Life in the Financial Markets: How They Really Work And Why They Matter To You

PRAISE FOR LIFE IN THE FINANCIAL MARKETS This work, originally published in Spanish, has been translated by Mark Lodge. "Refreshing and transcending, all at once. In a world loaded with theoretical market opinions, we finally get a view from a credible market practitioner. Lacalle gets it because he does it, every day." —Keith R. McCullough, Chief Executive Officer, Hedgeye Risk Management "Accessible and easy to read, but also thorough and rigorous. This book will be an excellent read for anyone wanting to understand financial markets, monetary policies and investing." —Lex Van Dam, Trader/Partner, Hamstead Capital "Lacalle has used his first-hand experiences to give a dose of reality and demystify the markets and the hedge fund industry. He cuts through the jargon and has given insight into how the markets and the real-world economy interlink. Lacalle shows us that the key ingredients that led to the last financial crisis, ie huge debt levels, are still with us now and could set the scene for the next one." —Steve Sedgwick, Host, Squawk Box CNBC "Intimate, insightful, inspiring. Daniel Lacalle, a top commentator and fund manager, explains in layman's terms how financial markets actually work by adding his unique personal perspective. A page-turner." —Francisco Blanch, Managing Director/Head of Commodity Research, Bank of America-Merrill Lynch

P reface 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, films and music about the market 259 Chapter 37 A day in the life of an investment fund 263 Chapter 38 Farewell 271 U p date to 3 rd edition 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).