>> this is a special global edition of bloomberg "surveillance" in prime time. from new york, here are tom keene and michael mckee. tom: good evening, everyone. we are here on a beautiful day north of new york city for one of our most anticipated events in the history of bloomberg "surveillance." this is 114 acres north of new york city. michael: a short ride. tom: a nine hole golf course.

it worked out well. we will be here tonight. michael: we have done this for five years in a row and this is the first time we have been able to use this new facility. tom: is it bigger than delaware or rhode island? michael: it is about the size of delaware but without i-95. tom: we say thank you. we need to get started. when we planned this with mr. dalio, we said we need a fed meeting with a little drama. we need emerging markets imploding. we need fear about productivity in this nation. it would help to have a presidential debate overlaid on top of it. four of the five candidates tonight will be talking about

that. why don't you start? michael: if you sold in may and went away, it is time to come back. we will start with ray tonight. interestingly enough, you begin your career on the golf course in finance. ray: i was a caddy. $6.00 a bag. it was the 1960's and it was a time when there was the biggest bubble. even more than 2007. i remember betting $50 on a company by the name of northwest airlines. i figured i could buy more shares and that was a good deal. it was a company about to go bankrupt, but somebody acquired it and a tripled in price and i was hooked. tom: what did you learn from your first loss?

you are a kid, you are a genius. what happened when you lost your first $282? ray: the economy is well managed and it was 1966 and we began a bear market. we had a recession. from then, it was 18 years we had negative real returns in the stock market. i learned about selling short. i learned about markets go down as well as up. tom: with president carter, there was the carter malaise.

was there a malaise and do we risk that malaise again? ray: it was very different then. you could take these decades. the 1950's was post-world war ii, plenty of capacity, not much debt. the 1960's, growth. we had deficits. yield curve. and then we could not pay our debts. the united states defaulted. the money was like gold. you would turn it in for what was perceived as the val of gold. it was the beginning of inflation. 1970's, inflation. 1979, paul volcker is appointed. when you are talking about

malaise, you are talking a wild runaway inflation, out of control. paul volcker was appointed by jimmy carter. and then the exact reverse happened. almost every decade is almost more likely to be the opposite. tom: i want to stay right there with paul volcker. my malaise is your microphone is not working so steve is going to fix it. we will speak, it is not going to be gotcha questions. i promise you i will not ask you what janet is going to do tomorrow. mike is. the idea of a serious discussion about the years of research put into this. michael: that is what you have based your entire career on,

your study of the economy. not just investing, but how the economy works. tell us about your concept of the machine. ray: the same things happen over and over again. anything that has happened economically, it happens over and over again. it is a very simple machine. it is the same for an individual. a country is nothing more than the collection of its individuals or companies. there are three main factors. productivity, which produces income. you can spend what you earn. what you earn is a function of your productivity. for the country, it is the same as individuals. work hard, well-educated, you can be more productive if you work harder or if you are more creative.

we have debt cycles and there are two major debt cycles. a short-term debt cycle, which we are used to. recession, fed eases. what they do is they increase the spread between the short-term interest rate and the return of other assets. as a result, money goes out into the system. when we are bidding on first asset prices, we make items that are cheaper because interest rates go down. we have that business cycle that we are used to. when that cycle gets past a certain midpoint, there is a tightening of monetary policy. and you start to have inflation and it becomes too tight and you

have the cycle go down. when we look at every country, you can see where it is in that cycle. we are in the mid-part of that cycle. there is a long-term debt cycle. these cycles out up. the long-term debt cycle, just imagine you start off with no debt. low debt to gdp ratio. let's say you are earning $100,000 a year and you have no debt. you can borrow $10,000 a year. you are spending somebody else's income. they can spend more and it becomes self-reinforcing until you get to the point where debts rise too much relative to the

