>> 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. ray: it's a very simple machine, i think. and so, there are three main factors, productivity, which produces income. you can spend at the into the day what you earn. but you earn is a function of your productivity. for a country it is the same as individuals. work hard, you are educated, you can be more productive if you

work harder or more creative. over short. of time you can spend the and -- the amount of money than what you earn. [laughter] thank you. so, we have debt cycles and their two major debt cycles, there is a short-term debt cycle and a business cycle. debt eases, and what they do is they increase the spread between the short-term interest rate, essentially, and return of other assets. as a result, money goes out to the system. so, when we are bidding first asset prices then we make items that are cheaper because interest rates go down, so we have that business cycle that we are used to. the net cycle gets past a certain net point, there is a

tightening of monetary policy. then you start to have inflation, it becomes too tight. that is the business cycle. we are all used to that. when you look at other countries, we are in the mid-part of that sack -- that cycle. hence, the reason we are having the issue with the federal reserve. and in a long-term debt cycle, just imagine, we start off with no debt. so, low debt to income ratios. let's say you earn $100,000 a , thatnd you have no debt means that you can borrow $10,000 a year because you have no debt. your spending is somebody else's income. they are more, so they can spend more. it becomes self reinforcing the

-- it becomes self reinforcing. you can leverage up to a certain point and a central bank are in the business of helping that cycle goal lines of a lower interest rates, and as they lower interest rates, we then come to a dilemma. we have the end of a monetary policy. keep thatt, you can't cycle going. ,hen, when you have big spreads -- there is debt and there is money. the difference between debt and money is that money is just a payback. excuse the, debt you have to pay back. you going to a store, you buy a suit, you pay it with a credit card, you can affect the money, and it settles the transaction. what a central bank does is that it can create credit in the same way. they put money in the system by

buying financial assets. when they buy bonds, the seller of the pond takes the cash, and they buy something else. as a result of that, it causes the spread too narrow. that appreciation and the asset prices we experience and creates a normal term structure of interest rates. equilibriums.e the first is that the fed cannot debt cannot arise. -- thirdbrium auilibrium is that we have lower market structure. the cash will have a lower thann then don's -- bonds.

monetary and fiscal policy are --tom: many of the people in this room lived that. we have enjoyed the last seven years. where are we now in that continuum when we observe odd things? radio. some math on radel el -- ray dalio, where we write down? as a result, -- we are near the end of a long-term debt cycle because that cycle of -- you haveo raise

interest rates going to zero. you have spreads that have come down. though friends that have come pricesans that has set have gone up. that bonds are two and a quarter percent. price premiums look like 3.5% or 4%. aligned. normal prices are aligned. tom: for those of you are , a successfully confident group of bloomberg , withinith that said

the framework of your machine, position,ume a jump or the can they manage it? ray: i don't believe they can raise rates faster than is discounted. that interest rate curve, the -- the rate at which it is to rise, if you raise them much more that is discounted, that is going to cause asset prices to go down. all assets are on a discounted of prices and subject to the same discount rate. faster than rates is discounted, all things being equal, that produces a downward

pressure. that is a dangerous situation because the capacity of the central banks ease has not been .ess in our lifetime we have a very limited capacity of central banks to be effective in easing monetary policy. the federal reserve has a sponsor ability as the u.s. central bank and the world central bank. we have a situation where if we go around the world, you should have an easier monetary policy in a europe. europe, if you look at it in the same framework, it is in a depression. with a lot of political extremism to merge because of the pressure of that. japan needs an easier monetary policy. china need an easier monetary policy. ♪

tom: do you think qe works anymore? ♪

tom: would you protect a stronger dollar like the rubin dollar of the 1950's. how does currency dynamic fit .nto what you see

ray: we have a lot of countries, particularly commodity producers, who have a lot of denominated debt. problem,re in a debt it's a self reinforcing situation. the revenues go down. they are short of dollars. he debt is a short position. that brings up the price of the dollar. so we have these commodity countries, very similar, emergency countries. it is a self reinforcing cycle. we have the need to have that

easing of monetary policy. we were able to use our monetary policy at the same time the economy grew. it is tough to do that where we are right now. we are a special prime -- we are with three calio -- ray dalia. what does the central bank do when they are at the end of the long-term credit cycle? risks areealize the symmetrical. there's enough sensitivity around. the risks are asymmetrical. that's the main thing.

