>> he founded the world's biggest hedge fund, bridgewater associates, investing nearly $170 billion. the self-made money manager predicted the lasting impact of the financial crisis. and his fund has outperformed for decades. we sat down with elio -- dalio for conversation on his investment strategy. his view on monetary policy. >> i don't believe they can raise rates faster than is discounted in the curve. >> analyzing the global economy. >> i think china is going to be

just fine. just to be clear. it will be weaker. >> and what his future holds. >> i can't stop. i love the game. >> on this special edition of bloomberg surveillance. good evening. we are here for one of our most anticipated events in the history of bloomberg "surveillance." let's set up where we are. this is 114 acres north of new york city. it is a benchmark. we have steve back there with our audience, we say thank you. we need to get started. michael: if you sold in may and went away, it is time to come back. >> why don't we get started on

the economic machine. >> that is what you have based your entire career on. your study of the economy, not just investing. tell us about your concept of the machine and how you got to that. the same thing happens over and over again. these things happen economically. let me just describe the machine. it is the same for an individual. in a country is no more than the collection of the people. 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. for a country it is the same as individuals. you work hard and are well educated. you can be more productive if

you work harder or you can be more productive if you are more creative. over a short amount of time you can spend the amount of money which is different from what you earn. that's because we have debt. >> they're also called children. ok, thank you. we have debt cycles and there are two. there is a short-term, the business cycle. recession, that eases. what they do is they increase the spread between the thet-term interest rate and return of other assets. as a result, money goes into a system and what it does is it ends up with prices. when we are getting the first then we make items that are cheaper because interest rates go down so we have that business cycle. when that cycle gets past a there is apoint,

monetary policy as you get to the later part of the cycle. and you start to have inflation, it becomes too tight end the cycle goes down and that is the business cycle. when we look at every country and see where it is, we are in the middle part of that cycle and we are having the conversation we are having about the federal reserve. there is a long-term debt cycle because these debt cycles add up. imagine you just start off with no debt. low debt to gdp ratios. you start out with no debt. earning $100,000 per year and you have no debt. you can borrow 10,000 dollars per year as you have no debt. 110,000 dollars. your spending somebody else's income. they are earning more so they can spend more and become self

reinforcing until you get to the point where debt rises too much relative to income like a balance sheet. you can leverage to a certain point. all central banks are in the business of helping that cycle go along so that lower interest rates. as they lower those and hit zero, we then come to a dilemma. we have the end of monetary policy as we traditionally have it. as a result you cannot keep that cycle going. then when you have big spreads, you put liquidity in the system, money, there is debt and money. the difference between debt and money as money, you have to pay back. you have to pay back. you go into a store, buy a suit, you pay with a credit card, money settles the transaction. what the central bank does is it can't create credit because there's too much debt. they put money in the system.

they do that by buying financial assets. , the sellery bonds of that bond takes the cash and buys something else. as a result, it causes the spread to narrow. it causes prices to rise. that appreciation in the asset prices the experience then creates a normal term structure of interest rates. there are three equilibrium's we have longer-term. the first is debt cannot rise faster than income. second is the operating rate in the economy cannot be too loose or too tight. the third is that we have term structure of a capital market structure. in other words, that cash is going to have a lower return than bonds which is going down to have a lower turnover than equity. there is an equilibrium that keeps working its way through that system.

monitoring fiscal policy. >> we did that out of world war ii. and it collapsed, many people in this room lived that. we have come down with a great moderation, enjoyed the last seven years. where are we now in that continuum when we observe things mathematically? i would say we need math on the radio, a lot of curves like indonesia, brazil. other challenges. where are we right now? the united states is in the midpoint of its short-term debt cycle. utilization, gdp gap. as a result we are talking about whether the fed should tighten. that is what central banks do. we are near the end of a long-term debt cycle. because that cycle of being able raise -- you have interest

