The February Reading List

I can hardly believe two months of 2022 have already passed by, but yet here we are with another reading list due to be published. This month, I read on a remarkably wide range of topics from history of art to biographies of Presidents to finance. 

I hope you enjoy reading about what I've been reading below, and as always... please do reach out with your recommendations and suggestions! The recommendation list is piled about 30 high, but I will eventually get through them all!

Radical Uncertainty - Mervyn King & John Kay: 

Let's start this month's reading list off with the best book on finance I have read in an extremely long time - Radical Uncertainty by Mervyn King & John Kay. 

The reason why I like this book so much is that it poignantly addresses the issues with modern economic theory and introduces this notion of "radical uncertainty", the kind of idea which Donald Rumsfeld named as "Unknown Unknowns". 

Much of economic theory is based on the fact that consumers act rationally and adjust their expectations and form probabilisitic beliefs over a wide range of alternatives. This can kind of be thought of as a Bayesian pendulum which swings back and forth as new information comes to light. 

But Kay & King spend a significant portion of the book explaining why this is such a flawed notion. The development of the Personal Computer in 1920 was an unknown unknown, as was the iPhone in 2000. 

What is particularly marvellous about this book though is the way in which the economics is explained to any audience. I can easily recommend this book to a non-economics audience because it is simply so well written and replete with examples which are easy to understand. One such example the authors return to over and over again is the decision by Barack Obama to attempt to kill Bin Laden in the compound in Pakistan. 

There was no guarantee the "man and family" were Bin Laden's, but there was some degree of chance that it would be - the reality is though, nobody knew how likely it was that it was indeed Bin Laden, and Obama, certainly did not have a sample set of previous instances on which to form a probability distribution. Thus, there was the presence of radical uncertainty. 

I know I've rambled on a bit in this review, so I'll keep the others a bit shorter... but to anyone in an economics/finance background - this is a MUST READ! 

The Story of Art - E.H. Gombrich

Well, this was a book which I maybe hadn't expected to enjoy, but thanks to Ben Connole for the recommendation. Simply put, this book is magisterial and a masterpiece, yet it is also highly suitable for those who are completely new to the mystical world of art. 

Without doubt, this stands as my favourite book on the reading list this month simply because it was so purely enjoyable. I now feel able to tell apart, at the very least, different periods of art and have been extremely inclined to go out and read more. With my trusty guide, I am certain I can now serve as a more useful tour guide on museum trips with the family, and it's worth reading just for this. The best way of describing this book is as a picture book for adults, but this is what makes it so delightful to read. 

The edition linked above is an absolutely pristine and beautiful book with laminated pages to really bring the art to life. For people who are looking for a simple primer to this fantastical world, look no further. 

Twelve Caesars: Images of Power from the Ancient World to the Modern - Mary Beard

When I bought this one, I don't think I quite understood what I was buying. Nevertheless, Twelve Caesars is a highly enjoyable read which looks at how our understanding of the original 12 Caesars has been influenced in the past in no small part by a collection of fakes, rip-offs, and replicas.

In Twelve Caesars, Mary Beard takes us through the Roman Empire with looking at historical artefacts, coins and art, and illustrates how many of the "treasures" of the Roman world we are actually unable to say much more than this is a "Roman Man", whereas previously people would have been quick to say "that's [Insert Roman Emperor here]". 

For me, by far the most interesting section of the book concerned how Andrew Jackson (that controversial seventh US President), refused to be buried in what was believed to be for Roman Emperor Alexander Severus (not one of the household name emperors but nonetheless) due to his desire to not appear imperial. These connections between the ancient world and the modern were very interesting, although... I would recommend reading in short stints... there's only so many pages in a row one can read on Roman coinage :) 

The New Silk Roads - Peter Frankopan: 

First of all, I'd like to start with some criticisms of this book. In my opinion, Frankopan takes too soft of a view on China throughout the book. Pertinent issues like the treatment of Uighur Muslims in Xinjiang are basically passed over (sure... this is a more topical issue now than it was a couple of years ago), and other areas of human rights abuses seem to be neglected. 