downside arethe better than the risks on the upside. qe is going to work a lot less than it did last time. -- so, we'llat have a downturn. worrisomern should be because we don't have the spread asset prices. is the purchase of those assets to get those premiums up. when you keep pushing -- you keep buying more bonds, if there is not an attractive investment relative to bonds, if there is not much spread, you get

ineffective monetary policy. we are not there yet. we are closer to being there. europe is there. happens, what are you going -- we arethe way very, very, very close to there. what you need more currency depreciation. in other words, the effectiveness of japan is there. when the person who is receiving that cash for selling their bonds has to do something, it is very different between cash and that other asset. there is a pressure. if you look at us, we have very high debts. it comes through the currency.

that's the environment we are in. tom: that is absolutely critical. we don't need to get into the republicans and democrats. they want productivity. is thertest thing discussion, this mystery from going non-efficiency or inefficiency to efficiency. what is radel young -- what is your prescription to assist the nation in productivity? ray: it is interesting. we took various factors and correlated them with the next 10 years of growth. we did this among 10 countries. so the things -- the same things work in most countries. if the same thing as an

individual. if you ask yourself if that individual is going to be productive, or what is the education? if someone is more educated, that is a good thing. but, if you have two adjusted by -- number of hours worked let's say, in europe, southern european countries, france, italy, spain -- after adjusting to the average hours worked in a week, -- no, it cost twice as much as an american. you can have an education, that's good, but if you are expensive, it is not good enough. , does thee to look income pay? 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? you have these debt cycles. closer to lower interest rates, less capacity to increase their balance. we have surveys and work attitudes by different cultures have different work attitudes. some places look to work and other places were to live. i am not saying one is better than the other. you can take surveys about that. prescriptionyour in the uproar of politics? we did not know it was coming. dalios the ray prescription of your study of betternomic machine to a

america? ray: or to a better world. there are these various factors. there is not one factor, there are many factors. they are clear and the art in the study. those doctors at the end of the day, are the same factors. you going to be well educated, are you going to be inefficient. there is a 50% correlation -- as weorruption and go -- productivity is going to be the single, biggest factor. the single biggest factor of a number of countries is do people feel the consequences of their earning, or not working? in countries where they are self

sufficient, they feel those consequences rather than a -- at the end of the day, when you look at your neighbors and say if they can get an income, they will not be penalized much. they will be less motivated. am trying to direct the attention to is what the specific factors are so that it is like a health index. i like to draw people to the productivity study. you can see what those correlations are. for all nations, the same formula. it is like a health report. if you could look at your cholesterol level, do you smoke, do you exercise not an -- mike: tom does not want to wide-out. [laughter] you can look at it, you

can see what the benchmark is. i don't want to oversimplify it. there is a formula and if we could look at the formula together, it's like a health report and that is what i would like to have happen. i have learned to be scared over the years.

basically, i am mostly just interested in who is going to buy and who 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. so now when i am trading at anything that is going to give me an edge, whether it is insider buying, we take those rules and we have written those rules down. it came really in 1982, 1983, i pretend i would put on a trade would write the reason i wrote , the trade down on a pad and i would look at those rules after i closed the trade. what i discovered is that those rules could be programmed into a computer. and when they were programmed i could then -- tom: the computer is called a bloomberg terminal. shameless plug. ray: i will give you the endorsement. so there are all different ways you can name. we trade 140 different markets.