rates going to zero. you have spreads that have come down. those spreads that have come down means that asset prices have gone up. now the expected return of asset glances are all very low. cash, we know bonds are two and a quarter percent. you know it will get for the next 10 years. two point 25 -- 2.25%. premiums look like three or 4% on that. all the assets are now aligned in normal risk premiums. that's why if interest rates rise faster than is discounted in the markets, those are discounted. ,om: for those of you worldwide they are an exceptionally competent group of bloomberg users. in the alternative investment

funds. within the framework of your machine, do you presume a jump banks comes central out of this, or can they manage it with smooth vectors and smooth flight paths? dalio: i don't believe they can raise rates faster than is discounted in the curve. that interest rate curve, the rate at which it is discounted to rise which is built into the curve, is built into all asset prices. if you raise them much more than is discounted in the curve, i think that will cause asset prices to go down because all things being equal, all assets are on the present value of discounted cash flow and we look at that. all of them are subject to the same discount. they have that in their structure. if you raise rates faster than is discounted in the curve, all

things being equal, that produces a downward pressure. that is a dangerous situation because the capacity of the central banks easement is not -- has not been less in our lifetime. we have a very limited capacity of central banks to be effective in easing monetary policy. the federal reserve has a responsibility both 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 europe. if we look at it in the same framework, europe is in a depression. rather than gdp gap, we have a depression with a low point. with a lot of political extremism beginning to emerge because of the pressure. they need an easier monetary policy. japan needs an easier monetary policy. china needs an easier monetary policy. ♪

>> do you think qe works anymore? dalio: it will work a lot less than a did last time. ♪

tom: your work which you most recently published with bridgewater and the most fascinating thing i see within your economic machine is a currency and how it plays into it. would you predict a stronger dollar like the pre-plaza accord or the rubin dollar of the 1990's? currency fit into how you see a lack of productivity and growing debt? the picture we are in is

very similar to the picture that was painted from 1982 to 1987. and that, we have a lot of countries, particularly commodity producers, who have a lot of dollar-denominated debt. , ase had that environment they are in a debt problem, it is a self reinforcing situation because their debt is denominated in dollars and revenues go down. they are short of dollars. a debt is a short position and you have to cover it. that bids up the price of the dollar. what we need now, we have these commodity countries. very similar, emerging countries, very similar. cycle, self reinforcing and back then until 1985. then we have the plaza accord as you refer to. and we have the need to ease

monetary policy. but we were able to do which was a good. we were able to ease our monetary policy as the economy grew. it is tough to do that where we are right now. this primetime edition of bloomberg surveillance on radio and television worldwide with ray dalio, founder of bridgewater associates. ?hat do we do what is a central bank do when it is at that. when you're at the end of that long-term credit cycle. ray: the thing that you do is you realize that the risks are asymmetrical. you can tighten monetary policy. there is enough debt, enough sensitivity. see, because to the risks are asymmetrical. that's the main thing.

the risks on the downside are different than the risks on the upside. brendan: do you think qe works anymore? ray: it will work less than it does last time just like each time it worked a lot less. we cannot have a big rate rise. the term structure on assets, because of the amount of debt, what it has with the dollar with deflationary pressures. we will have a downturn. worrisomern should be because we do not have the spreads. qe, you're asking if it will work. it is the purchase of those assets to get those premiums up. when you keep pushing, buying more bonds. not an attractive investment relative to bonds, the spread is what will drive that. if there is not much spread in something else, you get less effective monetary policy.

brendan: are we there? ray: no, not yet but we are closer to being there and some countries like europe, they are there. is, what are you going to buy in the way of the bombs? -- bonds? we are very close to there. that is why you need more currency depreciation. the effectiveness in japan is there. the effectiveness of monetary policy that comes through the currency. when the person who is receiving that cash for selling their bonds has to do something, and they are in different between cash and that other asset. there is a pressure to move it out of the country. we have very high rates. in comparison to those in europe and japan. it comes to the currency. you have to have currency moves.