Right, with that out of the way, the fact of the matter is that Frankopan presents a narrative which should be deeply concerning for the Western Reader. That is, we are in a pertinent decline and can never hope to rival the dominance of Asia once again where population is highest and living standards rising the fastest. 

Frankopan outlines, in considerable depth, the significant policy errors which the West has made in its approach to the East in the last decades, focusing a lot on issues like the withdrawal from the Iran nuclear deal, the Americans' attempts to woo India when it still has such close ties with Russia, and more. I found the entire book quite disturbing - particularly when reading in the midst of crisis in Ukraine which once again the West is powerless to do anything about given our total reliance on Russian commodities. 

I highly recommend this book in the current climate. It is topical and interesting and well worth your time. 

The Presidents - Iain Dale: 

For lovers of American history, this one cannot be missed. Even for those of you with limited interest in reading a biography (15-20 pages each) of every President, this book should be purchased to simply keep as a manual to hand. That way, whenever you here a comparison to some old President being made  on the news, you have a handy reference manual to see what their major achievements and failings were. 

What I particularly liked reading this cover to cover was learning about all those forgotten presidents. For instance, I did not know that the first Harrison died after contracting pneumonia for refusing to wear a coat at his inauguration - the only president to essentially die from machismo. 

Then there were the more familiar biographies of the twentieth century. Despite having studied LBJ extensively previously, I learnt a lot and significantly enjoyed George Osborne's biography of him. Nonetheless, my favourite President remains Theodore Roosevelt - The Bull Moose! The man who was shot while giving a speech and then proceeded to give the full speech for another 84 minutes, having figured it wasn't a lethal wound. 

I liked this book a lot, and it's something which can certainly help you out with any pub quizzes whenever asked about President X's VP, wife or any number of other random trivia. 

Next Month: 

Next month, I'm going to try and read as topically as possible given the current global geopolitical tension. I'm going to read Putin's People (by Catherine Belton) - attentive readers will notice that I have previously said I was going to read this before... but never wrote on it so I'm going to read again and then have it as a formal part of the reading list this month - thanks to Asaad Qureshi for the recommendation. 

Also on the list, is Roberts' biography of Churchill (standing at a whopping thousand pages), The Prime Ministers - Reflections on Leadership from Wilson to Johnson by Steve Richards, Genghis Khan and the Making of the Modern World by Jack Weatherford, and the Rise and Fall of the Great Powers by Paul Kennedy. 

All-in-all, this should serve as a good lesson in geopolitics - it can't come soon enough!

Trade Idea: SELL AUD-CAD

Hello All,

I decided to write on a couple of currencies I don't usually focus on today, and it's largely based on the rather juicy trend line below, but backed up by solid fundamental reasoning. 

SELL AUDCAD at 0.923, TP at 0.899, SL at 0.933. 

Source: cTrader FXPro 

You can see we have this quite nice downward channel and we are back up at the high points of that channel once again. It's not perfect, but I'm confident enough in it to give this trade a try, and also since it's a nice channel we can get a good risk/reward and have tight SLs to minimise losses. 

The Fundamental Backdrop: 

Obviously we are now living in an FX world driven by interest rate differentials. Canada has been one of the most interesting to watch in the central bank debate, originally one of the hawks, and now one of the doves. Meanwhile, Australia is undergoing the opposite pivot - originally having no hikes pencilled for a few years, and now quickly swapping into a much more hawkish narrative. 

The quote following the CPI release was that the BoC would be "nimble, and if necessary, forceful in using monetary policy tools to address whatever situation arises". 

On the other hand, in Australia, inflation is not quite so high, and there have been rumblings recently that the RBA is not as concerned as some may initially have expected. Wage data recently released showed an increase of just 2.5% for some sectors, and the RBA has been clear it would like to see 3% wage increases. Then when you add in the reopening of Australia's borders to internationals, this could further ease any labour market pressures. 