whatever the rules are. tom: do you have an informational advantage now that you had in 1996? seriously, ray, 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: for me, the technology continues to empower me. so, but i think there is no getting around the deep thought. the technology, if you put a lot of data in and you are not spending a lot of time with the deep thought and you have the fundamental cause and effect linkages, it is a dangerous tool. it has always been the case. by the way, artificial intelligence is not a new thing. 1953 is when it started. neural nets, all kinds of ways. every manager blew up that used

it. 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. with no need for introductions. a former caddy. yes, he is in the news. we will get to that. very importantly, economicprinciples.org. what will we do next? michael: if you are having a bad month, there are openings for caddies here.

maybe. this is where i want to get to risk parity. 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 that got you to this introduction? 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. i realized -- i know that making money in the markets is zero sum -- 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, 50%

in stocks, 50% in bonds, the problem with that you are dominated by equities. i need more volatility in order to create a balance because i want to beat equally on two things. in the traditinal way you have to buy more bonds and if you are buying more bonds, you are buying a lower returning asset class. as you buy more, you dilute your return and 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. and 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.

it has embedded leverage. the idea of taking a bond is going to produce a return stream that gives me about the same amount of risk in those two assets. it also raised the return because the return of cash is lower than the return of bonds in that time. 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 in any 10 year period or any period what is going to be good and what is not good. tom: what does the asset model say when your leveraged bond porfolio and you stock portfolio correlates? 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, than the mathematical answer is 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 that you are going to have as result, you are going to have diversification in 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 well-diversified portfolio. i look today and i would be terrified to own any other portfolio. the reason is am i going to own

stocks? am i going to be concentrated in bonds? i do not want to be concentrated in stocks, i do not want 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: do you test that it is operational within the great distortion we are living in now? ray: i have almost my entire net worth in it. meaning my trusts. the reason i have is because i need a balanced portfolio.

if i don't i am scared. 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] tom: no? this is serious. it is nice to make jokes as we saw with the "wall street journal." 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 in situation that it did badly were depressions. and what that means is, as the federal reserve is tightening monetary policy, if they cause asset prices as a whole to go

down, that is -- the only times it really did badly in the great depression and in 2008, in both of thos years, 20% to 25%, those are very tolerable contractions because the traditional portfolio fell, like, 60% in those periods of time. when i look at that, i am saying, we have central banks on your side and otherwise, you will be concentrated in some asset.

allweather lost 20%. is it a failure of risk parity? ray: on a month-to-month basis, the stock market was down, the assets were down. i think it is almost a good -- 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. like, i could look back, it is down 6% this year. i am comfortable being in that position. you look at the role history, 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: right. i want to defend the hedge fund industry. there are three people in here on the racket. the coverage in august, do we remember that we went to 50 intraday? it was wild. john paulson down. ray: let me be clear. we have our all weather fund. that is down about 6% for the year now for those reasons. i am comfortable it will be balanced. we have funds that are up materially. tom: we've got to make some news here. 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 in a couple of different markets. michael: you are applying how the machine works to this time period. you have said we are in secular stagnation. i will go back to the question from earlier which is 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, number one thing, are flush with cash. as a result, the biggest force in the stock market is the buybacks and mergers and acquisitions. something like 70% of the stock market is along those lines. of course, i think you know the changing complexion of the

businesses. the productivity numbers are severely distorted because you cannot account for productivity. 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 of the next black swan? ray: there are all sorts of embedded risks.

i would say we are better able to withstand them than we have been before. there is less liquidity in the markets. there is a fair amount of essentially 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, you are going to lose liquidity, but in terms of the bigger moves. prided that we don't have that big event we are talking about, which is the tightening of monetary policy, you get the doubt. 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 to ease monetary policy. michael: some central bankers would say, if we raise rates now, we will have some ammunition. you sound like you disagree. ray: again, it is a restrictive policy. i do not care if they raise 25 basis point. 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. now we have a situation where 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, but basically 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. and that's -- look at the world. we are in a world economy. tell me countries who should be tightening monetary policy. michael: this is a prime time bloomberg "surveillance" special worldwide. we are with ray dalio of bridgewater. in the time we have left, i want to talk about you and bridgewater. you have been around for a while, as tom noted, and you have suggested to people that you are starting to step back. a lot of people are saying, this man with his ability 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: what i am talking about is stepping back in management, not stepping back investments. i am an addict, i started at 12.