that is the environment we are in. tom: we have a presidential debate, we don't need to get into republican and democrat. this station, too many people, is flat on its back. they want productivity. the smartest thing in your work is the mystery of going from non-efficiency or inefficiency to efficiency. what is your prescription for the next president to assist in productivity? ray: we have done a study going back 60 years. we took the various factors and correlated them with the next 10 years growth rate. we did this across 20 countries. studies on economic principles.org so you can read this. economies like a human body, it basically works that way. it is the same thing as an

individual. when you ask yourself is that individual going to be productive and grow, you will ask what is the education and the most important single factor is what is the cost of an educated person? someone is more educated, that is a good thing. if you have to adjust it by the number of hours worked,, and what that cost is, because let's say in europe. southern european countries like france, italy, and spain, after adjusting to the average powers -- hours worked in a week, they cost twice as much as an american. education.e the that is good, but if you are expensive it is not good enough. does the 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? the second biggest factor is indebted to us. edness.e these -- indebt you have the later parts of these debt cycles, they have less capacity to increase their boundaries and expand. it goes toward other things. we have surveys of work attitudes. different cultures have different work attitudes. some places live to work and some places work to live. cultural, i'm not saying one is better than the other, but you can take surveys. tom: what is your prescription in the upper of politics, whether it is mr. corbin or mr. cameron. australia? we didn't even know this was coming. the prime minister is out. -- ray dalio for

a better america? ray: and for a better world. .here are these various factors there is not one factor. they are clear and in the study. those factors, at the end of the day, are the same. are you going to be well educated or economically well educated? inefficient? there is a correlation between corruption and economic growth over the ten-year timeframe. as we go into that, productivity will be the single biggest factor. how do you make people productive? self-sufficiency. the single biggest factor for another -- a number of countries is do people feel the orsequences of their earning not working? in countries where there is

self-sufficiency, they feel those consequences rather than a greater social net with higher levels of productivity. at the end of the day, it is when you look at your neighbors and say if they can get an income and they are not going to be penalized, they will be less motivated. direct therying to attention to is what those specific factors are so that it is like a health index. i like to draw people to productivity in this study. you can see what those correlations are because, for all nations, same formula. it is like a health report. if you can look at your cholesterol level, do you smoke, do you exercise? brendan: not that you want to find out. your ten-yearnow

prognosis and if you look at that with that benchmark, you can see what productivity is. of things and i don't want to over -- over simple fire that if we look at that formula, it's like a health report. ♪ ray: i don't have a balanced portfolio, i learn to be scared. ♪

♪ brendan: howdy you apply investing when you are looking at investments you want to make? what does it tell us about where america is and where american companies are going? interested in who is going to buy and sell and why. the way i look at the price is it is the aggregate of purchases divided by the quantity of goods

sold. that may be a pond or equities. i look down there and factor by factor. when i am trading, anything that will give me an edge, whether it is insider buying or whatever it is, what we do is we take those rules and have written them down. or 1983, every time i put on a trade, i would write down and look at those rules. what i discovered by doing that is those rules would be programmed into a computer. when they were programmed into a computer. tom: did you just say bloomberg terminal? brendan: shameless plug. ray: i give you the endorsement. so they are all different ways.

we trade 140 different markets, all liquid. whatever the roles are. tom: do you have an informational advantage now that you had in 1986? we will get to it but seriously, do 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 to your advantage? the technology continues to empower me. i think there is no getting around the deep thought. if you put a lot of data in and are not spending the time with the deep thought, thinking about how you are going to be wrong and you have the fundamental cause-affect linkages, that has ways been the case. artificial intelligence is not a new thing. 1953 is when it started.

