Читать книгу Life in the Financial Markets - Lacalle Daniel - Страница 8

I should say the reason I doubted that Spain's boom would be long-lived was because I had witnessed the Argentine crisis of 1999 to 2001, after which my children were born. Yes, triplets after a crisis that almost swept away the company for which I had spent a decade working. For some reason, my sense of caution and perception of the risk were dramatically affected. That shock led us from being praised for strategic transactions of international envy to searching for ways of securing liquidity on a daily basis. These experiences are never forgotten.

Before the crisis – which produced the massive devaluation of the Argentine peso – we were on cloud nine. After it, the successes, the bonanza, the euphoria, the feeling that “everything is going well” vanished and we had to deal with the basic problem of survival. This situation had such an impact on the company that a number of investment banks began to cast doubt on the group's future. Experiencing the Latin American crisis and learning from the corporate managers who saved the company from disaster helped me focus on what is really important when analysing a security, bond or country.

We love vague expressions such as “The company is a global leader”, “It's always been like this” and “Everything will turn out all right in the end”, and we forget the figures. What really counts is the cash, the balance sheet, the debt, the working capital. Liquidity and solvency. However, just three years after the Latin American shock, few seemed to remember those indicators. Business schools frequently discuss concepts like “increasing debt to lower the cost of capital” or “creating value by leveraging an asset”. These ideas are correct to a degree, but cease to be so if one forgets the debt saturation threshold, that is the moment when an additional unit of indebtedness does not generate positive marginal returns but negative ones.

And we forget. In 2014, barely six years after the biggest financial crisis since 1929, we are back to complacency and are forgetting debt and solvency ratios.

In England, they say: “Hope for the best, but prepare for the worst.” I had the impression that Spain had bypassed all security checks, and that all the lessons learnt from previous economic crises had been forgotten. All the Spanish autonomous communities acquired the right to more debt, an airport, a high-speed rail link. They all had to have the same economic model for growth, the same limitless resources. The same happened in Greece, Portugal, Italy and Ireland. Debt created the illusion of wealth. The US Federal Reserve announced the tapering, or partial withdrawal, of monetary stimulus in 2015, after almost two trillion dollars had been spent. However, despite a low 6.3 % unemployment rate, the US showed the lowest labour participation rate since 1978 and 11 million people taken out of the labour market and not counted as unemployed.

What is the problem? Monetary policy has not benefited the ordinary citizen, only financial market participants. But the risks are paid by the citizens. Easy money has inflated financial assets, and the cost of reducing unnecessary expansionary policies was met by heaping massive financial burdens on ordinary taxpayers.

The middle class lost in the crisis, but had almost no access to the easy money of the quantitative easing (QE) years and will likely pay the hangover when this new credit bubble bursts.

In those years between 2005 and 2008 few spoke of the housing bubble, and fewer still of the infrastructure bubble that went hand in hand with those ever-growing demand estimates: an excess in infrastructures that I discussed in my articles in the press. No one asked where the money would come from, let alone how it would be returned.

The sensible managers, those who warned of this wasteful spending spree, were removed from their posts for being party poopers. I was fortunate to learn and grow professionally alongside some of these prudent managers, with experience of how to deal with cycles and crises. So, like them, that optimism paid for with debt made me shudder.

The fact is that in 2008 we returned to the same pre-Argentina euphoria and I began to get the jitters. I had been making plans for a big change that I had spent years mulling over since I began to work in the investor relations office. I spent eight years doing this in the two companies I mentioned. My duties consisted of coordinating the company's communications and reporting and attending to the share and bond investors on a daily basis. This experience opened my eyes to the reality of the financial sector and the different operators working in it, from the investment banks to the ratings agencies, debt and equity investors, the competing companies and the different sectors. Above all, it gave me the opportunity to better grasp something that most people do not perceive: the true nature of the markets. How they think, what they seek, what their concerns are.

One of the first lessons of my experience was to understand the nature of the economic information that we receive. Most of the information that reaches market participants is reactive: it only explains what has happened. What's more, such information is belated, filtered, often massaged and sometimes tainted by politics and social relations.

It's no coincidence it's called “the market”.