income. the central bank is in the business of helping that cycle go along so that lower interest rates and as they lower the interest rates and those interest rates hit zero, we come to a dilemma. as a result, you cannot keep that cycle going. when you have big spreads and you put liquidity in the system, the difference between debt and money is money, you have to pay back -- debt you have to pay back. money settles the transaction. what the central bank does, they put money in the system and they put money in the system by buying financial assets. when they buy bonds, the seller

of that bond takes the cash and they buy something else. as a result of that, it causes the spreads to narrow. that appreciation in the asset prices that we experience creates a normal term structure of interest rates. there are three equilibrium that we have longer-term. first equilibrium is debt can't rise faster than your income. the operating rate in the economy cannot be too loose or too tight. we have term structure of the capital market structure. in other words, the cash will have a lower return than bonds. there is an equilibrium that keeps working itself through that system, monitoring fiscal policy. tom: we did that after world war ii.

a great moderation, we have enjoyed the last seven years. where are we now in that continuum when we observe -- we need some math. where are we right now within the equilibrium? ray: the united states is in the midpoint of a short-term debt cycle. as a result, we are talking about whether the fed should tighten or not. we are near the end of a long-term debt cycle. that cycle of being able to raise -- if you have interest rates going to zero, you have

spreads that have come down. spreads that have come down means asset prices have gone up. now the expected return of asset classes are very low. we know that bonds are 2.25%, you know for the next 10 years you will get 2.25% on your bonds. all of the asset classes are aligned, normal risk premiums. that is why if interest rates rise faster than is discounted in the markets -- tom: within the framework of your machine, do you presume a

junk position as central banks come out of this? ray: i do not believe they can raise rates faster than is discounted in the curve. but interest rate curve -- the rate at which it is discounted to rise -- it is built into all asset prices. if you raise them much more than is discounted in the curve, that is going to cause asset prices to go down. all things being equal, all assets are subject to the same discount rates. if you raise rates faster than is discounted in the curve, all things being equal, that produces a downward pressure on rates.

that is a dangerous situation because the capacity of the central banks ease is not -- has not been less in our lifetime. we have a very limited capacity of central banks to be affected in easing monetary policy. michael: the fed is talking about 25 basis points to start. no other central bank is talking about raising. ray: you know what the curve is. if they raise it by 25 basis points, it is a little more than discounted. very small rise in rates. the dollar is the world's currency and the rest of the world would need monetary policy. i mean there is a lot of dollar-denominated debt. the federal reserve has the responsibility as the u.s.

central bank and the world central bank. if we go around the world, you should have an easier monetary policy. europe, it is in a depression. we have a depression, a cyclical low point. with a lot of political extremism beginning to emerge because of that. japan needs an easier monetary policy. china needs an easier monetary policy. emerging countries need easier monetary policy. tom: i have a good amount of ray's recent work. would you predict a stronger dollar?

how does the currency dynamic fit into what you see with the lack of productivity? ray: we have a lot of countries who have a lot of dollar-denominated debt. as we have that environment, as they are in a debt problem, it is a self-reinforcing situation. the revenues go down. they are short of dollars. a debt is a short position and you have to cover that position. we have these commodity countries. emerging countries, very similar. a self-reinforcing cycle.

back then, it went to 1985 and then we had the plaza accord. what we were able to do in that period, we were able to ease our monetary policy at the same time the economy grew. it is tough to do that where we are right now. we have a situation where if you would like to ease -- the pressure is going to be more on easing monetary policy longer-term. michael: this is a primetime edition of bloomberg "surveillance." ray dalio is the founder of bridgewater associates. what do we do, what does the central bank do? ray: you realize the risks are asymmetrical.

you can tighten monetary policy. there is enough sensitivity around. you wait to see -- the risks are asymmetrical. the risks for the world are asymmetrical. the risks on the downside are totally different than the risks on the upside. tom: mike, help me out with this. august 24, 2015, the end of the super cycle, bridgewater and mr. dalio say -- he is channeling nouriel roubini. michael: the big move would be to bring in additional qe. do you think qe works anymore? ray: it will work a lot less than it did last time.