there were narrow nets and different ways of doing it. -- neural that's. escaping the fact that when you think about relationships, they have to be connected cause effect relationships. the same things happen over and over again through history. tom: gluten-free. get some water and let me preset you for the audience. we welcome all of you worldwide. bloomberg television on bloomberg radio. introduction, former caddie, yes he is in the news, we will get to that. economic principals.org is where so many of these concepts and structures are. brendan: if you are having a bad

month, there are openings for caddies here. this is where i want to get to and not about the current situation but how you develop the theory. idea thatut of the everything happens over and over again. thatanted a way to invest would enable you to sail through all the various ups and downs. tom: what happened in 1996 that got you to do this? where is the moment where you decided to take a bet on the disparity? ray: in the early 90's, i earned enough money that i was putting together trusts for my family. i realized making money and the market is zero some and the allocation is the important thing. i realized how markets work. the problem with those markets is you can't achieve balance. if you have a stock-bond mix, and you want to diversify, and

you buy stocks, 50-50 of your you are dominated by equities because it has twice the volatility. i need more volatility in order to create a balance because i want to that equally on two things. way, you haveonal to buy more bonds and as you buy more, you are buying a lower return of assets. assets, youut the dilute your turn and you're 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. if you look at risk-return through time, those that have risky assets or volatile assets, tend to have a higher return and a higher risk. that is structural because they have a longer duration and because assets are leveraged themselves. hasaverage s&p 500 company

a debt-equity ratio of 1-1. the idea of taking a bond and changing its complexion of return by borrowing cash and bonds. buying say to -- 2 bonds. tech gives me the same amount of risk in those assets and raised the return because the return of cash is lower than the return of bonds over that amount of time. that meant i can create diversification. the most important thing is how do you create diversification without lowering your return? i don't know in any ten-year amount of time what will be good and not good. i needed balance. when your leverage bond portfolio and you're on leveraged equity -- on leveraged equity correlate and stock and bond prices go down together, what if the shock analysis that

you see with this? ray: i imagine it would be equal to stocks. you have 100% correlation between these two assets. i have made it more leveraged so it has the same volatility and risk. , thewere 100% correlated they will equal the volatility of stocks. but the fact is if it is not 100% correlated we get into what drives correlation. is that you are going to have, as a result, diversification. comparable volatility. i get diversification. then i can have -- the most important thing is diversify my portfolio. i look today and i say i would any othered to own

portfolio. the reason i would be terrified to own any other, am i going to own stocks? well i be concentrated in stocks? will i be concentrated in bonds? i don't want to be concentrated in either. tom: where you are almost too diversified whether it is by leveraging up or it is by going to different assets? howdy respond to the criticism of diversification? ray: diversification of assets where you don't know which is going to be the better return, similar expected returns and risk, it does not lower your turn. -- return. tom: is this operational within the great dispersion we live in right now? i have, almost my entire net worth in it. all -- the reason i have is i

need a balanced portfolio. i have a balanced portfolio, i'm scared. i learned to be scared. i tested it through the most severe. i tested it through the great depression, i tested it through the wide my republic in germany. tom: did you tested through the giants game this weekend? it's nice to make jokes about this but this is serious. ray: i want to be clear. nothing is a sure thing. let me say that. if you have a well diversified and it underperforms in 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 as a whole to go time it really did badly in the great depression and in 2008, something and both of those those are25%, tolerable contractions because the traditional portfolio fell at about 60%. when i look at that, i am saying we have the central banks on your side. otherwise, you will be concentrating and some assets. brendan: you have suggested to people that you are starting to step back. what are your plans? ray: i'm talking about stepping back in management, not investment. ♪

♪

brendan: your risk fund that lost 5% in august according to most resorts. is that a failure of risk parity or the assets you bought? on a month-to-month basis, i didn't know the stock market was down. the assets were down. a lousy month for us. if you look at the longer-term returns, they are what they are which is good. you have the stock market down, whatever. that was a month. .ou could lose 5% in a year i could look back and say it is down 6% this year. the stock market, if you look at the whole history, the stock market in 2008 was down 38%.