The big question I'm often asked is “Who or what really are ‘the financial markets’?” The best definition I have ever found was given to me by my good friend Marc Garrigasait, a fund manager at Koala Capital. It is this: “Your mother's savings.” More precisely, the financial markets are the savings of the entire world's fathers and mothers, although the savings with the most sway belong to the fathers and mothers from countries that have the most assets and can loan them to, or invest them in, other countries. The pension funds, which are charged with ensuring that a lifetime's savings are not lost, invest the money they hold via the “financial markets” in bonds, stocks, commodities and currencies as core assets. The managers of these huge pension funds must ensure they get a reasonable annual return so that when families retire they receive the highest amount possible. So if they fear that the money loaned to (bonds), or invested (shares or stocks) in, a country or specific company may be lost, they immediately withdraw it and invest in or loan to another country or business that conveys more confidence and greater seriousness. Another part of the market are countries that hold vast sums of money as a result of their surpluses, such as China, India, Brazil, Russia or Norway, which invest astronomic sums in bonds and shares from the leading Western countries.

My son Daniel, upon learning that his grandmother was about to publish her first book, coined the slogan “Make my grandma happy: buy her novel.” This simple expression allowed me to fathom the soul of the market. It's a selling process and there are two parts to this business: the supplier and the customer. The seller appeals to our emotional instinct to win clients. Make my grandmother happy. Buy government bonds for the good of the country. Buy shares in company X for their contribution to society.

Companies, governments, investment banks and analysts are all sellers in this market. They sell their product to the buyers, that is investors and ordinary people, who are themselves consumers of the “goods” that these entities sell. It's very important to understand this, because failure to understand the selling nature of some agents can lead us to misinterpret or overestimate the information we receive.

In a shopping centre with many different displays, intermediaries and end customers, the seller always strives to showcase the best qualities of their product. The seller is optimistic and tends to offer us a positive outlook. Similarly, and though today we don't perceive it as such, the market functions according to positive impulses. It's something that stems from human nature itself, which needs both to believe in the long term in order to survive and to feel optimistic and receive encouraging news, even in the face of adverse events.

Therefore, the market, rather than trying to deceive, appeals to human nature's yearning for growth and betterment. So sellers put on their best face for their product, as people do for family snapshots where they always look happy, or in advertising, which always displays an attractive image. They are like the father who thinks his child is the brightest and the one who will go furthest in the world.

Between the sellers and buyers, there are a number of agents or intermediaries who facilitate financial trading operations. First, there are the brokers, agents who are charged with finding a counterparty for their clients. These agents are mere intermediaries who just match buy and sell orders and take a commission on both transactions. Brokers may be small firms or big banks. Then there are the dealers, or negotiators, who have a more active role in the process. These agents trade with their clients, that is they buy and sell securities. What they've bought from or sold to one client they can then sell to or buy from another. Brokers offer their clients liquidity, and run the risk that prices move against them before they are able to pass on their products.

Many of these intermediaries are concentrated in investment banks – the main ones being Goldman Sachs, JPMorgan, Bank of America, Merrill Lynch and Citigroup, yet they also operate in traditional banks like Santander, Barclays and HSBC. These banks also offer fixed income and equity analysis, economic studies and corporate assistance services to companies who want access to the markets in order to be able to issue shares and debt.

Inside this machinery, the banks act like oil for the engine. They are essential to ensure the financial system's smooth running. We forget about them when everything is going well, because we take for granted the liquidity and the instant access to financial transactions we enjoy. When a client decides to sell or buy, they never doubt they will find a counterparty. It is taken for granted.

Banks actually do a very difficult job. They put together the savings and deposits of participants with short- to medium-term liquidity needs and return expectations with the demand for credit from participants with longer-term requirements.

We forget the basic importance of the banks as intermediaries because we assume that liquidity is guaranteed and that it will always exist. We only remember the banks for the problems they cause, which of course must be recognised and solved. And we forget that the banking system is the most regulated of sectors.

Yes, the European financial crisis is not a crisis of deregulation or private banks; 50 % of European financial institutions were semi state-owned or controlled by politicians in 2006. There have been thousands of pages of regulations published every year since the creation of the European Union and the European Banking Authority (EBA). Regulation and supervision in Europe is enormous. Since 1999 and based on documents produced by the EBA, EU and European Central Bank (ECB), that's 180 new rules a week.