we will have a downturn and the downturn should be worrisome because we do not have the spreads. qe is the purchase of those assets to get the premiums up. when you keep pushing and you buy more bonds, if there is not an attractive investment relative to bonds, if there is not much spread in something else, you get less effective monetary policy. we call that pushing on a string. we are not there yet, but we are closer to being there. europe is there.

michael: they are pushing on a string? ray: what are you going to buy in the way of bonds? michael: you cannot buy a german two-year. ray: the effectiveness of monetary policy comes through the currency. when the person who is receiving the cash has to do something, it is there -- there is a pressure to move it out to the country. if you look at us, we have very high rates in the world by comparison to those in europe and japan. it comes to the currency. if you cannot have interest rate moves, you have to have currency moves. tom: i want to get to this video from economicprinciples.org. why don't you introduce the

video that we have got? michael: ray has put together a video and it has been a huge hit. tom: he is like the ariana grande of economics. michael: here is a segment. ray: that accumulated knowledge raises our living standards. we call this productivity growth. those who are hard-working raise their productivity and living standards faster than those who are complacent and lazy. that is not necessarily true over the short run. productivity letters most in the long run and credit matters most in the short run. it is not a big driver of economic swings. debt is because it allows us to consume more than we produce when we acquire it and forces us

to consume less than we produce will me have to pay it back. michael: economicprinciples.org. it raises the question -- ray: i am sorry to interrupt. i want to emphasize the reason i did that and the reason i am doing these interviews is because i think we spend too much time arguing about what is going to happen. i think, if we could agree on how the machine works, we will have a simpler foundation for agreement and that would be positive. i have seen so many economic tragedies. like printing of money, at the time, there was a debate about the printing of money because they thought it would be

inflationary. what i was trying to convey, it is the amount of spending that matters. if credit goes down and money goes up -- tom: this is absolutely critical. we have a presidential debate. this nation, too many people, is flat on its back. this discussion, this mystery of going from inefficiency to efficiency. what is the prescription for the next president to assist the nation in productivity? ray: it is interesting. we have done a study going back 60 years and we took various factors and correlated them with the next 10 years growth rate and we did this across 20 countries. the study is on economicprinciples.org.

the economy is like the human body. when you ask yourself, is that individual going to be productive, what is the education and what is the cost of an educated person? if someone is more educated, that is a good thing. if you have two adjusted by the number of hours worked and what that cost is, because let's say in europe, very interesting, southern european countries, france, italy, spain, after adjusting for the average hours worked in a week -- they cost twice as much as an american. you can have an education and that is good. if you are expensive, it is not good enough.

if you have a situation where you have an educated population, the single most important factor is what does it cost to have an educated person? the biggest factor is indebtedness. you have these debt cycles. those who were at the later part of the debt cycles have less capacity to increase their balance sheet and expand. it goes down to other things. we have surveys of work attitudes. do you want to work? tom: what is your prescription in the uproar of politics? we did not even know this was

coming, the prime minister of australia is out. what is the prescription out of your study of our economic machine to a better america? ray: and/or a better world? there are these various factors. there is not one factor. they are clear and in the study. those factors are the same factors. are you going to be well-educated? are you going to be economically well-educated? are you going to be inefficient? 58% correlation between corruption and economic growth. as we go into that -- productivity is going to be the single biggest factor. how do you make people productive? the single biggest factor, do

people feel the consequences of their working or not working? in countries where there is self-sufficiency, higher levels of productivity. the things when you look at your neighbors and you say, if they can get an income and they are not going to be penalized, they will be less motivated. what i am trying to direct the attention to is what those specific factors are o it is like a health index. what is your cholesterol level? you can know your 10-year prognosis. it is a series of those things that i am mentioning. there is a formula and if we

could look at the formula together, it is like a health report. michael: you have put this together. let's bring it back to investing. how do you apply that when you are looking at investments that you want to make? what does it tell us about where america is and where american companies are going? ray: i am mostly just interested and he was going to buy and he was going to sell and why. it is the aggregate of purchases divided by the quantity of a

bond or equities. i look at it factor by factor. when i am trading at anything that will give me an edge, whether it is insider buying, we take those rules and we have written those rules down. 1982, 1983, i would write the reason i wrote the trade down on a pad and i would look at those rules. what i discovered is that those rules could be programmed into a computer. when they were programmed -- tom: the computer is called a bloomberg terminal. ray: i will give you the endorsement. we trade 140 different markets.

