nice couple of posts on the favorite reads of hedge fund Blue Ridge Capital.

Behavioral Finance

Investment Psychology Explained: Classic Strategies to Beat the Market by Martin Pring: A ‘back to basics’ book on how to beat the market.

Beyond Greed and Fear by Hersh Shefrin: A look at how bias, perception, and psychology run the stock market.

The Money Game by Adam Smith: Book hypothesizing that the stock market is just a game; explains technical analysis, fundamental analysis, psychology, and more.

Influence: The Psychology of Persuasion by Robert Cialdini: Understanding the foundation of persuasion and marketing.

The Inefficient Stock Market by Robert Haugen: ‘What works and why.’ This book looks at how the market is inefficient and argues that financial models based on economic behavior cannot explain certain aspects of (often irrational) market behavior.

Why Smart People Make Big Money Mistakes by Gilovich & Belsky: Close examination of the psychological reasons behind how and why people invest, spend, and save.

The Psychology and Judgment of Decision Making by Scott Plous: Examination of your own psychology of decision making.

How We Know What Isn’t So by Thomas Gilovich: Focuses on errors humans make when forming opinions and trying to comprehend things.

Decision Traps: 10 Barriers to Brilliant Decision Making by J. Russo: Training to become a good decision-maker (one of the most important business skills out there).

Extraordinary Popular Delusions and the Madness of Crowds by Tobias & McKay: A book discussing “the herd mentality” at its finest, where the masses collectively assemble and follow each other like lemmings.

Hare Brain, Tortoise Mind by Guy Claxton: How to handle complex situations by way of perception, problem solving, and creativity.

The Moral Animal: Why We Are the Way We Are by Robert Wright: Evolutionary psychology and human nature.

Economics

Capitalism and Freedom by Milton Friedman: A must-read by one of the most well-known economists out there.

The Lexus and the Olive Tree by Thomas Friedman: A book that deals with understanding globalization and argues that globalization (the Lexus) is “the central organizing principal of the post-cold war world.”

Economics in One Lesson by Henry Hazlitt: With an introduction by Steve Forbes, this book is a great primer on economic thinking.

Eat the Rich by PJ O’Rourke: A tour of two years worth of economic practice, focusing on good capitalism and bad capitalism, among other things.

Analytical

The Art of Short Selling by Kathryn Staley: Examples and instructions on how to find overpriced stocks and profit from their decline.

Financial Shenanigans: How to Detect Accounting Gimmicks by Howard Schilit: How to identify inflated profits, suspicious write-offs, and shifted expenses.

A Random Walk Down Wall Street by Burton Malkiel: A great investing guide covering all asset classes.

One Up On Wall Street by Peter Lynch: A classic with contributions from John Rothchild as well.

The Warren Buffett Way by Robert Hagstrom: Outline of Buffett’s tenets for investing.

Security Analysis by Graham & Dodd (also a staple on our fundamentals recommended list): Hands down THE best book on fundamental analysis and value investing principles.

Common Stock and Uncommon Profits by Philip Fisher: Investment philosophies from a widely regarded investor.

Winning the Loser’s Game: Timeless Strategies for Successful Investing by Charles Ellis: Growing with the markets, rather than fighting them: Topics ranging from compounding to fighting down-cycles.

Built to Last: Successful Habits of Visionary Companies by Collins & Porras: Evaluation of what makes companies “great” and how to spot those with solid products, a great brand, and a bright future.

Against the Gods by Peter Bernstein: Comprehensive guide to understanding risk and probability throughout history.

Biographical/Historical

The Money Masters ( & The New Money Masters) both by John Train: Covers experts on various schools of investing thought: growth, value, emerging markets, turnarounds, top-down, bottom-up, and more.

No Bull by Michael Steinhardt: Autobiography by one of the first true hedge fund managers out there. His firm survived the collapse of the 1960’s.

Soros on Soros: Staying Ahead of the Curve by George Soros: An interview with Soros (an entire book’s worth) regarding his investment philosophies and more.

Where Are the Customers’ Yachts? by Fred Schwed: Humorous and entertaining book about the hypocrisy and folly of Wall Street (sounds like our kind of book!)

The New Market Wizards & Interviews with Top Traders both by Jack Schwager (and staples on our reading list): Inside look at some of the best traders in the game, including many fund managers who we cover on the blog

Reminiscences of a Stock Operator by Edwin Lefevre (also on our previous lists): Takes you inside the mind of a trading and provides tons of trading wisdom and insight.

Classic II: Another Investor’s Anthology by Ellis & Vertin:

The Great Game by John S. Gordon: History of how New York became the world’s “preeminent financial power.”

