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.