one of theett, greatest investors, his bed year was down 48 -- 47%. to me, i feel like i'm fine. tom: there are people here that are actually in the racket. -- wege in august, was it went to 50 intraday. he took six weeks off in august. it was wild. let me be clear, just to get the facts right. we have are all weather fund which is down 6% for the year now because of those reasons. i know it will be balanced. we have our. alpha funds that are up materially. tom: how much are they up? depends on which fund you

are in, some were about 6%. brendan: where are you getting the alpha? ray: we could go long and short in a lot of different markets. you are -- brendan: you are applying the hobby machine works to this time period. you said in stagnation, i will go back to where is american business right now, and even global business? what is the ability of businesses to turn a profit so you can make money? ray: american businesses right now are the number one thing, they are flush with cash. they are the biggest floors on the stock market with buybacks and purchase and acquisition. of my by anke 70% the stock market is along those lines. i think you know as well as i

have the change in the complexion of the businesses. i think productivity numbers are very distorted because of the fact that we cannot count. tom: you are more optimistic. ray: the way we do our accounting for productivity, it means photos have collapsed. what is the value of a photo? tom: are you on instagram? ray: no. tom: i'm not either. but we look at the map of the seriousness of this, i promised i would not bring a probability distributions but in the math of it, looking at rare events. with all the work you have done, all the experience you have, are these derivative strategies around bonds and equities able to withstand the shock of the next?

there are all sorts of embedded risks in different ways. i would say that we are better able to expand them then we have been before. there is less liquidity in the market. there is a fair amount of dynamic edging -- hedging. that is a way for insurance companies when they take their protection in terms of insurance rate risks, that is an issue. i would say we are better to withstand them in terms of, not the short-term volatility type of thing. but in terms of the bigger moves, we are better able to withstand them provided that we do not have that big event i am talking about just the tightening of monetary policy. ist scares me or worries me what the next downturn and the economy looks like with asset andes where they are,

lesser ability of central banks to squeeze monetary bonds. brendan: some would say if we raise rates now we have ammunition. you sound like you disagree. it is a restrictive policy, i don't care whether they raised 25 basis points. i don't see the reason for it. in 2007, i was watching this incredible bubble happen. a finance on a lot of debt and it was an obvious bubble. the fed just gave attention to the gdp gap and we had an economic collapse. now we have a situation in the mid part of the cycle, they are trying to identify where inflation is. what they are worried about, we have a lot of liquidity around. -- littlelow glimmers. worried too are

much about the short-term debt cycle and not enough about the long-term debt cycle. i don't get it given those asymmetrical risks and that is a look at the world. we are in a world economy. outside should be tightening return policy. brendan: bloomberg radio and television worldwide, we are at the corel arrowwood conference center in new york. in the time we have left, i want to talk about you and bridgwater. you have been around for a while. you have suggested to people you are starting to step back. , thisof people are saying man with his abilities, should stay in the game. what are your plans? ray: it has been 40 years, we just celebrated 40 years. ist i'm talking about stepping back in management, not

setting back in investments. i am an addict, i stood at 12 and can't stop. i love the game. is some confusion about what stepping back is. i will always be playing. brendan: do you have a succession plan in place? bob prince who has been working with me for 27 years. i think he's 55. greg jensen has worked with me for 17 years. he just turned 40. , i have a lot of people that have been there for a long time. we are used to it. i could step out and that doesn't matter. meeting, i think it was thursday morning. 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? ray: the business we're in teaches us that. we have a very unusual culture. the unusual culture is that we -- well, nothing is like that. it is a meritocracy and what we do is we take everything so everything can listen to everything. there is nothing hidden. it is a very straightforward way. it is an unusual idea and meritocracy. that is why the young, best people can come there. everyone has the right to make sense of anything. there is no traditional hierarchy. you can ask any question. that keeps you on your toes. the best way to do it, what did they call it in parliament. brendan: question time?

ray: you stand up in front and you have everybody shoot at you and you get the stress test. that is the best way to test your thinking. there is meaningful work and meaningful relationships. are you having a greater debate at bridgewater about china? ray: you have two problems in china. ♪

♪ are you having a greater debate about china, when you have debates about china, are they heated or collegial? ray: it is not heated because the culture is very analytical. keep it,, say anything you want to say. , itou have this template

just dropped the number in the template. brendan: that is an interesting situation because china is one of the few times that people have seen you actually come out culpa.near kulpa -- mia ray: what's your question? brendan: how did you miss it with the template? ray: we miss things. in terms of that, what happened is when they went to the bubble bursting, you went from -- you have two problems in china. you have a debt problem, local governments have to restructure. that is a manageable problem. it is in their local currency. i've gotten to know a number of policymakers. they are intelligent and prudent.