The chart above shows the yield differentials between AU and CA and then the AUDCAD rate. We can see a clear relationship between higher AU differentials and higher AUDCAD. What I find interesting is the rapid spike in AU-CA 10y yields, and how AUDCAD has also climbed. 

With the above monetary policy changes above I expect, this move could reverse and then we'd have another driver for lower AUDCAD. 

Central Bank Meetings: 

Always an important question is the one on timing. 

The next BoC meeting is the 2nd March. 

The next RBA meeting is the 1st March. 

If we see a much more hawkish RBA, then it will immediately be time to throw in the towel on this trade, but I don't expect this and would rather prefer to play the likelihood of more dovish talk from the RBA. Likewise, if the BoC comes out more dovish it's also time to throw in the towel. 

All-in-all, I like this sell AUDCAD idea on monetary policy divergence and that rather forceful trend channel in the first chart. Other technical indicators like RSI are also flashing overbought for the pair, and this is a relatively low risk trade where you can be flexible with stops to suit your own risk preferences. 

SELL AUDCAD at 0.923, TP at 0.899, SL at 0.933. 

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EURCHF: Start your engines

Being too far ahead of your time is indistinguishable from being right. This is much the way I feel about my EURCHF call from earlier this year. See Trade Idea: Buy EURCHF on SNB interventions, August 2020. 

If anyone followed me on this, I am extremely sorry. First of all, I was wrong - we haven't seen major SNB interventions. Secondly, it's been 6 months. Ouch. I still hold the same position I recommend then, and finally EURCHF is starting to turn around. 

This time, I continue to be long EURCHF and will recommend further adding to this position now. It's almost as if this is the moment we've been waiting for, and EURCHF is about to explode off the line in a screaming shower of tyre smoke. Sure, there are a few geopolitical tensions lingering around in the background, but are these truly likely to derail the global rates story? Not really in my opinion. To extend the racing analogy further, the Russia Ukraine story is almost like when two drivers at the back of the pack have a first corner crash, it slows the race down for a while, but then things soon get back on track. 

(Perhaps this understates the threat of a Russian invasion of Ukraine, but have a look what happened when we had Crimea). 

In Feb/Mar 2014, the CHF gained a little versus the EUR (note this chart is EURCHF), but it was hardly a monumental move!

What's driving EURCHF?

Well, at first glance it looks like yields: 

We can see that historically, there has been a clear link between EURCHF and German - CHF 2y yields. Generally, higher yield differentials lead to higher EURCHF and vice-versa. What's interesting to me though is that the last time yield differentials were this high, EURCHF was closer to 1.20. 

To me, this implies that there could be a lot further to go - I know that I'm not accounting for real rates here etc, but the magnitude of the move higher in yields relative to the move in EURCHF is surprising to me. 

Source: Reuters 

With the ECB also trying to maintain a semblance of credibility in the face of rising inflation, we even have some members talking of hikes in 2022, this can only be further beneficial for the EUR story too. While I do not personally buy into it, the first mutterings of hawkishness are likely to continue in future ECB meetings, so I continue to be bullish EURCHF. 

You might argue, doesn't the SNB need to become more hawkish too? Clearly the answer here is no! The Franc, for one, has appreciated dramatically over the last year or so which has helped keep inflation contained. The SNB's target is certainly still not being dramatically exceeded as the chart below shows. 

It seems likely then that SNB rates will remain in deeply negative territory, while markets will continue to price hawkishness for the ECB. This could lead to an absolutely fantastic carry trade for some market participants by utilising swaps markets etc. 

What's The Trade? 

I'm long EURCHF here at 1.0560, and I'm targeting 1.09 with a SL at 1.03. I think this is a fair balance of risk and a trade which could play nicely over the next couple of months. Decent upside available and can be done all the while picking up some decent carry.

Treasury Tuesday's (On Wednesday... Sorry)

Hey All, 

Treasury Tuesday's is making a return this week and yes, I know, it's Wednesday. Apologies this is a day late but I thought better late than not at all! 

