(the lion sleeps tonight.) woman snoring take the roar out of snore. yet another innovation only at a sleep number store. announcer: ray dalio is acclaimed in the world of finance. 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 alpha fund has outperformed for decades. we sat down with dalio for his view on monetary policy. ray: i don't believe they can raise rates faster than is discounted in the curve. for the large part. announcer: analyzing the global economy. ray: i think china is going to be just fine. just to be clear.

but it is going to be weaker. announcer: and what his future holds. ray: i can't stop. i love the game. announcer: on this special edition of bloomberg "surveillance." ♪ tom: good evening, everyone. tom keene and michael mckee. we are here for one of our most anticipated events in the history of bloomberg "surveillance." and bloomberg on the economy. let's set up where we are first. should we do that first? this is 114 acres north of new york city. it is at the benchmark resort and hotel. we have steve back there with our audience, we say thank you. we need to get started. michael: we have to say that, if you sold in may and went away, it is time to come back. we going to start with ray tonight. tom: why don't we get started on the economic machine.

michael: that is what you have based your entire career on. is your study of the economy, not just investing, but how the economy works. tell us about your concept of the machine. how you got to that and how you developed it. ray: the same thing happens over and over again. anything that has happened economically, happens over and over again. let me just describe the machine. it is a very simple machine, i think. it is the same for an individual. a country is no more than the collection of its individuals or the companies. so there are three main factors. there is productivity, which produces income. you can spend at the end of the day what you earn. and what you earn is a function of your productivity. for a country, it is the same as for individuals. you work hard, you are well educated. you can be more productive if you work harder or you can be more productive if you are more creative. so that is that.

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. tom: that is called children. continue. ray: ok, thank you. so we have debt cycles and there are two major debt cycles. there is a short-term debt cycle we are used to. the business cycle. recession, that eases. what they do is they increase the spread between the short-term interest rate, essentially, and the return of other assets. as a result, money goes into a system, money and credit goes into a system. and what it does is it ends up with prices. when we are bidding the 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. when that cycle gets past a certain midpoint, usually in the cycle, there is a monetary policy as you get to the later

part of the cycle. and you start to have inflation, it becomes too tight, and you have the cycle goes down and that is the business cycle. we are all used to that. 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. and then there is a long-term debt cycle, because these debt cycles add up. and a long-term, just imagine you start off with no debt. low debt to gdp ratios. low debt to income ratios. you start out with no debt. let's say you are earning $100,000 per year and you have no debt. that means you can borrow $10,000 a year because you have no debt. you could spend $110,000. you're 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 debts rise too

much relative to the income, like a balance sheet. you can leverage up to a certain point. and the central bank, all central banks, are in the business of helping that cycle go along so that lower interest rates. and as they lower those interest rate and as those interest rates hit zero, we then come to a dilemma. we have the end of monetary policy as we traditionally have it. and as a result, you cannot keep that cycle going. then, when you have big spreads and you put liquidity in the system, in other words, there is debt and money. the difference between debt and money is money, you have to pay back. excuse me, debt you have to pay back. you go into a store, buy a suit, you pay with a credit card, you have to pay it back. money settles the transaction. what the central bank does is it cannot create credit in the same way, because there's too much debt. so what they do is they put money in the system. 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. and as a result of that, it causes the spread to narrow. it causes asset prices to rise. that appreciation in the asset prices that we experience then creates a normal term structure of interest rates. so there are three equilibriums that we have longer-term. the first equilibrium is debt cannot rise faster than income. second equilibrium is the operating rate in the economy cannot be too loose or too tight. third equilibrium is that we have a term structure of a capital market structure. in other words, that cash is going to have a lower return than bonds, which is going to have a lower return than equity. and so on. and there is an equilibrium that keeps working its way through that system. monetary and fiscal policy -- tom: we did that out of world

war ii. it always works. we worked up to volcker. it collapsed. we lived through that. 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 odd things? mathematically i would say -- folks, we need math on the radio. a lot of curves like indonesia, we have brazil. other challenges. where are we right now within that equilibrium? ray: 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 or not. that is what central banks do. we are near the end of a long-term debt cycle. because that cycle of being able to 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. in other words, so now, the expected return of asset prices are all very low. cash, we know bonds are 2.25%. you know what you will get the next 10 years. 2.25% on your bonds. the equity price premiums look like 3% or 4% on that. so all of the asset classes now are aligned in normal risk premiums, that kind of thing. that's why, if interest rates rise faster than is discounted in the markets, those markets are discounted. tom: as i pointed out, for those of you worldwide on television and radio, they are an exceptionally competent group of bloomberg terminal users and ray dalio in the alternative investment funds business. with that said, within the framework of your machine, do

