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



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

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).

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, films and music about the market 259

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

Chapter 38 Farewell 271

Update to 3rd edition 275

Recommended reading 285

Index 287