This one will be fairly brief. I just want to touch on where we are now in US and European Rates, and outline my short-term views for likely action in the coming weeks. 

Where are we now? 

So in the US, there have been sone pretty startling moves higher in all tenors of bonds over a 1 month horizon. The 2y really stands out - rocketing 45bps higher in just a month! Yet, the longer maturity bonds haven't jumped quite so much - so what we have is actually significant flattening in the curve at the long-end over the lsat month. It seems then that we could actually be heading for a long-end yield curve inversion, and this is part of my thesis behind why I believe the Fed will be slower to act than the market is pricing. The Fed does not want to create the perverse incentives that long-end yield curve inversion could bring! 

The yield curve below shows that actually between 20y and 30y periods we already have an inversion. 

In Europe: 

If you thought the MoM moves in the US were dramatic, wait until you look at the Bunds above - a whopping move higher in the 10y Bund by 26bps which actually takes it above 0. 

If we look at all the negative yielding debt in Europe, there has been a tremendous decline. 

In fact, rates markets are now pricing in 2 hikes from the ECB by the end of 2022. Wait... hold up! Two hikes!! This is madness. I am one to take the other side of this bet by particularly focusing on playing the 5y and 10y. This market has definitely moved too far too fast. 

One question I had recently was on EURUSD, with the Fed hiking a lot and the ECB not, does it make sense to get short EURUSD. My answer to this is... no. The Fed hikes are fully priced in via FX markets and therefore it is my view the Fed is more likely to be more dovish than the mark expects and the ECB could still be that little bit more hawkish. 

I think a much cleaner trade for the USD is to short it against those CBs which are certainly among the most hawkish and pivoting fast. AUD and others look a bit more attractive. 

Also for this report, I had a fairly in-depth look at DXY performance versus periods of significant yield curve flattening / steepening and couldn't come up with much conclusive evidence. I will keep looking as I suspect there is something worth seeing, but the below scatter plot isn't very helpful! 

I'm going to keep digging on this flattening story as I'm sure there must be some exciting correlations I can try and find... but will keep you posted on that one. 

Please do reach out with your questions as always. Treasury Tuesday's will return in a fortnight (unless something particularly notable happens this week). 

The Equity View: Pounding the Table

At the beginning of the year, I outlined my rationale for why I expect to see a continued surge in equity markets throughout 2022. The main thesis I had was that the pricing for Fed hikes was extreme, US corporate profitability would allow for continued earnings growth, and that laggard sectors would outperform and be the drivers of continued growth in the equity market. My views, at this stage, are effectively unchanged. 

I also argued for a nuanced sector view - taking it easy on tech but being much more bullish in the financials / commodities / real asset space / value stocks. So far, we have witnessed a rapid rotation from growth into value in 2022, vindicating my sector selection approach, but the pricing for Fed hikes has just grown more and more extreme. 

Tech has underperformed

The famous market adage has been that a rising tide lifts all boats, and this has largely been the reason for stellar index returns over the last decade. In my view, the tide (from growth) may now be ebbing slightly, but fresh currents from value could help to drive returns in the year ahead. Given the drop in indices to start 2022, I am paring my SPX end-year target slightly, to 5400. But this still represents a whopping return from current levels. 

It's been quite a plunge for tech in the last 6 months or so, bit relative returns are still far higher. 

Yields: 

Many market peers have been saying that I was wrong to try and catch a falling knife (although email subscribers will know that I effectively picked the exact bottom of this YTD decline... sign up above), but my conclusion here is that this market, has for the time being bottomed. 

The major tech earnings are out of the way, and the earnings ahead for this week will further help to illustrate where we are going in the months ahead. My personal expectation is that corporate America continues to surprise to the upside. 

Source: Seeking Alpha

The yield curve has steepened dramatically, but again, this plays nicely into my sector views for owning value stocks over the technology names (although, some bargains have started to appear in META, AMZN etc). 