And as I will come on to argue, the crisis was born of an economic model too dependent on commercial banks with total assets that exceeded 320 % of the eurozone's combined gross domestic product (GDP) within a deeply integrated system. Excessive, complex and bureaucratic regulation has prolonged the agony of the industry for many years, instead of facilitating market conditions for the capital increases and asset sales needed.

Despite the detailed and complex regulation of the eurozone, between 2008 and 2011 Europe spent €4.5 trillion (37 % of the GDP of the EU) in aid to financial institutions, many of them public and highly regulated.

More regulation will not solve the problem.

Europe's banks suffer what is called an “endogeneity problem” (read the excellent analysis Regulation of European Banks and Business Models published by the Centre for European Policy Studies). It is precisely this excessive intervention which prevents a quick and surgical solution to the financial sector's difficulties. Regulation must be effective and simple. In Europe, it is not.

Banks play an essential role in a market driven by the perception of growth and prosperity.

The market simply reflects that human nature of which we spoke earlier, regardless of whether we see things from the point of view of the sellers or intermediaries. So I find it hilarious when people speak of “attacks” by the market. More than 67 % of the funds under management are exclusively “long-only”, so they only enter the market as buyers. And in hedge funds, which we will analyse later, the average net long exposure (bullish) rarely goes below 30 % of total funds.

Just as governments, companies and investment banks play the role of sellers and intermediaries, so do investors play the role of customers. And as such, they can make a mistake when choosing a product. So they also take on certain levels of risk. And as clients, they have every right to expect a lot from what they buy. When we forget that the market is a triangular seller–product–client relationship, and assume that we are within our rights to expect to find a seller for poor-quality products, the chain of value and confidence begins to break.

Understanding that the seller–client relationship in the financial markets is identical to that of any other business activity has been invaluable for me to carrying out the transition from the business world to banking and investment management. Be your product a sovereign bond or a company share, it's absolutely imperative to understand and evaluate the needs of your clients and to strive to offer competitive, quality goods and then attract clients and capital, and not wait for it to rain down from heaven.

What was it that fascinated me about those investors who came to see our company? In the meetings with the senior management, they were not afraid to pose awkward questions and to turn balance sheets, ideas, forecasts, past performances and the like on their heads. At first I wondered: “How dare they speak so frankly and so directly to our chairman, CEO, CFO, who within the company and the country are treated almost like royalty?” But these were our clients, current or prospective. They had every right to do so, and were only expressing their concerns. They wanted to analyse and understand what could happen, not what had already happened.

An investor is your client. He is not doing you a favour or making a donation. He is taking a risk: investing his money and seeking to maximise the possibilities of obtaining a profit with respect to the risk he takes. And our product is one of thousands from which he can choose on the world market. Not only must we outshine the others in image and in current figures; we must lend credibility to our “proud father” expectations that our product will grow into something strong and healthy.

I remember a meeting with a leading international investor. His biggest worry was not “How much will I make?” but “How much do I stand to lose?”

It was during this learning curve that I realised that in continental Europe the concept of open and transparent communication was still rather rudimentary. This was perhaps due to the existence of majority shareholders and the generalised absence of mutual interests between actors on the buy-side (above all, companies) and clients (minority shareholders). The protectionist environment had not changed.

This experience led me to seek an opportunity to change my career and attempt to go over to the investor side: to become a client, a risk-taker. I also considered my career and my professional profile. I had spent the last 12 years at two companies and felt the need to branch out, add experiences and gain knowledge that could lead me to positions where I might improve my independence and, naturally, earn more money.

The opportunity to put this decision into action came from the market.

After three months of fruitless searches, I was contacted by a head-hunter to discuss the possibility of leaving Spain in order to work as an analyst in a London investment bank, in the City.

It was an opportunity worth considering. To gain a foothold in the financial markets, in particular in the City, is incredibly difficult. If you're given the possibility to get into that environment, you should think seriously about the answer you will give. To let that train pass by could have closed up a direct avenue to securing my long-term goal.