you presume a jump condition as central banks come out of this, or can they manage it with smooth vectors and smooth flight paths? ray: i don't believe that they can raise rates faster than is discounted in the curve. for the large part. because that interest rate curve, in other words the rate at which it is discounted to rise, which is built into the curve, is built into all asset prices. and if you raise them much more than is discounted in the curve, i think that is going to cause asset prices to go down, because all things being equal, all assets sell on their present value of discounted cash flow, and we look at that. all of them are subject to the same discount rate. they all have that built into their structure. so 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 to ease has not been less in our lifetime. so we have a very limited capacity of central banks to be effective in easing monetary policy. so the federal reserve has a responsibility, both as the u.s. central bank and the world central bank. so we have a situation where, if we go around the world, you should have an easier monetary policy in europe. europe, if we look at it in the same framework, is in -- southern europe -- a depression. rather than gdp gap, we have a depression at the cyclical low point. with a lot of political extremism beginning to emerge because of the pressure of that. they need an easier monetary policy. japan needs an easier monetary policy. china needs an easier monetary policy. ♪ >> do you think qe works anymore? ray: it is going to work a lot

less than it worked last time. just like each time it worked a lot less. ♪

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

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

period, we were able to ease our monetary policy as the economy grew. tom: it is tough to do that where we are right now. ray: it is tough to do that where we are right now. michael: let me just say, this special primetime edition of bloomberg "surveillance" on radio and television worldwide with ray dalio. he is the founder of bridgewater associates. everyone knows who you are. what then do we do? what does a central bank do when you're at the end of that long-term credit cycle? ray: i think the thing that you do is you realize that the risks are asymmetrical. you can tighten monetary policy. it will work. there is enough debt around, there is enough sensitivity around, there is the dollar. you wait more to see, because the risks are asymmetrical. the risks of the world are asymmetrical. that's the main thing. the risks on the downside are totally different than the risks on the upside.

michael: do you think qe works anymore? ray: it is going to work a lot less than it worked last time, just like each time, it worked a less. i am saying we cannot have a big rate rise. the term structure of assets, because of the amount of debt, what it has with the dollar with disinflationary, deflationary pressures that exist. we will have a downturn. the downturn should be particularly worrisome because we do not have the spread, asset prices. qe, you're asking if it will work. qe is the purchase of those assets to get those premiums up. when you keep pushing, buy more bonds, if there is not an attractive investment relative to bonds, the spread is what is going to drive that. if there is not much spread in something else, you get less effective monetary policy. we call that pushing on a string. michael: are we there? ray: no, not yet, but we are

closer to being there. in some countries, like in europe, they are closer to being there. what happens is, what are you going to buy in the way of the bonds? michael: you cannot buy a german two-year. ray: so we are very, very, very close to there. that is why you need more currency depreciation. in other words, the effectiveness, in japan, is there. the effectiveness of monetary policy then comes through the currency. so the person who was receiving that cash for selling their bonds has to do something. if they are in different the between cash and that other asset, there is a pressure to move it out of the country. if you look at us, we have very high rates in the world, in comparison to those in europe and japan. so it comes through the currency. if you cannot have interest rate moves, you have to have currency moves. that is the environment we are in. tom: this is absolutely critical

to that. we have a presidential debate, we don't need to get into republican and democrat. this nation, to many people, is flat on its back. they want productivity. the smartest thing in your work is this discussion, this mystery of going from non-efficiency or inefficiency to efficiency. what is ray dalio's prescription for the next president to assist the nation in productivity? ray: it is interesting. we have done a study going back 60 years. we took the various factors and correlated them with the next 10 year's growth rate. and we did this across 20 countries. and by the way, the study is on economicprinciples.org, so you can read the study if you are inclined. and so the same things work in all countries. economy is 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 whether it is going to grow, you ask what is the education? and the most important single factor is what is the cost of an educated person? so if somebody is more educated, that is a good thing. but you have to adjust it by the number of hours worked and what that cost is. because let's say in europe. it is very interesting. southern european countries -- france, italy, and spain -- after adjusting to the average hours worked in a week, they cost twice as much as an american. in other words, the income. so you can have an education. that is good. but if you are expensive, it is not good enough. so you have to look at, does the income pay? i am saying 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.

