we sat down for -- with ray dalio for his economic strategy. analyzing the global economy.

it is going to be weaker. >> and what his future holds. ray: i can't stop. >> on the special of bloomberg surveillance. 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. we say thank you. we need to get started. mike: we're going to start with

ray tonight. tell us about your concept of the machine, how you got to that, and how you develop it. anything that happened economically i learned over and over again. it's the same for an individual. so, there are three main factors. productivity, which produces income. you can spend at the end of the day what you earn. what you earn is a function of your productivity. educated,ard, well you can be more productive if you were carter -- were carter.

--work harder. so, we have debt cycles and their are two major debt cycles. eases, and what they do is the increase the spread between the short-term interest rate and the return of other assets. money and credit goes out the system and what it does, it bids of prices. cheaperitems that are go down. so we had that business cycle. when that cycle gets past a certain midpoint, that is a

tightening of monetary policy. then, you start to have inflation. then the cycle goes down. that's the business cycle. when we look at every country, we are in the mid-part of that cycle. hence, that is the conversation we are having with the federal reserve. then there is the long-term debt cycle. you start off with no debt. low debt to gdp ratios. figure $100,000 a year and you have no debt. that means you can borrow $10,000 a year because it you have no debt. spend $110,000. your spending is somebody else's income. can spendore so they more.

it become self reinforcing until you get to the point where debt arises relative to the income. you can leverage to a certain point. central banks are meant for the -- as they lower the interest rates, we have the end of monetary policy. as a result, you can't keep that cycle going. spreads,n you have big -- there is debt and there is money. have to pay back. you go into a store, you buy a suit, you pay with a credit card, you pay it back, and that ends the dead.

-- the debt. that appreciation in the asset prices creates a normal term structure of interest rates. three equilibrium's that we have longer-term. first equilibrium is debt can't rise faster than your income. -- the the operation operating rate in of the economy can't be too loose or too tight. third, a capital market structure. the cash will have a lower return than bonds which will have a lower return than equities. there is an equilibrium that

works its way through the system. we did that in world war ii. and i live that, many people in this room live that. where are we now in that continuum when we observe. mathematically, folks, we need some math on radio. ray dalio, where we right now within that equilibrium? ray: united states is in the midpoint of their short-term debt cycle. as a result, we are talking about whether we arm meant to tighten it or not. the endre in the in

of a long-term debt cycle. you have spreads that have come down. those friends that have come --n means that asset prices that have come down means that asset prices are low. are 2.4%.at bonds all of the asset classes are aligned. why, if interest rates rise, those markets are -- tom: for those of you worldwide on radio and television, confident uses a bloomberg said,als, with that

within the framework of the machine, do you presume a jump condition a central banks come out of this, or can they manage it? believe they can raise rates faster than what is discounted in of curve. , it'snterest rate curve built into all asset prices here it if you raise them much more than is discounted than the curve, that is going to cause asset prices to go down. all things being equal, all are subject to the same discount rate. rates fasterise than is discounted, all things being equal, that produces a

downward pressure and that is a dangerous situation because the capacity of the central banks has not been less than our lifetime. we have a very limited capacity of central banks to be effective in easy monetary policy. has aderal reserve responsibility both as the u.s. central bank and the world central bank, so we have a situation where if we go around an world, you should have easier monetary policy in europe. is in a depression. of political beginning to emerge because of the pressure of that. monetary an easier policy. japan need an easier monetary policy. china needs and easier -- an

easier monetary policy. ♪

how does currency dynamic fit into what you see with the lack of productivity?

we have a lot of countries particularly commodity producers that have a lot of dollar denominated debt. problem,re in a debt it's a self reinforcing situation because their debts are denominated in dollars. 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. 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. and we will have a downturn the downturn should be particularly worrisome because we don't have this 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: we are very close to there. 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.

that's the environment we are in. tom: i want to get to this video -- the smartest thing in your work is this mr. ray from going from non-efficiency to efficiency. your prescription for the next president to assist the nation in productivity? we have done a study that has gone back 60 years. this a cross 20 countries. so the same things work in all countries. the economy is like a human body , it works the same in all countries. it works the same as an

individual. if you ask yourself is that individual going to be productive. you'll ask, what is the education? costuestion is what is the of an educated person? if you have two adjusted by the number of hours worked and that in europe,t's say seven european countries, france, italy, spain -- after adjusting the average hours worked in a week -- it costs twice as much as america. have an education, but if you are expensive, it's not good enough. you have to look at does the income pay? if you have a situation where an educated population, the single most important

factor, is what does it cost to have an educated person? next factor is indebtedness. they have less capacity to -- we have surveys of work attitudes like different cultures have different work attitudes. and alaces live to work places work to live. so there is a cultural -- i am not saying one is better than the other. but you can take surveys about it. tom: so, what is your prescription? we did not even know it was coming. the radel yelp -- ra