The above chart, I think, is interesting. It shows the QoQ change in 2y rates against the QoQ % return in SPX tech. What is interesting is that the relationship here is relatively inconsistent - sometimes, when we have big declines in short rates, we also see big declines in tech QoQ. This goes against conventional wisdom - lower rates are good for tech, but sometimes, they move in opposite. What is perhaps most clear is that after big drops in yields, tech generally does pretty well a little later. 

The other thing which is interesting to me is that extreme falls in tech are generally precipitated by extremely rapid increases - sure this is a small sample set, but I wouldn't be surprised at all if we saw a repeat of this once more in 2020. I continue to think value is the safer bet, but this is certainly something interesting and worth watching. If yields do start to roll over, the increase for tech could be rapid. 

In terms of hikes, the market is pricing some ridiculous number of hikes from the Fed for the year - see below: 

1Y rates have run riot (1y swap)

This I can almost understand... but the 10y Bund up in positive territory (and more than that, having moved about 100bps of the lows), seems frankly overdone to me. More on this will follow tomorrow in Treasury Tuesday's. I continue to believe the ECB will not be hiking this year. 

My view that the move in yields is done is key to my view that we can see equity outperformance this year - we will have a) no further yield driven declines in tech, and b) have significant enough yields to make value an attractive proposition. Of course, with yields closer to 2%, we should be more cautious in the stocks which are the big dividend payers. 

The whole move higher in yields and increasingly aggressive analyst forecasts has left me pounding the table and screaming at the talking heads on Bloomberg. 

Some now are pricing hikes for every remaining meeting of the year. And yet, we have a Fed which did not immediately taper asset purchases to 0 at the January meeting, choosing to let the program run lower as planned. This is hardly the most hawkish move which could have occurred. 

I continue to predict 2 hikes this year. Once in March, once in June, then inflation will. have cooled enough that the Fed can afford to wait and see and try and exploit any further labour gains - clearly people are heading back to work... look at the January Payrolls number for example!

This is not an economics piece, but much of the data in the US is starting to look a bit more grim and less rosy. Retail sales really stuck out to me in January as a particularly disastrous number (for the December sales), others like industrial production are also starting to show signs of an economy which is not on quite as firm as footing as the analysts might like to think. 

In contrast, the Eurozone seems poised for an explosion as remaining pandemic restrictions are removed, in my view. Further, I would not be surprised to see a full abandonment of the China Covid zero policy before long - this should end any remaining bottlenecks in the region. I'm a little cautious in this aspect, but I am starting to become a big fan of Chinese equities. I'm not outright recommending a buy - as being too early is indistinguishable from being wrong, but it does seem like some of the concerns on China regulation are starting to melt away since there hasn't been much news on this front in a while. There could be a quick 30% gain to Chinese equities if this turns out true and sentiment matures more positive. 

CONCLUSIONS: 

And that really is my wrap. Basically, I like stocks - expect SPX to continue to perform well driven by either tech sell-off which has finished and value outperformance or a rising tide which lifts all boats. Then, I like value, so Europe is a favourite increasingly along with China. 

Sector wise, financials, materials, and industrials are among the favourites but stock picking and specific selection is critical to ensure only the names with the most pricing power are chosen. 

I do not buy the Fed is going to hike 6 or 7 times this year, and instead expect only 2-3 hikes this year. This means that there could in fact be upside as these Fed expectations reprice lower. 

The January Reading List

 Hello All,

Apologies for the delay to this month's reading list... I've been away on holiday sunning myself since the end of January (gaining a bit of vitamin D-ubai for a few days) and therefore haven't had a chance to publish the reading list. 

This month was pretty varied, I read the Bourne Identity, Mastering the Market Cycle, Nixon - The Life, and Value(S) by Mark Carney. It was therefore a pretty varied month. As many of you will know, I also published in the previous month my top 5 of 2021, and Thinking Fast and Slow came top, so I also read this (as preparation for both my exams and life) so this made up the 5 books. You can read the Thinking Fast and Slow review here.

That's me outside the British Pavilion at Expo 2020. 