because you have these debt cycles. those who are at the later parts of the debt cycles and closer to lower interest rates have less capacity to increase their balance sheets 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. there is a cultural -- i'm not saying one is better than the other -- but you can take surveys about that. you want to work, you are trying to achieve. tom: what is your prescription in the upper of politics, whether it is mr. corbin or mr. cameron in the house of commons today, france, australia. we didn't even know this was coming. the prime minister is out. what is the ray dalio prescription out of your study of our economic machine to a better america? ray: and/or a better world.

there are these various factors. and there is not one factor. there is various factors. but they are clear and they are in the study. those factors, at the end of the day, 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's a 58% correlation between corruption and economic growth over the ten-year timeframe. so as we go into that, productivity is going to be the single biggest factor. how do you make people productive? self-sufficiency. you know that the single biggest factor for a number of countries is, do people feel the consequences of their earning or their not working? in countries where there is self-sufficiency, they feel those consequences rather than a

greater social net. they will have higher levels of productivity. so at the end of the day, it is things, when you look at your neighbors and say, if they can get an income and they are not going to be penalized much, they are going to be less motivated. there is a series of those, and what i am trying to direct the attention to is what those specific factors are, so that it is like a health index. so i would like to draw people to -- we did this productivity study. you can see then what those correlations are because, for all nations, same formula. and because it is like a health report. if you can look at what is your cholesterol level, do you smoke, do you exercise? michael: you do not want to know. tom does not want to find out. ray: you can know your ten-year prognosis. and if you can look at that unemotionally with that benchmark, you can see what productivity is. so it is a series of things and i do not want to oversimplify

it. but if we look at that formula, and if we could look at that formula together, it's like a health report. that is what i would like to have happen. i 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 you want to make? and what does it tell us about where america is and american companies are going? ray: basically, i am mostly just interested in who is going to buy, who is going to sell and why. so the way i look at the price is it is the aggregate of purchases divided by the quantity of goods sold. whatever that may be. that may be a bond or equities.

i look down there factor by factor. when i am trading, anything that is going to give me an edge, whether it is insider buying or whatever it is, what we do is we take those rules, and we have written those rules down. it came really 1982 or 1983. every time i would put on a trade, i would write down the reason i put on the trade and look at those rules. what i discovered by doing that is those rules could be programmed into a computer. when they were programmed into a computer -- tom: the computer is called a bloomberg terminal by any chance? michael: shameless plug. ray: i use a bloomberg terminal. tom: thank you. ray: i give you the endorsement. so, they are all different ways. we trade 140 different markets, all liquid.

whatever the rules are. tom: do you have an informational advantage now that you had in 1986? we will get to risk parity. it is not a big deal. we will get to it. but seriously, you have been doing this for 10 years, 20 years, 30 years. is it tougher today, given the flow of information, or is there so much information across the bloomberg terminal that you're advantaged? which is it? ray: the technology continues to empower me. 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 the time with deep thought, thinking about how you are going to be wrong and you have the fundamental cause-effect linkages, that 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.

there were neural nets and all different ways of doing it. and almost every manager blew up who has used it. there's no escaping the fact that when you think about relationships, they have to be deep, connected, cause-effect relationships. but the same things happen over and over again through history. tom: i do not want you to choke up. gluten-free. get some water and let me reset you for our audience. we welcome all of you to new york city and all of you worldwide on bloomberg television and bloomberg radio. we are with ray dalio of bridgewater. no need for introduction. former caddie. yes, he is in the news, we will get to that. and also very importantly, economicprincipals.org is where so many of these concepts and structures are that he has put together. where are we going next? michael: i was going to tell everybody, if you are having a bad month, there are openings for caddies here.

this is where i want to get to risk parity. and not about the current situation, but how you develop the theory. it comes out of this idea that everything happens over and over again. you wanted, as i understand it, a way to invest that would enable you to sail through all the various ups and downs. tom: what happened in 1996 that got you to this introduction? what was the moment where you decided to take a bet on the ballast that is risk parity? ray: in the 1990's, i earned enough money that i was putting together trusts for my family. i realize that making money and the market is zero sum and the allocation is the important thing. i knew something about how markets work. the problem with most 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 money, 50% in stocks, 50% in

bonds, the problem with that is 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 bet equally on two things. the thing about it is, in the traditional way, you have to buy more bonds and as you buy more bonds, you are buying a lower return of assets. as we turn out the assets, you 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. the average s&p 500 company has a debt-equity ratio of 1-1. it has embedded leverage.