During the interview with the head-hunter, he asked me where I saw myself five years from now, and I replied, “Working in a hedge fund.” The head-hunter looked at me in amazement. He told me it was a very ambitious and terribly difficult goal. Not only that, he warned me that more than half the hedge fund managers are fired every two years. “Be careful what you wish for”, he said.

The decision was not easy. From my secure position as a director at a good company, with little risk and a stable environment, I was to become an analyst, which meant taking a step down the hierarchical ladder and moving into an extremely competitive sector, fraught with risk and with much of my salary dependent on bonuses for meeting targets.

I would be taking one step back in order to take three steps forward in the medium term. It was a risky decision, but one that would allow me to be what I wanted to be: an investor (and, of course, enjoy the remuneration that came with it). My decision process was undeniably influenced by this over-arching personal ambition.

If you want to get into the financial world, you have to like money and you have to want to earn lots of it. If your aims are to “broaden my experience”, “meet people” and “study other sectors in detail”, there are thousands of jobs out there. You must know why you are there and what other people are there for. All of them. I was not going to work for an NGO or for an engineering firm. I was about to enter the “money-making market”.

I recall the conversation with my family when I announced that, at my age (late thirties), with three newborn babies (triplets), I was renouncing a cushy, secure, well-paid executive position in the corporate world, the dream of any son's mother, in order to try my luck in London. Of course, everyone I knew told me it was a mistake, that it was risky, that I should not give up a certain quantity for the great unknown… the usual clichés.

In the book The New Market Wizards: Conversations with America's Top Traders, by Jack D. Schwager, all the participants agree that to be successful one needs to have a magnificent relationship with, and the support of, one's partner. My own experience supported this finding. My wife and I had to have a common goal and a clear objective and to be willing to take risks, even be separated for a time, if I was to be ultimately successful with my career change.

At that time everyone told us it was crazy, but I had made up my mind.

I flew to London, leaving my family in Spain. At the weekends, whenever I could, I would get up at four in the morning and fly back to see them for a few hours, then return to London on the Sunday at midnight. After two years of weekly commuting, my wife gave up her job as a manager at an investment firm to look after the children and come to London, where it's almost impossible to combine work and family life on account of the timetables, holidays and demands of the British private school system. We went from having two sizeable steady incomes to the uncertainty of the City and the gamble of annual bonuses and variable remuneration.

You may have read the sad story of a bank intern in the City of London who died in 2013 after allegedly working 72 hours straight. If you read about it in the papers, you will probably have been horrified by the description of “inhuman hours”, deaths and suicide in the financial sector. Nothing could be further from the truth.

Life in the City is tough, and employers demand results, as it should be. Imagine for a second that the person who manages your savings or your pension fund was remunerated by any other measure than profitability. Would you invest in this fund? Work can be strenuous, but slavery-type hours and inhuman conditions are a fiction. Yes, the day begins very early, at six or seven o'clock. But anyone who takes the train at Waterloo Station or the tube at Bank or Liverpool Street knows that at five or six p.m. the vast majority of people are on their way home.

Everyone in the City has had to work long hours and several weekends, but so do entrepreneurs, writers, musicians and journalists.

I'm afraid that behind the controversy over the City's death lies more demagoguery than real concern for working too hard. In the same way that no one questions an elite athlete who trains aggressively or a singer who performs at 250 concerts in a row, few question the long hours required of skilled professionals giving of their best in a highly competitive industry.

Professionals who go through a very thorough selection process freely take the responsibility, because it is also a passion. This is not just work. It is a meritocracy and competition is encouraged. The same thing that many call sacrifice is, for the vast majority in the City, a pleasure.

Working in the City is a conscious and free decision. Whoever does not like the system should not worry, because they would probably never be hired. However, between a free and competitive work environment and a safe but frustrating one, there is something about which I am very clear: I would not trade freedom for security. Never.

Today, we are told that we were very lucky and that it was a good move. It was neither luck nor madness. It was about taking risks and being prepared to make sacrifices. More than ten years later, I can say that I have a full life, a wonderful family and my work is not a burden, because I love it. The day it becomes a burden I will quit, and I'm sure there will be dozens of candidates happy to take my place. Freely.