The Bourne Identity - Robert Ludlum: 

I'm sure many of you have seen the film "The Bourne Identity", and so had I before reading the book. While the film is actually brilliant, I much prefer the book. Ludlum goes into such a great level of detail and it's one of those perfectly constructed books where only just enough information is ever given to keep you hooked and reading. 

I like reading fiction before I go to bed, generally just a chapter or two to help myself off to sleep. However, with this one I would frequently storm through 50-100 pages in an evening, generally just because it was (sorry cliche ahead...) too good to put down. 

The book differs quite a bit from the film, but it's still very familiar and enjoyable, so go out and buy this one, I highly recommend for popular entertaining literature. 

Value(s): Climate, Credit, Covid, and How We Focus on What Matters - Mark Carney: 

OK, this was probably the most important book I read this month. Carney, with his wealth of experience across finance, takes each of the title issues in turn and explains both how finance can help and hurt these topics, and what must be done in order to ensure the best outcome for all generations. 

While this book was essential reading, I am not going to stand up and say I completely agree with every chapter and the conclusions which Carney draws. For instance, I was not particularly convinced by the chapter on "Creating a Simpler, Safer, Fairer, Financial System". Clearly, Carney has expertise here having been in central banking for the last decade, but I felt like the chapter lacked the necessary detail to actually be convincing. Many of the policy recommendations here seemed, to me at least, naive and difficult to implement. I appreciate Carney is trying to write a book for the masses, but the prescriptions here lacked detail, and a global action plan also seemed to be missing. 

In general however, this book is a seminal achievement, it has significantly altered my perception of some areas of finance particularly those related to ESG metrics, and I have learnt a huge amount about the role finance can play in the transition to greener power. Also, the topics on the financial crisis are exceptionally interesting and provide concise summaries of what went wrong. 

On the whole, this is a must read for anyone in finance / economics / interested in global warming. So really, everyone. 

Mastering the Market Cycle: Getting the odds on you side - Howard Marks

This book from legendary investor Howard Marks provides a very concise overview of cycle psychology throughout various aspects of financial markets. 

While it may appear a little simple, and state a number of obvious truisms, to anyone with any experience of investing, it is very well worth reminding yourselves of the role of psychology in financial markets. While everyone knows they should "Buy Low and Sell High", nearly always, people do the exact opposite as soon as fear turns to greed, and greed to fear. 

Marks takes us through a number of the recent cycles and what were the key drivers and also looks at various cycles in other sectors than just equities/credit by looking at housing and the economic cycle. 

Marks' investment philosophy has been one I have tried to follow myself implicitly, without the direct influence of reading the book, so it was reassuring to see that my approach closely mirrored that of Marks. Nonetheless, for anyone trying to start investing, I would mark this as essential reading. 

Richard Nixon: The Life - John Farrell

Ah Nixon... one of those presidents who is always one to inspire controversy, relatively successful in a number of key areas of policy, but mired by scandal throughout his tenure. 

Writing a book on this President is, therefore, exceptionally difficult - given you need to appear unbiased to have any kind of authority. In this respect, Farrell is extremely successful. We do often sympathise with Nixon throughout the book, and find that he is often unfairly treated, and did stand up for Civil Rights in his years as vice president, and was an advocate for many policies which advanced the cause of minorities, yet we cannot forgive him for the extension of the Vietnam War despite his knowing of its un-winnability. 

This is, probably, the best Nixon biography available. It is concise, and yet detailed and precise. It is a simple one volume (worth about 550 pages) and intimately details the life of the President. The biography is unsparing, and I cannot recommend it enough to anyone who wants to learn more about one of America's most controversial Presidents. 

So that concludes the January Reading List and actually marks the 12th reading list I've written! Onto the next year of reading lists. 

Next Month, I'll be Reading The Presidents by Iain Dale, The New Silk Roads by Peter Frankopan, Radical Uncertainty by Mervyn King, Twelve Caesars by Mary Beard, and some fiction... which I haven't yet decided on (recommendations requested :) ).