tom: do you have an informational advantage now? you have been doing this for 10, 20, 30 years. is it tougher today given the flow of information or is there so much information across the bloomberg terminal that you are advantaged? ray: the technology continues to empower me. there is no getting around the deep thought. the technology, if you put a lot of data in and you are not spending the time with the deep thought and you have the fundamental cause and effect linkages, it is a dangerous tool. by the way, artificial intelligence is not a new thing. 1953 is when it started.

there is no escaping the fact that when you think about relationships, cause-and-effect relationships. the same things happen over and over again through history. if you start to look at those -- tom: get some water. let me reset you for our audience. we welcome all of you on bloomberg television and radio. we are with ray dalio of bridgewater. a former caddy. very importantly, economicprinciples.org. what will we do next?

michael: if you are having a bad month, there are openings for caddies here. how do you develop the theory, it comes out of the idea that everything happens over and over again. you wanted a way to invest that would enable you to sail through all of the various ups and downs. tom: what happened in 1996? what was that moment? ray: in the early 1990's, i had earned enough money that i was putting together a trust for my family. making money in the markets -- i knew something about how markets worked. the problem is you -- if you have a stock-bond mix, if you want to diversify, and you buy stocks, 50-50 of your money, the

problem with that you are dominated by equities. i need more volatility in order to create a balance because i want to but equally on two things. you have to buy more bonds and if you are buying more bonds, you are buying a lower returning asset class. you are not getting much. in order to have an equal amount on each one of those things, you have to have an equal amount of risk. because those that have riskier assets are volatile assets, they tend to have a higher return and higher risk. that is structural because they have a longer duration and because assets are leveraged themselves. the average s&p 500 company has a debt ratio of 1-1.

the idea of taking a bond is going to produce a return stream that gives me the same amount of risk. it also raised the return because the return of cash is lower than the return of bonds. that meant that i could create diversification because the most important thing is how do you create diversification without lowering your return? i do not know what is going to be good and what is not good. tom: what does the asset model say when your portfolios correlate? what is the analysis you see? ray: it would be equal to if you

own stocks. 100% correlation between these two assets, now i have made more leverage so it has the same volatility and they are 100% correlated, it will equal the volatility stocks. the fact is, if it is not 100% correlated, we can get into what drives correlation. what it means is you are going to have as result, diversification without lowering your returns. if i apply that to different asset classes, then i can have -- the most important thing is that you have a diverse portfolio. i would be terrified to own any

other portfolio. am i going to own stocks? am i going to be concentrated in bonds? tom: how do you respond if you are almost too diversified? how do you respond to the criticism? ray: diversification of assets, you do not know which would be the better return, similar expected risks, it does not lower your return. tom: you do not test that it is operational within the great distortion we are living in now? ray: i have my entire net worth in it. the reason i have is because i need a balanced portfolio.

i learned to be scared over the years. i tested it through the most severe -- the great depression, 1923 in germany. tom: did you test it through the giants game this weekend? [laughter] this is serious. ray: i want to be clear. no thing is a sure thing. if you have a well diversified portfolio and it underperforms cash, the only times in that situation that it did badly were depressions. what that means, as the federal reserve is tightening monetary

policy, if they cause asset prices to go down, that is -- the only times it did badly in the great depression and in 2008, 20% to 25%, those are very tolerable contractions because the traditional portfolio fell, like, 60%. when i look at that, i am saying, we have central banks on your side and otherwise, you will be concentrated in some asset. michael: is it a failure of risk parity? ray: on a month-to-month basis, the stock market was down, the assets were down. that was a lousy month for us.