the idea of taking a bond and changing its complexion of return by borrowing cash and having, say, 2 bonds. 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 watched this. i needed balance. tom: when your leverage bond portfolio and your unleveraged equity portfolio correlate and stock and bond prices go down together, what is 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. now, i have made it more leveraged so it has the same volatility and risk. if they were 100% correlated, the mathematical answer is that they will equal the volatility of stocks. but the fact is if it is not 100% correlated we get into what drives correlation. what it means is that you are going to have, as a result, diversification. without lowering your returns. comparable volatility. if i apply that to different asset classes, if i get diversification. then i can have -- the most important thing is a well diversified portfolio. i look today and i say i would be terrified to own any other portfolio. the reason i would be terrified to own any other, am i going to own stocks?

will i be concentrated in stocks? am i going to be concentrated in bonds? i don't want to be concentrated in bonds or in stocks. tom: where you are almost too diversified whether it is by leveraging up or it is by going to different assets? how do you respond to the criticism of diversification? ray: diversification of assets that where you don't know which is going to be the better return, similar expected returns and risk, it does not lower your return. in other words, if i have similar -- tom: is this operational within the great dispersion we live in right now? do you have to amend a risk-parity strategy? ray: i have, almost my entire net worth in it. my trust and investments are in it. the reason i have is i need a balanced portfolio. if i don't have a balanced portfolio, i'm scared.

i learned to be scared. i have tested it through the most severe. i tested it through the great depression, i tested it through the republic in germany. tom: did you tested through the giants game this weekend? no? 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 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 as a whole to go

down, that is the only times it really did badly in the great depression and in 2008, something in both of those years, 20% to 25% -- those are 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 in some assets. michael: 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. i am an addict, i started at 12. ♪

michael: your risk fund lost 5% in august according to most reports. is that a failure of risk parity or the assets you bought? ray: on a month-to-month basis, i didn't know the stock market was down. the stock market was down, the assets were down. i think it was almost a gift, it was 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. all i'm saying, you could lose 5% in a year. i could look back and say it is down 6% this year. tom: are you comfortable being in that position? ray: the stock market, if you look at the whole history, the stock market in 2008 was down 38%.

warren buffett, one of the greatest investors, his bad year was down 48%, 47%. when you have those kinds of -- to me, i feel like i'm fine. tom: there are people here that are actually in the racket. coverage in august, was it -- we went to 50 intraday. you took six weeks off in august. right? it was wild. these guys are down -- ray: let me be clear, just to get the facts right. we have our all-weather fund which is down 6% for the year now because of those reasons. and i know you are comfortable, i know it will be balanced. we have our alpha funds that are up materially.

tom: how much are they up? ray: depends on which fund you are in, somewhere about 6%. michael: where are you getting the alpha? ray: we could go long and short in a lot of different markets. you are -- michael: you are applying the hobby machine works to this time period. you said we are in secular 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. as a result, the biggest force in the market right now is with buybacks and purchase and acquisition. something like 70% of my by an -- of my by in 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. like many others. ray: the way we do our accounting for productivity, it means -- photos have collapsed. in terms of productivity. what is the value of a photo? tom: are you on instagram? ray: no. tom: i'm not either. seriously, when 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. within 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 market swing? ray: there are all sorts of embedded risks in different ways. i would say that we are better i would say that we are better able to withstand them then we -- than we have been before. there is less liquidity in the market. there is a fair amount of dynamic hedging. dynamic hedging 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, we will lose liquidity

