The man betting $18bn on euro failure

Ray Dalio © Getty
Dalio: he gets the big calls right

Even for one of the world’s richest men, $18bn is a big bet. That’s the amount hedge-fund manager Ray Dalio has staked against eurozone equities. It is the biggest short out there in a market where most investors have been bullish. It is a dramatically contrarian call.

And yet Dalio has a record of getting these calls right. He is the founder of one of the world’s largest hedge funds, Bridgewater Associates, and has an estimated fortune of $17bn. You don’t make that kind of money as an investor without getting a few things right. He was ahead of the pack in predicting the global financial crisis of 2008 and 2009, and that made his reputation as one of the savviest players in the market.

That helps explain why the billions his firm has staked against Europe, including big wagers against firms such as Siemens and Daimler, have attracted attention. If Dalio is betting against something, it’s wise to pay attention.

So far, the man himself has said very little about the thinking behind the move. But there are three good reasons for thinking the eurozone could well be heading for a sharp correction, if not a complete collapse. First, there are signs Germany is slowing down, and if it slows, so will the whole eurozone. In the fourth quarter of last year, for which figures have just been published, consumer expenditure was completely flat. Investment spending didn’t rise, and construction actually declined. Overall, demand rose by just 0.1% and that was thanks to exports, always the saviour of the German economy.

That might be just a temporary slowdown. But if it’s something more serious, it will knock the whole continent.

Political chaos to come

Next, there is still a lot of political chaos to come, with elections in Italy, and potentially fresh ones in Germany. Nobody has any real idea what might happen in Italy next week. There could be some form of grand coalition under Silvio Berlusconi or a caretaker prime minister, or the populist Five-Star Movement could take power. Whatever happens, with anti-euro parties potentially winning a majority, it is not going to be good for the EU or the single currency.

In Germany, the situation might be even more serious. Angela Merkel’s grip on power is looking ever more tenuous. If there are fresh elections then deadlock will be the most likely outcome. A return to political stability, following the elections in France and the Netherlands, had been a major reason funds shifted towards Europe this year. If chaos is back, and with it a threat of the euro breaking up, that money is going to disappear very fast.

Thirdly, the European Central Bank (ECB) is still printing money like crazy, but there are signs it is losing its bite. Over the past two years, the central bank has pumped €1.2trn into the economy as well as slashing interest rates down close to zero. It has been a massive blast of stimulus. It has pushed growth back up to 2.5%, and finally started to bring unemployment down. But credit growth has stalled, and the rate of price rises is still well below target. The eurozone is starting to look a lot more like Japan than the US – its quantitative easing (QE) has not engineered a sustained recovery.

A bet against China

There are other possibilities as well. There has been some speculation that Dalio is betting on a severe downturn in China, and is shorting some of the big European companies that rely on it for exports because it is hard to bet against Chinese equities directly. Or a hard-line German candidate might become the front-runner to replace Mario Draghi at the ECB. That could mean the end of QE, and possibly no more support for peripheral bond markets. Overall, it’s clear there are plenty of potential events out there that could derail the European markets.

The eurozone has recovered better than most people expected in the past year. But it has been a fragile recovery based on printed money and an illusion of reform. Dalio has seen through that, and is betting big that it will collapse. He may well be right. And if he is, ordinary investors need to think about joining him.

Who’s getting what

Bill Galvin, the head of the pension scheme at the centre of a university strike, saw his pay package rise from £484,000 to £566,000 this year. A recent valuation found the Universities Superannuation Scheme had a £6bn deficit, but striking lecturers dispute the figure and say proposals to tackle the shortfall will cut their retirement income by £10,000 per year.

The co-founder of Snapchat, Evan Spiegel, is set to become the best-paid US chief executive of 2017, after his total remuneration hit $638m. Parent company Snap went public last March and Spiegel was given a stock award valued at $637m at the end of last year. He also got $1m in benefits relating to insurance premiums, legal fees and $500,000 in personal security costs.

The chief executives of Standard Life Aberdeen, Keith Skeoch and Martin Gilbert, took home bumper pay packages in 2017 after the duo engineered an £11bn merger of their rival Scottish firms. Total pay for Skeoch, former boss of Standard Life, rose by 9% to £3m, while Gilbert, the former head of Aberdeen Asset Management, took home £4.3m (compared with £2.8m a year earlier).