up until then, the longer term returns are what they are. that was a month. all i am saying, you could lose 5% in a year. i am comfortable being in that position. the stock market in 2008 was down 38%, right? warren buffett, greatest investor, his bad year was down 48%, 47%. when you have those kinds of -- to me, i feel like i'm fine. tom: i want to defend the hedge fund industry. the coverage in august, do we remember that we went to 50

intraday? it was wild. ray: let me be clear. we have our all weather fund. that is down about 6% for the year. for those reasons. we have funds that are up materially. tom: how much are they up? ray: it depends which fund you are in, somewhere around 6%. michael: where are you getting the alpha? ray: we can go long and short and a couple of different markets. michael: you are applying how the machine works to this time period? we are in secular stagnation. where is american business right

now, even global business? what is the ability of businesses to turn a profit so that you can make money? ray: american businesses are flush with cash. as a result, the biggest force in the stock market is the buybacks and mergers and acquisitions. 70% along those lines. of course, i think you know the changing complexion of the businesses. the productivity numbers are severely distorted. tom: you are more optimistic? ray: it means photos have collapsed in terms of productivity. what is the value of a photo? tom: are you on instagram?

ray: no, i am not. tom: seriously, i promised i would not bring up probability. with all of the work you have done, are these derivative strategies around bonds and equities able to withstand the shock? ray: there are all sorts of embedded risks. i would say we are better able to withstand them than we have been before. less liquidity in the markets. there is a fair amount of

dynamic hedging. dynamic hedging is a way -- like insurance companies when they take their protection. i would say we are better able to withstand them in terms of, not the short-term volatility, but in terms of the bigger moves. provided that we don't have that big event we are talking about, which is the tightening of monetary policy. what worries me is what the next downturn in the economy looks like with asset prices where they are and lesser ability of central banks -- michael: some central bankers would say, if we raise rates now, we will have some ammunition. you sound like you disagree. ray: it is a restrictive policy. i do not see the reason for it, frankly.

2007, i was watching this incredible bubble happened. it was an obvious bubble. and the fed just paid attention to the gdp gap and they missed the whole bubble. we are in the mid-part of the cycle and they are trying to identify where the inflation and and we have a lot of liquidity. little glimmers here and there, always little glimmers of something, i think they worry too much about the short-term debt cycle and not enough about the long-term cycle. i do not get it. look at the world. tell me countries who should be tightening monetary policy. michael: this is a prime time bloomberg "surveillance" special. we are with ray dalio of bridgewater.

i want to talk about you and bridgewater. you have been around for a while and you have suggested to people that you are starting to step back. a lot of people are saying, this man should stay in the game. what are your plans? ray: by the way, it has been 40 years. michael: i was just trying to be nice. ray: stepping back in management, not stepping back investments. i am an addict, i started at 12. i can't stop, i love the game. i will always be playing the game. michael: do you have a succession plan in place? ray: bob prince, who has worked with me for 27 years, i think he

is 55. greg jensen has worked with me for 17 years and he just turned 40. and i have a lot of people who have been there a long time and we have all played the game. tom: alan mullally has an historic meeting. everybody runs a company differently. everybody has a style. when you have a meeting at bridgewater, with the incredibly trained individuals you choose to hire, how do you inject humility into the meeting? ray: the business we are in teaches us that. we have a very unusual culture. tom: we do not have that at bloomberg. ray: it is a total meritocracy.

there is nothing hidden. it is a very straightforward way. that is why a lot of people come there. everyone has the right to make sense of anything. there is no traditional hierarchy. you can ask any questions and that keeps you on your toes. what do they call that in parliament? you stand up in front and you have everybody shoot at you and you get the stress test and that is the best way to test your thinking. meaningful work and meaningful relationships. tom: are you having a greater debate at bridgewater about china?