-- 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. what scares me or 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 squeeze monetary bonds. michael: some central bankers would say if we raise rates now we have ammunition. you sound like you disagree. ray: again, it is a restrictive policy, i don't care whether they raised 25 basis points. i don't care if it moves along the curve. i don't see the reason for it. in 2007, i was watching this incredible bubble happen. it was an asset bubble. it was 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. when i look at this, there are little glimmers. there are always little glimmers

of something. i think they are worried too much about the short-term debt cycle and not enough about the long-term debt cycle. i don't get it given those asymmetrical wrists, and that is a look at the world. we are in a world economy. countries outside should be tightening monetary policy. they all should be easing monetary policy. michael: the prime time bloomberg special 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 bridgewater. you have been around for a while. you have suggested to people you are starting to step back. a lot of people are saying, this man with his abilities, should stay in the game. what are your plans? ray: it has been 40 years, we just celebrated 40 years. michael: i'm just trying to be nice. ray: what i'm talking about is stepping back in management, not setting back in investments.

i am an addict, i started at 12 and can't stop. i love the game. there is some confusion about what stepping back is. i will always be playing. michael: do you have a succession plan in place? or do you plan to run -- we'll obviously, not forever, but -- ray: bob prince who has been working with me for 27 years. i think he's 55-years-old. greg jensen has worked with me for 17 years. he just turned 40. this team, i have a lot of people that have been there for a long time. we've all played the game, we are used to doing it. i could step out and it doesn't matter. tom: an historic 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. tom: i'll say. ray: 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 tape everything so everything can listen to -- everybody can listen to everything. there is nothing hidden. it is a very straightforward way. it is a very unusual idea and meritocracy. that is why the young, best people 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. michael: 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. we find that that is fantastic. there is meaningful work and meaningful relationships. tom: are you having a greater debate at bridgewater about china? do you have meetings on china? ray: you have two problems in china. ♪

>> are you having a greater debate about china? when you have meetings on china, are they heated or collegial? ray: it is not heated because the culture is very analytical. keep it calm, say anything you want to say. if you have this template, it just drops the number in the template. michael: that is an interesting

situation because china is one of the few times that people have seen you actually come out with a mea culpa. you said, we missed something. ray: what's your question? michael: how did you miss it with the template? ray: we miss things. by the way, that's where we learn the humility. in terms of that, what happened was 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. by the way, the people, i've gotten to know a number of the policy makers, 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 1971. we had the latin american debt crisis. the restructured. and the s&l crisis -- . that is a manageable crisis. if you have your balance sheet you can manage that. the other issue they have is they have to restructure what they are spending money on, what the economy is like. 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. tends to weaken them. but like most 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 equity market, which is normal in the early emerging stages of many economies where you get the speculator in and hyped up and leveraged on margin. and then you have the bubble. 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. if you look at 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 kind of a set of circumstances, two minuses and a plus. in a sense, another negative. i still think we exaggerate over the short-term. a lot of importance is there. we look at everything up close. when you look at china, i think china is going to be just fine. just to be clear.

it will be weaker. but their weak growth will probably still be twice our normal growth. tom: i love how you come back with these beautiful historical charts on currency depreciation. we see that in dollar real in brazil, i promised i wouldn't ask you for currency quotes. but at the end of the day, is the solution of the international trilemma always going to be currency depreciation? ray: it has always been that if you are facing a domestic contraction, and you have a choice, you want to depreciate your currency. everybody judges their net worth by their own local currency. what happens is, that was a lesson i learned in 1971.

i was clerking on the floor of the nyse. i walked on the floor, richard nixon, on sunday night, and -- announces that he is going off the gold standard. i walk on the floor of the nyse and it is up a lot. and i learned that every time, what do you have is it stimulates and makes everything cheaper and causes things to go up. in other words, when you have zero interest rates, what are you going to do? michael: you have an economic model, central banks around the world have to ease the u.s. and -- in secular stagnation. you are optimistic about china, but they will be slow. for investors. ray: i don't think the secular stagnation, i shouldn't even

interrupt your question. i'm sorry. michael: you can fold that into the answer of your question. what kind of returns, in the next 10 years, can investors expect? i'm not talking about your particular funds, but 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. let me say it better. if you invest in a 10 year bond that is 2.25%, you are going to get 2.25%. 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 2.25%. when you look at the whole structure of asset prices from cash to the 2.25%, and you carry 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 expenditure? you need to have a lot of money. we needed to have that to get the economy going as we did, but we have a situation where we know it is certain have -- we are to have very low returns. tom: i had to give a signal to the cameras, one minute or one

more hour with you. we went with one more minute. here at hbs, everyone wants to go find the next uber out in silicon valley, what the you say to a 26-year-old smart kid to go into finance? how do you sell them on that in 2015? ray: it is easy. 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 --

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

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