dalio prescription for a better america? ray: four for a better world. there are various factors, but they are clear and the art in the study. and they arelear in the same study. there is a 50% correlation between corruption and economic growth over a ten-year timeframe. into --e go productivity is going to be the single biggest factor. how are you going to make people productive? the biggest factor for a number of countries is do people feel the consequences of their working?or their not re countries where the

self-sufficiency, they will have higher levels of productivity. day, when youthe look at your neighbors, if they can get an income and they won't be penalized, they will be less motivated. to direct toing the attention to is what those .pecific factors are i like to draw people to productivity and it you can see what those correlations are. nations, same formula, it's like a health report. if you can look at what your cholesterol level, do you smoke, do you exercise -- mike: tom doesn't want to find out. [laughter] on: if you can look at it

the benchmark, you can see where productivity is. want a series and i do not to oversimplify it. there is a formula. it's like a health report and that's what i would like to have. ♪ tom: i don't have a balanced portfolio. i am scared.

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. [laughter] shameless plug. 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? which is it? 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. that has always been the case. by the way, artificial intelligence is not a new thing. 1953 is when it started.

almost every manager blew up who 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. no need for an introduction. a former caddy. yes, he's in the news. very importantly, economicprinciples.org. what will we do next? michael: if you are having a bad month, there are openings for caddies here.

[laughter] 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. it is twice the volatility. i need more volatility in order to create a balance because i want to but equally on two things. in the traditional way you have , to buy more bonds and if you are buying more bonds, you are buying a lower returning asset class. 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. that is structural because they have a longer duration and also 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 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. i need balance. 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. that is what it would 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 asset classes, then i can have -- the most important thing is that you have a diverse portfolio. i look today and i say i would be terrified to own any other portfolio.

what am i going to own lack of 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? do you have to amend -- 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] no? this is serious. it's nice to make jokes about this, but this is serious. ray: i want to be clear. no thing is a sure thing. let me say 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. tom: what would you suggest to people? ray: i'm an added, i started at 12 years old.

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. it's down 6% this 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. i know there are three people in your that are actually in the racket. the coverage in august, do we remember that we went to 50 intraday? you took six weeks off in august. 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? let's make some news here.

[laughter] 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? you said we are in secular stagnation. although 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. and as a result, the biggest force in the stock market is the buybacks and mergers and acquisitions. so something like 70% along those lines. and 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? ray: 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: 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. all the time. 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. 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 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: again, 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. bubble.s an asset 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. when i look at this, there are 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. so i do not get it. , 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. we are with ray dalio of bridgewater. 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 should stay in the game. what are your plans? ray: by the way, it has been 40 years. we just celebrated 40 years. michael: i was just trying to be nice. i was talking about 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. we are used to doing it. i can step out, and it doesn't matter really. 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. 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. 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. we find that that is fantastic. meaningful work and meaningful relationships. tom: are you having a greater debate at bridgewater about china? ray: we have two problems in china.

tom: are you having a greater debate at bridgewater about china? are the heated? 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. by the way, 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. we defaulted in 1971. that is a manageable process. if you got 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's a challenge. 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. third thing, they went from an equity market. 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. you have those three negative 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 is 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 is. we look at everything up close. when you look at china -- i think china is going to be just

fine. just to be clear. but 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. in other words, 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 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 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. when you have zero interest rates, what are you going to do? tom: you live in connecticut and you have done better than good.

i am not talking about your particular funds. mike: is it going to be different? this is a major pension fund problem. work is whens there is quantitative easing or purchases and prices go up, that is presenting a present value of fact. it is like a holland. ond.our -- it is like a b i am not saying it clearly. ,f you invest in a 10 year bond no matter what, you are going to get 2.4%.

the reality is when you collect that profit and invested at a lower interest rate. so when you look at the whole structure of asset prices from 2.4% and you carry that all the way through, that is permeating all asset classes. estate -- all asset classes are going to have a very low return. that means you need a whole lot more money. have a $100,000 a year expenditure. how much money do you need to have? you need to have a lot of money. we need that to get the economy going, but we have a situation -- we know, it is certain, we are going to have very low returns. to give a signal

to the cameras. hbs and everyone wants to find the new uber. what do you say to a 26 your old ?mart kid to go into finance had you sell them on that? ray: it is easy. when you can go long or short, anything in the world or everything in the world, that means you don't have any cycles. to thinks you get about the whole world and how it is connected. ifre are no excuses because you go into any other business, you are going to have a cycle. tech is going to be a cycle or anything. if you take financial engineering, every invest that you are going into is a business.

i think we should do that. mike: because he can caddy. tom: thank you so much.

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