Life in the Financial Markets. Lacalle Daniel

in many IPOs and institutional trips (the so-called roadshows) to explain the company's strategy to prospective investors. He had prepared many presentations. I felt privileged to have the opportunity to work for a company that was to undertake a stock market launch for the first time, and to have the full support of an executive who perfectly understood this world, its needs and the crucial importance of financial disclosure. True, we had experience, but the task that lay ahead was monumental. We had to convince potential shareholders that a small, unknown company with sizeable risks and regulatory uncertainties was a good investment.

      This was not easy. I recall, for example, a trip across the United States visiting far-flung places, such as Des Moines (Iowa) in the middle of the American heartland, to talk with a farmers' pension fund. At the end of the meeting, we flew immediately to another state where someone might want to listen to us. To place a small Spanish company on the stock market map is no easy feat. Many investors received our presentations with doubt, suspicion or outright boredom. We covered five states in four days and then returned to Europe to do six countries in another four days. We had to stand out from the thousands of securities that were competing for capital. And the only way to do this was by being better, more transparent and more committed.

      It was like having a huge white canvas and a palette of colours to create the picture we had always wanted to paint. Over those years, we set up an investor relations office, we organised shareholder meetings, did all the paperwork and everything else we could to put the company on the map. Thanks to an outstanding team, which is still there today, the share price doubled in three years, and today it continues to be one of the few Spanish IPOs since 2001 that has created value for the shareholder, despite the enormous uncertainties surrounding the group's results, the lack of regulation and the fact that some of the major shareholders have had to reduce their ownership positions.

      The successes we achieved in that time – including several awards for the Best Work in Investor Relations and the Best Offer of Securities to the Public of the year – cemented my interest in and passion for the financial markets. And so we arrive at the year 2003.

      Spain was experiencing a boom. Everything was going up, and Europe looked on enviously and held us up as an example of an economic miracle. Our companies got bigger by the day, absorbing all kinds of foreign companies at high prices. Debt had increased by 200 % since 1996 and the world was our oyster. Despite having been through the Latin American crisis a few years earlier, which left many conglomerates on the verge of bankruptcy, we went on to conquer the world… accumulating debt. Suddenly, your next-door neighbour was an expert in property, shares and investments. “In the long term, everything goes up.”

      Maybe I was an oddball, but I noted something was amiss. None of this tallied. And numbers that did not tally were very important to me, and would be even more so in the future. We had overlooked the balance sheet and forgotten the importance of debt. I still recall a conversation with a senior executive of a listed company who explained to me, without blushing, that the debt from the recent strategic acquisitions undertaken by the company “should not be taken into account”, because “when we sell at much higher prices we repay it and even generate a profit”. We were dominated by the so-called greater fool theory, which states that after a malinvestment or an expensive purchase someone, preferably foreign, will always turn up who will purchase at an even higher price.

      In conversations with my friends, I was always told, “You're wrong, Daniel. This can and will continue.” Few people doubted that it was possible to experience annual growth levels of three per cent for the next 20 years. I was very dubious.

      An enlightening crisis and a real shock

      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