i can't stop, i love the game. right? there is some confusion as to what the stepping back is. 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 this team, i have a lot of people who have been there a long time and we have all played the game. we are used to doing it. i could step down and it wouldn't matter, really. tom: alan mullally has an historic meeting. a 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: oh, the business we are in teaches us that. tom: i'll say. ray: we have a very unusual culture. tom: we do not have that at bloomberg. ray: it is a total meritocracy. what we do is tape everything so everyone can listen to everything. there is nothing hidden. it is a very straightforward way. that is why a lot of people come there. because everyone has the right to make sense of anything. there is no traditional hierarchy. so you can ask any questions and that keeps you on your toes. the best way to do it -- it is like, what do they call that in parliament? tom: question time?

ray: 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. that is fantastic. meaningful work and meaningful relationships. tom: are you having a greater debate at bridgewater about china? when you have meetings about china, is it heated?

tom: are you having a greater debate at bridgewater about china? when you have meetings about china, is it heated? ray: it is not heated because the culture is analytical. keep it calm and say anything you want to say. china -- if we have this template, 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 i was saying is -- by the way, we miss things. that is the humility. 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. and, by the way, the people -- i've gotten to know many of the decision makers -- 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. the snl crisis. that is a manageable process. if you have your balance sheet, you can manage that. 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. but like most heart transplants nowadays, you will get through it ok if you have good surgeons. you get the speculator and they get hyped up, they get leverage on margin, and then you have the bubble. that bubble was a negative at the same time.

all i am saying is you went from a bull market and you are having a negative force coming in at the same time. those three negatiev forces. if you look at other economies, that is a negative for economic activity. ok, so, what comes next? we know the certain things that come next. my statement was when we had that 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 importances. we look at everything up close. and so when you look at china, i think china is going to be just

fine, just to be clear. it is going to be weaker. their weak growth is going to be more than twice our normal growth. tom: i love how you come back -- you have historical charts -- on currency depreciation. many people -- i promised you i would not ask you for currency quotes in this wonderful session we are having with you. 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? because everybody judges their net worth based on their own local currency. that was the lesson i learned in 1971.

i was clerking on the floor of the new york stock exchange. i walk on the floor of the stock exchange. richard nixon on sunday night announces that he is going off the gold standard. i thought, wow, we don't have money. i walked on the floor of the exchange and i learned that every time, it stimulates and makes everything cheaper. in other words, when you have zero interest rates, what are you going to do? central banks around the world as brady's u.s. stagnation, you are optimistic about china but they are going to be slow. i don't think the secular stagnation -- i should have

dropped her question. what kind of returns for the next 10 years can investors expect? i'm not talking about your particular fund, but will it be different? >> yes, you know it. we will have returns that will -- this is ahere major pension fund problem. is whenaffects work there is quantitative easing and prices go up, that is producing a present value effect. it's like a bond. as your bond price goes up you i'm not saying it clearly. ,f you invest in a 10 year bond no matter what you will get to and a quarter process. if the bond price goes up the

reality is we can then collect a profit and sell it, the lower will stillte and you get to and a quarter percent. when you look at the structure of asset rises from cash to the 200 quarter percent, you carry that all the way through, that's permeated all asset groups. capital, all asset classes are going to have a lower term. that means a whole lot money. suppose you have hundred thousand dollars, how much money do you have to have in or to immunize $100,000? we needed to have that in order to get the economy going but we have a situation that we know is certain that we will have lower returns. tom: we have one minute.

one minute or one more hour? we went with one more minute. everybody wants to everybody wants to go find your next uber out of silicon valley. what do you say to a 26-year-old smart kid? how do you sell them in 2016? 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. that means you get to even think about the whole world and how it is connected, and there is nothing more exciting. and there is no excuses. because if you go into any other business, you will have a cycle. there will be a tech cycle, everything. i think -- if you take financial engineering, every investment that you will go into -- tom: i think we should do that.

thank you. we have run out of time, thank you so much. [applause]

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