Famous First Bubbles by Peter Garber: Explanations of the three most famous bubbles in history: Dutch Tulips, Mississippi Buble, and the South Sea Bubble.

Chainsaw: The Notorious Career of Al Dunlap by John Byrne: Documentation of the rise and fall of a man known for downsizing corporations for short-term shareholder gain.

The Essays of Warren Buffett by the Oracle himself: Lessons from Warren Buffett over the years.

Go-Go Years: Drama and Crashing Finale of Wall Street’s Bullish 60s by John Brooks: A look at the rise of growth stocks in the 1960’s that led to the ultimate fall in the 1970’s.

Baruch: My Own Story by Bernard Baruch

It’s apparent from the SEC filings of John Paulson, the billionaire hedge fund manager, that he is betting big on inflation to show its ugly head going forward.  Paulson’s latest 13-F filing shows large positions in Anglogold,Kinross gold, Gold Fields, market vectors gold ETF and the S&P gold ETF.   Just as interesting is the news that he is raising $100m for a  “real estate recovery” fund.

The blog VIX and more has an interesting chart:

It shows the ratio of the VIX Index and the VXV Index.  The author of the blog explains:

My thesis is simply this: the VIX looks out 30 days into the future and captures “event volatility” – or the volatility that is associated with events that are expected to occur in the next 30 days. These include Fed meetings, important economic data releases (employment report, consumer prices, retail sales, durable goods orders, GDP, etc.), earnings from bellwether stocks, even hurricanes, geopolitical crises and other events which can expect to cast a shadow over the course of the next 30 days.

The other half of the thesis is that the VXV (essentially a 93 day version of the VIX) always incorporates a full earnings cycle and a full economic data release cycle – so these events have very little impact on the VXV. As a result, the volatility that is relevant to the VXV is structural or systemic.

So whenever the VIX/VXV ratio is high (low), event volatility is expensive (cheap) relative to structural volatility. The chart above shows that the VIX is currently cheap relative to the VXV. So expect an upturn in the VIX going forward (and lower equity prices along the way).

As the FT reports today:

The Vix uses options pricing as a way to measure perceived market risk and uncertainty.

On Tuesday, it fell to as low as 29.12, on track for its first close below 30 since Friday September 12, just two days before Lehman Brothers filed for bankruptcy, when it closed at 25.66.

As the credit crisis took hold in late 2007 and early to mid-2008, the Vix index was typically trading in a range of around 20 to 30.

It rose sharply following the Lehman Brothers bankruptcy, reaching levels above 80 by mid-October last year.

Its move below 30 is likely to give investors another shot of confidence as a host of measures also suggest a return of, albeit cautious, optimism.

Tuesday’s 3.5 per cent fall in the Vix to an 8-month low came as the stock market shrugged off a surprisingly low number of housing starts in April, staging a muted rally after it initially seemed that the data would push the market lower.

And it also came as 3-month dollar Libor, the cost of borrowing in dollars between banks fell to 0.7525 per cent, its lowest level since the British Bankers Association began publishing Libor rates in 1986.

The TED spread, the difference between what banks and the US Treasury pay to borrow for three months, narrowed six basis points to 57 basis points, its lowest level since the credit crisis began in August 2007.

And the Libor Overnight Index Swap (OIS) spread, another measure of banks’ willingness to lend, fell three basis points to 55 basis points, the least since February last year.

So believe or not. The markets are saying: business as usual.

At the same time, the real economy looks to be in a shambles however. More bailouts needed. Mass lay-offs and the weakest economic growth figures in years decades since World War II.

Optimists will say: old news! The markets are forward looking beasts and are clearly showing the recovery is in sight.

Others are saying that we are currently experiencing a misplaced stroke of optimism. A “I knew it was wrong, but did it anyway”-rally if you like.

Time as always will tell as to who’s right. I would go with the age old saying; If it looks to good to be true….it probably is!

The latest viral (sexual) video on the internet. However this time it was made by a German financial institution: Bontrust. Nice work.

Interesting inside view on what happened at LTCM about ten years ago, by one of its principals, Eric Rosenberg.

By Krishna Guha in Washington

Published: April 27 2009 03:06 | Last updated: April 27 2009 03:06

By Ambrose Evans-Pritchard

The Telegraph, London

Sunday, April 26, 2009

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/522011…

The world is running out of capital. We cannot take it for granted that the global bond markets will prove deep enough to fund the $6 trillion or so needed for the Obama fiscal package, US-European bank bailouts, and ballooning deficits almost everywhere.

Unless this capital is forthcoming, a clutch of countries will prove unable to roll over their debts at a bearable cost. Those that cannot print money to tide them through, either because they no longer have a national currency (Ireland, Club Med), or because they borrowed abroad (east Europe), run the biggest risk of default.

Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions — not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.

Commerzbank said every European bond auction is turning into an “event risk.” Britain too finds itself some way down the AAA pecking order as it tries to sell L220 billion of Gilts this year to irascible investors, astonished by 5 percent deficits into the middle of the next decade.

US hedge fund Hayman Advisers is betting on the biggest wave of state bankruptcies and restructurings since 1934. The worst profiles are almost all in Europe — the epicentre of leverage, and denial. As the IMF said last week, Europe’s banks have written down 17 percent of their losses — American banks have swallowed half.

“We have spent a good part of six months combing through the world’s sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking,” said Hayman’s Kyle Bass.

It looked easy for Western governments during the credit bubble, when China, Russia, emerging Asia, and petro-powers were accumulating $1.3 trillion a year in reserves, recycling this wealth back into US Treasuries and agency debt, or European bonds.

The tap has been turned off. These countries have become net sellers. Central bank holdings have fallen by $248bn to $6.7 trillion over the last six months. The oil crash has forced both Russia and Venezuela to slash reserves by a third. China let slip last week that it would use more of its $40 billion monthly surplus to shore up growth at home and invest in harder assets — perhaps mining companies.

The National Institute for Economic and Social Research said last week that since UK debt topped 200 percent of GDP after the Second World War, we can comfortably manage the debt-load in this debacle (80 to 100 percent). Variants of this argument are often made for the rest of the OECD club.

But our world is nothing like the late 1940s, when large families were rearing the workforce that would master the debt. Today we face demographic retreat. West and East are both tipping into old-aged atrophy (though the US is in best shape, nota bene).

Japan’s $1.5 trillion state pension fund — the world’s biggest — dropped a bombshell this month. It will start selling holdings of Japanese state bonds this year to cover a $40 billion shortfall on its books. So how is the Ministry of Finance going to fund a sovereign debt expected to reach 200 percent of GDP by 2010 — also the world’s biggest — even assuming that Japan’s industry recovers from its 38 percent crash?

Japan is the first country to face a shrinking workforce in absolute terms, crossing the dreaded line in 2005. Its army of pensioners is dipping into the collective coffers. Japan’s savings rate has fallen from 14 percent of GDP to 2 percent since 1990. Such a fate looms for Germany, Italy, Korea, Eastern Europe, and eventually China as well.

So where is the $6 trillion going to come from this year, and beyond? For now we must fall back on the Fed, the Bank of England, and fellow central banks, relying on “quantitative easing” (printing money) to pay for our schools, roads, and administration. It is necessary, alas, to stave off debt deflation. But it is also a slippery slope, as Fed hawks keep reminding their chairman, Ben Bernanke.

Threadneedle Street may soon have to double its dose to L150 billion, increasing the Gilt load that must eventually be fed back onto the market. The longer this goes on, the bigger the headache later. The Fed is in much the same bind. One wonders if Mr Bernanke regrets saying so blithely that Washington can create unlimited dollars “at essentially no cost.”

Hayman Advisers says the default threat lies in the cocktail of spiralling public debt and the liabilities of banks — like RBS, Fortis, or Hypo Real — that are landing on sovereign ledger books.

“The crux of the problem is not sub-prime, or Alt-A mortgage loans, or this or that bank. Governments around the world allowed their banking systems to grow unchecked, in some cases growing into an untenable liability for the host country,” said Mr Bass.

A disturbing number of states look like Iceland once you dig into the entrails, and most are in Europe where liabilities average 4.2 times GDP, compared with 2 percent for the US. “There could be a cluster of defaults over the next three years, possibly sooner,” he said.

Research by former IMF chief economist Ken Rogoff and professor Carmen Reinhart found that spasms of default occur every couple of generations, each time shattering the illusions of bondholders. Half the world succumbed in the 1830s and again in the 1930s.

The G20 deal to triple the IMF’s firefighting fund to $750 billion buys time for the likes of Ukraine and Argentina. But the deeper malaise is that so many of the IMF’s backers are themselves exhausting their credit lines and cultural reserves.

Great bankruptcies change the world. Spain’s defaults under Philip II ruined the Catholic banking dynasties of Italy and south Germany, shifting the locus of financial power to Amsterdam. Anglo-Dutch forces were able to halt the Counter-Reformation, free northern Europe from absolutism, and break into North America.

Who knows what revolution may come from this crisis if it ever reaches defaults? My hunch is that it would expose Europe’s deep fatigue — brutally so — reducing the Old World to a backwater. Whether US hegemony remains intact is an open question. I would bet on US-China condominium for a quarter century, or just G2 for short.