ray: it is not heated because the culture is analytical. keep it calm and say anything you want to say. we have this template and you just drop the numbers in this template. michael: china is one of the few times people have seen you actually come out with a mea culpa and say, we missed something. ray: what is your question? michael: how did you miss it with the template? ray: what happened was when they went to the bubble bursting, you have two problems in china. you have a debt problem and you have to restructure. local governments have to restructure.

but that is a manageable problem because it is in their local currency. the people i've gotten to know, they are very intelligent and capable and prudent people. restructuring your debts in your local currency is a manageable exercise. we have done it three times. that is a manageable process. the second issue they have is they have to restructure what they are spending money on. they have to rebuild a new economy to replace the old economy. that is like a heart transplant, a serious operation, and it tends to weaken them. you will get through it ok if you have good surgeons.

you get the speculator and they get hyped up and then you have the bubble. that bubble was a negative at the same time. you went from a bull market and you are having a negative force coming in at the same time. if you look at other economies, that is a negative for economic activity. what comes next? we know the certain things that come next. when we have the bubble burst, we shifted from one set of circumstances, two minuses and a

plus, i think we exaggerate over the short-term a lot of the importance is. we look at everything up close. i think china is going to be just fine. it is going to be weaker. their growth is going to be more than twice our normal growth. tom: i love how you come back on currency depreciation. many people -- i promised you i would not ask you for currency quotes. at the end of the day, is the solution always going to be currency depreciation? ray: it is always going to be the number one choice. if you are facing a domestic contraction, and you have a choice, do you want to

depreciate your currency? everybody judges their net worth by their own local currency. that was the lesson i learned in 1971. i was clerking on the floor of the new york stock exchange. richard nixon on sunday night announces that he is going off the gold standard. i walked on the floor of the exchange and i learned that every time, it stimulates and makes everything cheaper. when you have zero interest rates, what are you going to do? tom: you live in connecticut and you have done better than good.

how important to your state is it to have generous electorate in connecticut? ray: we have an issue, of course, in terms of the tax rates and competitiveness. austin, texas, is getting silicon valley people. it is the nature of that particular competition. i think it is up to the governor and the legislature to try to balance that in the best practical way. i do not really care to comment on that. i understand the dilemma. when you are taking the big wealth gap, you have to deal with the wealth gap. i am not the one to say how that

is best handled. michael: you have an economic model. the fed probably has to do more qe. central banks have to ease. the u.s. in secular stagnation. you are optimistic about china. ray: i do not think the secular stagnation -- i am sorry, i should not interrupt the question. michael: what kind of returns in the next 10 years can investors expect? i am not talking about your particular funds, but is it going to be different? ray: yes, and you know it. you will have returns averaging between three and 4%. this is a major pension fund problem.

the way assets work is when there is quantitative easing or purchases and prices go up, that is just producing a present value effect. it is like a bond. as your bond price goes up -- i am sorry, i am not saying it clearly. if you invest in a 10-year bond and it is 2.25%, no matter what, you will get 2.25%. if the bond price goes up, you can be jubilant, but when you collect the profit, the lower interest rate means you will still get that 2.25%. you carry that all the way through. that has permeated all asset classes. all asset classes going forward

are going to have a very low return. that means you need a whole lot more money. supposing you have $100,000 a year expenditure, how much money do you have to have in order to immunize a $100,000 a year expenditure? we need that to keep the economy going. tom: we have one minute. one minute or one more hour? we went with one more minute. everybody wants to go find your next uber out of silicon valley. what do you say to a smart 26-year-old kid? ray: it is easy. when you can go long or short,

anything in the world or everything in the world, that means you do not have any cycles. you get to even think about the whole world and how it is connected, and there is nothing more exciting. if you go into any other business, you will have a cycle. i think -- if you take financial engineering, every investment that you will go into -- tom: i think we should do that. we have run out of time, thank you so much. [applause] what are we doing tomorrow? michael: tomorrow is fed day. janet will be present tomorrow. kathleen hays will anchor special coverage of the decision.

tom: a particular thanks to ray dalio. to all of you, good evening. ♪ a