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.

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: let's just describe the machine. it's a very simple machine. if the same for an individual. the country is nothing more than a collection of individuals. 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. there's 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. 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.

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tom: i have a good amount of ray's recent work. the most fascinating thing i see is how currency plays into it. would you predict a stronger dollar? how does the currency dynamic fit into what you see with the lack of productivity?

ray: picture wherein is very similar that in picture we ran from 1982 to 1987. 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 er-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. michael: 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: this is absolutely critical. we have a presidential debate. i don't want to get into parties. they want productivity. inefficiency from or non-efficiency to efficiency. what is your prescription for to assist thedent 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. basically works the same in all countries.

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. but 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 second factor, 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. but it goes down to other things. we have surveys of work attitudes. like different cultures. some places live to work and some work to live. you can take surveys. 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. this is various factors. but 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? there is a 58% correlation, for example, between corruption and economic growth over the 10 year time frame. as we go into that -- productivity is going to be the single biggest factor. how do you make people productive? self-sufficiency. the single biggest factor for a number of countries is do people feel the consequences of their earning or not working? in countries where there is self-sufficiency, they feel those consequences versues higher social net, less higher levels of productivity.

the things when you look at your neighbors and you sa 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, it is like a health index. what is your cholesterol level? do you exercise? do you smoke? you can know your 10-year prognosis.

it is a series of those things that i am mentioning. i don't want to oversimplify. there is a formula and if we could look at that formula together, it is like a health report. that's what i would like to have happen. ♪ don't have a balanced portfolio, i am scared. i learned to be scared over the years.

michael: 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: 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 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 use the bloomberg terminal i will give you the , endorsement. so there are all different ways you can name. we trade 140 different markets.

all liquid ways. 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 tt. very importantly, economicprinciples.org. that's where so many of these instructors are that he is put together. 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. 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 more 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. and so, 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 in any term or period is going to be good and what is not good. tom: what does the asset model say when your portfolios correlate? what is the shock analysis you

see? ray: it would be equal to if you own stocks. you've got 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. stocks. equal.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. comparable volatility. if i apply that to different then the most important thing is that you have a diverse portfolio. i would be terrified to own any other portfolio. and the reason i be terrified to

own any other portfolio, m i going to own stocks? am i going to be concentrated in bonds? tom: how do you respond if you are almost too diversified? whether by leveraging were going to different asset classes, how do you respond to the criticism mar?versification question 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, you amend a risk parity? ray: i have my entire net worth in it. the reason i have is because i need a balanced portfolio.

when i have a bounce portfolio, i am scared. -- balanced portfolio, i am scared. i learned to be scared over the years. i tested it through the great depression, 1923 in germany. tom: did you test it through the giants game this weekend? [laughter] tom: we are still getting over that. ray: i want to be clear. no thing is a sure thing. let me say that 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 is, 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 you're going to be concentrated in some asset. >> you have suggested to people that you are going to step back. what are your plans? >> i'm an addict. i started at 12. ♪

lost 5% inarity fund august. is that 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, if you look at , that'ser-term returns what they are. that was a month. all i am saying, you could lose 5% in a year. it's down 6% this year. i am comfortable being in that position. if you look at the whole history, the stock market in 2008 was down 38%, right? warren buffett, greatest

investor, his bad year was down 48%, 47%. michael: you didn't care though. ray: this is one of those moments where 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? you take six weeks off in august. it was wild. ray: let me be clear. just to get the facts right, we have our all weather fund. that is down about 6% for the year. for those reasons. i know it will be better. other components are up materially. tom: how much are they up?

well, 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 lot of different markets. michael: you are applying how the machine works to this time period? we are in secular stagnation. i will go back to the question, 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.