more than people understand. restructuring debt in local currency is a manageable exercise. we have done it three times, we defaulted in 71, the latin american debt crisis. and the snl crisis -- . that is a manageable prices -- crisis. have isr issue they they have to restructure what they are spending money on. they have to rebuild a new economy to replace the old one. that is a challenge. that is like a heart transplant, a serious operation. heart transplants nowadays, you will get through it ok if you have good surgery. they have a bubble, the third thing is they went from an is normalket, which in the early emerging stages of many economies where you get the speculator in and hyped up and leverage. and they had that bubble.

that bubble was a negative at the same time. you went from a bull market and you are having another force, a negative force coming in at the same time. you have those three negative forces. the economies having an analogous set of circumstances, what are economies that had to restructure debt, what is it like? that is a negative for economic activity. what comes next? we know certain things come next. my statement was, when we have that bubble burst, that we shifted from one time of the -- one set up of circumstances, two minuses and a plus. we exaggerate over the short-term. a lot of importance is. we look at everything up close. china, i thinkt

china is going to be just fine. it will be weaker. willeir week growth probably still be twice our normal growth. backi love how you come with these beautiful historical charts on currency depreciation. ie that now in brazil, promised i wouldn't ask you for currency quotes. of the day, is dilution of the international lemma always-- pri going to be currency depreciation? always been that if you are facing a domestic contraction, and you have a choice, you want to depreciate or currency -- your currency. is, that was a

lesson i learned in 1971. i was a clerk on the floor of the nyse. i walked on the floor, richard night, andunday ounces that he is going off the gold standard. i walk on the floor of the nyse and it is up a lot. ,nd i learned that every time but you have is it stimulates and makes everything cheaper and causes things to go up. when you have a zero interest rate,? what will you do? brendan: you have an economic model, central banks around the the u.s. and ease secular stagnation, you are optimistic about china but they will be slow. for investors. the secular think stagnation, i shouldn't even

interrupter question. -- your question. brendan: what kind of returns, and the next 10 years, can investors expect? is it going to be different? ray: you know it. you will have returns that are probably going to average somewhere in the vicinity of 3% or 4%. this is a major pension fund problem because the way assets work is when there is quantitative easing for these purchases and prices go up, that is producing a present value effect. it is like a bond. as your bond price goes up, you invest in, sorry i am not saying it clearly. if you invest in a 10 year bond that is 2.5% -- 2.25%, you are going to get that.

if your bond price goes up you can be jubilant but when you collect that profit and sell it and invest it at a lower interest rate, the lower interest rate means you will still get the two and a quarter percent. the wholeook at structure of asset prices from , and you carry5% that all the way through, that has permeated all assets. that has permeated venture capital, private equity, real estate. all asset classes going forward will have a very low return. that means you need a whole lot more money in order to immunize something. supposing you have $100,000 per year expenditures, how much money do you have to immunize a $100,000 to the church -- expenditure? we do that to get going as it did but we have a situation where we know it is certain have low returns. to: i had to give a signal

the cameras, one minute or one more hour with you. we went with one more minute. , everyone wants to go find the next silicon valley. what the you say to a 26-year-old smart kid to go into finance? have you sell them on that in 2015? ray: i think that when you can go long or short, anything in the world, or everything in the world, that means you don't have any cycles. that means you get to think about the whole world and how it is connected. there is nothing more exciting and there are no excuses. if you go into any other business, you'll have a cycle. if you going to the tech cycle, anything. if you take financial engineering, every investment that you go into in business, if i bought --

well, he can caddy. tom: we have run out of time, thank you so much. ♪

action,ng ideas into the clinton global initiative attracts some of the world's most influential people. business, politics, and philanthropy. the goal is to find solutions to economic problems and establish commitments that improve lives. 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, secretary,ousing julian castro. >> we want more folks to live comfortably and in a decency