Life in the Financial Markets

An accessible and thorough review of the international financial markets

Life in the Financial Markets—How They Really Work And Why They Matter To You offers the financial services professional, and anyone interested in knowing more about the profession, an entertaining and comprehensive analysis of the financial markets and the financial services industry. Written by Daniel Lacalle—a noted portfolio manager with EcoFin and well-known media personality—the book goes beyond a simple summary and offers solid advice on the future of the global financial markets. This great resource also includes a review of effective strategies and forecasts the trends that represent potential opportunities for investors.

The book reviews the recent history of the financial crisis and includes information on hot topics such as derivatives and high frequency trading. An in-depth section on investment banking is written from the perspective of a successful practitioner and provides clarity on several complex and overly politicized elements of the banking system. The author gives an expert's perspective on the debt markets, monetary policies, and quantitative easing, and helps explain the various issues surrounding sovereign debt, the Euro crisis, and austerity versus growth policies. Comprehensive in scope, this resource also offers an analysis of investment styles, from hedge funds to "long only" investments, as well as an in-depth look at corporate communication and its impact on markets and investments.

• Offers an engaging and comprehensive analysis of the financial services industry
• Includes information on the workings of the global financial system following the economic crisis
• Contains a review of complex banking systems

Analyzes the various investment styles and answers the most common questions pertaining to investing

Preface xi

Acknowledgements xiii

Part I The financial markets: Who they are, what they are, how they work 1

Chapter 1 “Thinking against the box” 3

Chapter 2 The financial market: Complex and volatile 9

Chapter 3 Welcome to London 25

Chapter 4 The market doesn’t attack, it defends itself 37

Chapter 5 The Lehman crisis and the change in mentality: Habits and customs 43

Chapter 6 Traders, “robots” and speculators 55

Part II The debt crisis and the great lie of free money 71

Chapter 7 The debt market 73

Chapter 8 Welcome, investors! 83

Chapter 9 The European and sovereign debt crises 85

Chapter 10 Credit-rating agencies 95

Chapter 11 When the problem only seemed to be Greece 99

Chapter 12 Why was the break-up of the euro feared? 105

Chapter 13 Evil speculators: Someone else is to blame 111

Chapter 14 Snowballing debt 115

Chapter 15 The damned risk premium 119

Chapter 16 Derivatives: Weapons of mass destruction? 125

Chapter 17 The illusion of easy money: The investment banks and the great deception 131

Chapter 18 Stimulus policies and kicking the can down the road 137

Chapter 19 Lies and mistakes of the debt crisis 147

Chapter 20 Economic liberty and austerity 165

Part III Hedge funds and the stock market 173

Chapter 21 Hedge funds: The bad guys of the economic crisis? 175

Chapter 22 Active management 181

Chapter 23 Critics and reality 185

Chapter 24 Strategies 187

Chapter 25 Building portfolios 193

Chapter 26 Closeness makes the heart grow fonder: How to identify investment opportunities 197

Chapter 27 Short positions in a portfolio 203

Chapter 28 Banning short selling and the Tobin tax 207

Chapter 29 Recommendations 211

Chapter 30 The long-term illusion… and the opportunity of value investing 223

Chapter 31 A strange case: Companies with politicians 231

Chapter 32 Communication with the market and attractiveness to investors 239

Chapter 33 Why invest in a hedge fund? 245

Chapter 34 Ten golden rules for investing 249

Chapter 35 “Warning” phrases and comments 253

Chapter 36 Books and films about the market 259

Chapter 37 A day in the life of an investment fund 263

Chapter 38 Farewell 271

Euro-crisis and “exceptions” 275

Recommended reading 285

Index 287

DANIEL LACALLE is an economist, fund manager and certified financial analyst overseeing equities, bonds and commodities. He holds a postgraduate degree in IESE and a master's degree in economy investigation. Mr Lacalle was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters' Extel Survey in 2011, the leading survey among companies and financial institutions. Author of two best-selling books Nosotros los Mercados and Viaje a la Libertad Económica, now in its fifth and third edition respectively, as well as The Energy World Is Flat (Wiley, 2015, with Diego Parrilla).

Most of the economic news that reaches market participants is reactive: it only explains what has happened. What's more, this information is belated, filtered, often massaged and sometimes tainted by politics and social relations. In times of crisis "speculators" all too often take the blame for economic downturns both in the media and in political discourse.

Life in the Financial Markets offers financial services professionals, as well as anyone interested in the topic, an accessible and provocative guide to the functioning of the financial system. Written by Daniel Lacalle—a senior portfolio manager and contributor to the Wall Street Journal and CNBC—Life in the Financial Markets passionately defends the honesty, seriousness and above all the essential and irreplaceable role that financial operators play in today's economy. Lacalle also includes a diagnosis of the economic crisis, that may be considered by some as controversial, but which offers a hopeful and honest way out of our current problems.

Lacalle explores the recent history of the market and the financial crisis and touches on hot topics such as derivatives, high frequency trading, and investment banking. Viewed from the perspective of a successful practitioner, Lacalle provides clarity on some complex and very politicised elements of the banking system including the debt market, monetary policies, and quantitative easing. In accessible terms, Life in the Financial Markets explains the impact of, as well as the different issues surrounding, sovereign debt, the European crisis, and austerity versus growth policies.

Based on his experience, Daniel Lacalle lambasts some of the myths surrounding the activity of hedge funds and financial operators, offers his take on the causes of the current crisis and includes ways to resolve them. Among other controversial ideas, Life in the Financial Markets argues persuasively that traders do not act outside the law; access to the investor's pocket is not anyone's right, not even that of a government; liquidity alone is not enough to tackle the current crisis; consensus assessment poses a danger to the investor; and the currency markets always impose the fundamentals.

This important resource provides ideas and recommendations for negotiating the financial sectors and offers suggestions to investors for making their own investment decisions.

Most of the economic news that reaches market participants is reactive: it only explains what has happened. What's more, this information is belated, filtered, often massaged and sometimes tainted by politics and social relations. In times of crisis "speculators" all too often take the blame for economic downturns both in the media and in political discourse.

Life in the Financial Markets offers financial services professionals, as well as anyone interested in the topic, an accessible and provocative guide to the functioning of the financial system. Written by Daniel Lacalle—a senior portfolio manager and contributor to the Wall Street Journal and CNBC—Life in the Financial Markets passionately defends the honesty, seriousness and above all the essential and irreplaceable role that financial operators play in today's economy. Lacalle also includes a diagnosis of the economic crisis, that may be considered by some as controversial, but which offers a hopeful and honest way out of our current problems.

Lacalle explores the recent history of the market and the financial crisis and touches on hot topics such as derivatives, high frequency trading, and investment banking. Viewed from the perspective of a successful practitioner, Lacalle provides clarity on some complex and very politicised elements of the banking system including the debt market, monetary policies, and quantitative easing. In accessible terms, Life in the Financial Markets explains the impact of, as well as the different issues surrounding, sovereign debt, the European crisis, and austerity versus growth policies.

Based on his experience, Daniel Lacalle lambasts some of the myths surrounding the activity of hedge funds and financial operators, offers his take on the causes of the current crisis and includes ways to resolve them. Among other controversial ideas, Life in the Financial Markets argues persuasively that traders do not act outside the law; access to the investor's pocket is not anyone's right, not even that of a government; liquidity alone is not enough to tackle the current crisis; consensus assessment poses a danger to the investor; and the currency markets always impose the fundamentals.

This important resource provides ideas and recommendations for negotiating the financial sectors and offers suggestions to investors for making their own investment decisions.