i think, by the way, the productivity numbers are severely distorted. tom: you are more optimistic? like many others. ray: the way we do our accounting, it means photos have collapsed in terms of productivity. what is the value of a photo? tom: are you on instagram? [laughter] ray: no, i am not. tom: i am not either. seriously, i promised i would not bring up probability. it, within the messiness of we have seen people make quite a name for themselves looking at rare events. in experience you have is 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 essentially dynamic hedging. dynamic hedging is a way -- like insurance companies when they take their protection. by and large, 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. we are better able to withstand them provided that we don't have , that big event we are talking about, which is the tightening of monetary policy. what scares me or 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 value. 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 don't care whether they raise, quite frankly. i don't see the reason for it, frankly. 2007, i was watching this incredible bubble happened. it was an obvious bubble. -- it was an asset bubble. and the fed just paid attention to the gdp gap and they missed the whole bubble. we had an economic collapse. 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. when i look at this, there are 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 don't get it, given those asymmetrical risks. that's 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. 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: ok, so, 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. there's some confusion about what the stepping back is. i will always be playing the game. michael: do you have a succession plan in place as bridgewater? 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. we are used to doing it. i can step out, and it doesn't matter. tom: alan mullally has an historic meeting. i believe that was thursday morning. everybody runs a company differently. with mullally it was one plan.

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. tom: i will say. ray: we have a very unusual culture. tom: we do not have that at bloomberg. ray: well, nothing is like this. it is a total meritocracy. everyone can listen to everything. there is nothing hidden behind. it is a very straightforward way. it is a very unusual meritocracy. that is why a lot of the best people come there. everyone has t right to make sense of anything. there is no traditional hierarchy. you can ask any questions and that keeps you on your toes. the best way to do it is like, what do they call it in question time?

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. there is meaningful work and meaningful relationships. tom: are you having a greater debate at bridgewater about china? ray: you have two problems in china. ♪

tom: are you having a greater debate at bridgewater about china? when you have meetings about china are they heated, are they collegial? 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. particularly, local governments have to restructure. but that is a manageable problem because it is in their local currency. by the way, the people i've gotten to know, they are very intelligent and capable and prudent people. more intelligent prudent people

understand. restructuring your debts in your local currency is a manageable exercise. we have done it three times. we did in 1971. we had latin american debt crisis. we had the s&l crisis, and the rtc. 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 a challenge. that is like a heart transplant, a serious operation, and it tends to weaken them. like most heart transplants now you will get through it ok if , you have good surgeons. they had a bubble. you get the speculator and they get hyped up and then you have the bubble. they had that 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. you have those three negative forces. if you look at other economies, and analogous set of circumstances, that is a negative for economic activity. ok, so what comes next? we know the certain things that come next. my statement was that 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. we look at everything up close. 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 on currency depreciation. we see that in brazil right now. many people predicted this in brazil. i promised you i would not ask you for currency quotes. at the end of the day, is the solution to the international trilemma always going to be currency depreciation? ray: it is always going to be the number one choice. it has always been. 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. i walk on the floor of the new york 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. it causes things to go up. when you have zero interest rates, what are you going to do? tom: you have an economic model, you are optimistic about china, they are going to be slow, so for investors out there -- i don't think that secular stagnation, i'm sorry i should not interrupt your question.

tom: when the fold that in. tenurend of returns on a -- 10 year time horizon can we expect? ray: you're going to have returns that are probably going to be somewhere in the vicinity .f three or 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. let me say it better. 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%. when you look at the whole start of asset prices from cash to the 2.25% in the bond, you carry that all the way through. that has permeated all asset classes. that has permeated venture capital, real estate, so 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? you need to have a lot of money. that to get have the economy going. we're going to be in a situation where we are going to be getting very low returns.

tom: i just had to give the signal to the cameras, 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 26-year-old kid to go into finance? 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 that you get to even think about the whole world and how it is connected, and there is nothing more exciting. there is no excuses. if you go into any other business, you will have a cycle. there's going to be a tech cycle. there's going to be anything. 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. ♪ ♪

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(the lion sleeps tonight.) woman snoring take the roar out of snore. yet another innovation only at a sleep number store. >> turning ideas into action, the clinton global initiative attracts some of the world's most influential people, leaders in business, politics, and philanthropy. the goal -- find solutions to economic problems and establish commitments that improve lives. on this bloomberg television special, we take you to the cgi america meeting in denver, colorado, where a discussion of the nation's growing wealth gap featured the housing and urban development secretary julian castro. secretary castro: we want to address that affordable housing component so that folks can live comfortably in a decent, safe place. >> a panel of visionaries explore diversity and vision in