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Takeaway: The world's largest hedge fund has quadrupled its short bets against EU stocks. We've been on #EuropeSlowing for eight months.

Bridgewater Bets Big On (Our) Short Europe Call - Euro Zone cartoon 08.17.2016

"Looks like we have company on the short side of European Stocks in Bridgewater (we’ve had steady pushback on that call for months)…" wrote Hedgeye CEO Keith McCullough this morning.

Here's the latest from Bloomberg:

In just one week Bridgewater, the world’s biggest hedge fund firm, more than quadrupled how much it’s betting against European Union companies.

The firm, run by Ray Dalio, has at least $13.1 billion in shorts, or wagers that a stock will fall, according to EU regulatory filings. That’s up from the $3.2 billion it had disclosed on Feb. 1. It also more than doubled the number stocks it’s shorting to 44 from 20...

Bridgewater has been building positions against Italian banks and insurers ahead of the March election, which is widely expected to produce no clear winner, hindering the country’s ability to produce economic reforms.

#EuropeSlowing has been our call for some time now. We've been focused on short Spanish and Italian equities (EWP and EWI) for eight months now, as both are heavily weighted to financials.

Here's what we said in our Q3 2017 Macro Themes presentation:

"Contrary to our positive outlook in the U.S., our model is prospectively signaling a concomitant deceleration in both economic growth and inflation across the Eurozone economy. This view is very counter to consensus that remains extremely complacent on the long side of the euro and European equities."

We've been admittedly early in our call for a broader slowdown (even though Spain's IBEX is down -7% since then), but we don't anticipate being wrong. 

For some time now, the Euro has been among the most consensus net long positions in all of macro, as Wall Street continues to espouse the "synchronized global recovery" narrative. 

This positivity belies the reality on the ground.

As our Senior Macro analyst Darius Dale wrote recently:

  • The TREND (i.e. 6MMA) in Eurozone consumption growth has inflected from what has previously proven to be an unsustainable rate;
  • The TREND in Eurozone manufacturing growth has negatively inflected from a 7-year high;
  • The TREND in Eurozone export growth is explicitly negative;
  • The TREND in Eurozone headline CPI is sideways; and
  • The TREND in Eurozone core CPI is explicitly negative at half the ECB’s +2% inflation target and a breakout in wage inflation remains elusive despite the marked improvement across Eurozone labor markets.

As Dale concludes, "we do think a multi-quarter mid-cycle slowdown has the potential to catch a lot of investors off guard."

In other words, we think a bet on Europe is tantamount to being long complacency.

Bridgewater Bets Big On (Our) Short Europe Call - etf pro