UK outsourcer Serco plans to cut the salary of its chief executive, Rupert Soames, by 20% following Carillion’s collapse. Soames, who is steering a recovery of the firm after it teetered on the brink of collapse five years ago, earned £2.217m in 2016. In 2014
he gave up a £900,000 bonus after Serco announced £1.5bn in writedowns.

Nice work if you can get it

University vice-chancellors have claimed £7.8m in expenses over two years, according to a Channel 4 investigation. Apart from booking luxury hotels, fine dining and first-class air travel, claims included Easter eggs and scented candles as well as £1,600 to relocate a pet dog from Australia to Britain. Southampton University revealed that 17 senior managers claimed a total of £400,000 in expenses, while Steve West, the vice-chancellor of the University of the  West of England, claimed more than £43,000, including £10,000, on taxis. Teaching and support staff have had an average annual pay rise of just over 1% since 2012.

  • Timothy Stroud

    If and when the euro falls a lot of people are going to look pretty stupid –
    and on the front rank they include Messrs Major, Blair and Cameron. The Italian
    general election ( today 4 March ) will point the way – to confusion, incoherence,
    and bunga, bunga. Trump’s threat to impose tariffs on European car imports into
    the US is not an idle one. The whole outlook for the EU, economic and political, is poor, very poor or catastrophic – depending on your point of view.

    • Apollocreed

      But unfortunately, the huge UK trade deficit and Government debt doesn’t put the UK in any better position than the EU

    • InterAct Party

      Why the hell would anyone listen to them? What facts did they put forward? Start thinking structure and fact! How is the system working? How is money created?Should we be paying down our own savings account of money active in the economy which will then LEAVE THE ECONOMY IF WE DO AS A CONSEQUENCE OF DOUBLE ENTRY BOOK KEEPING. We need to know how the nuts and blots turn within the structure, and stop harping on about left right and center.

  • Jonny D

    Yes the becoming a failed project.It has shown its total incompetence in all its important problems,from its unemployment to its migration its Euro catastrophe,that is trying to align totally different economies.—- Brexit will also badly damage the they will lose their second biggest donator and the soon to join new members, which are very poor,corrupt nations, will require billions off the get anywhere near the standards they will require as members of the Eu.Even the Eu plans for a military will undermine the security that they receive from the USA and the UK, which mainly funds NATO, are becoming more and more disillusioned with the Eu,especially with some Eu.members refusing to pay their fair share towards NATO protection.No wonder Trump is annoyed with the likes of Germany,who have never paid their agreed share towards NATO.costs,but welcome NATO protection.Germany who also caused the massive migrant problem by inviting millions into the Eu.without even conferring with its the Eu really is a failed,dangerous project that could well destroy Europe.

  • AAJ

    People have been claiming the EU is doomed for years and still it trundles on. I guess everything is doomed if you wait long enough. I think that many people who claimed it’s about to collapse will be long dead before it does. However, when you look at individual companies, these would be hit by a US/EU trade war

  • LG

    Money week has been desperate for the EU to fail for years. Here’s another example of the converse of the Ad Hom argument. You bum up some bloke because he’s managing a lot of other people’s money – and the inference is he’s right – forgetting that thousands of other people managing other rich people’s money are betting the other way.
    You’ve called the end of the EU and the euro so many times now. Like the catastrophe that was going to follow the end of the UK housing market, etc. Buy gold! Oh yeah, that’s another one.

  • Nicky Brennan

    ray would be one of donald trump’s friends at a wild guess lol

  • InterAct Party

    You need to learn HOW MONEY WORKS which is the real reason that Dalio got it right in 2008.Money is always born as debt therefore the paying down of the “debt” which is now active in the economy will mean less money to spend or invest – hence slowdown. It’s not rocket science, its simple math. I have no idea why your editors and article providers do not get it. If I go to the bank for a loan and I am not suitable candidate I do not get a loan especially when I am already up to my neck in debt. If I have no money to spend the businesses who depend on me to spend to them will go bust because there are millions of people in this position because of the incredibly stupid and senseless austerity politic which you advocate. Please get yourself educated and stop pretending that we are still in the gold standard. and here a billionaire investment manager Warren Mosler who has been there and got the tshirt once again lays out the truth which no doubt you will ignore
    The deficit is actually a national savings account, a statistical representation of all the money in accounts denominated in your currency including yours!
    Money is created via keystroke as debt which then becomes an asset of money that previously had no existence, it is not other peoples savings or the banks “own money” that is lent, its just a keystoke creation that is now a debt! .