>> but closed down from 11. lou: we'll have you both back soon. that's it for us tonight. >> from fox business headquarters d new york city, the new "wall street week." maria: be welcome to "wall street week," the program that helps position you for the week ahead. i'm maria bart row know. coming up, hedge fund billionaire, the legendary ray dalio, my special guest this weekend. but first, take a look at some of the big headlines this past week impacting everything from wall street to main street. the federal reserve did not raise short-term interest rates, but fed chair janet yellen said there is still a possibility for a rate hike by year end, that would be december. yellen also said as many as three rate hikes could come next year as well, and they have begun to reduce the size of their balance sheet. that will begin next month.

that 4.25 trillion balance sheet. the nasdaq at risk of being down for the second consecutive month. the devastating hurricane season continues, maria hitting puerto rico. the entire island losing power completely. the power may not be fully restored for up to six months at a minimum. meanwhile, president trump announcing new sanctions against north korea, essentially saying nations and entities have a choice. you can do business with america or do business with north korea but not both. the president also said that china has told its banks to stop doing business with north korea. ray dalio is the founder and co-chairman of bridgewater associates which, over the last 40 years, has become the world's largest and best performing hedge fund. bridgewater manages about $160 billion in global assets. he is also the author of a new book which lays out the reasons why he and his firm have been as successful as they have with the hope he can help others achieve

their potential. ray, it is great to have you on the program. >> it's a thrill to be here. maria: thank you so much for joining us, and we know this program is somewhat special to you, because you appeared with louis 35 years ago on "wall street week." let's take a look at that. here's a clip. >> you were recently quoted in an article as saying, that you gave your view on the economy, and you said i can say this with absolute certainty because i know how markets work. i've heard that from other people before, and eventually they were buried because it's a very inflexible statement. why do you say this? >> no, as a trader -- >> i know you're a trader, and you're flexible there, but why in your forecast? >> i can say with absolute certainty if you look at the liquidity base in the corporations and the world as a whole, that there's such a reduced level of liquidity that you can't return to an era of stagflation. in other words, enough liquidity and injection, a large enough injection of liquidity to avoid an economic tumble is also

enough to cause much higher levels of inflation. it's a matter of dollars and cents. maria: you said that experience was a life-changer. tell me. >> it was probably one of the most important experiences in my life. i was exactly wrong. [laughter] you know, you look at that, and i was so arrogant. up until that point, you know, i had calculated that mexico and other countries couldn't pay their debts, and we would have a debt crisis. and that was controversial. and in august 1982, the mexico defaulted on its debts. more money, they defaulted on their debts. at that moment i thought they were headed for a collapse. that was the exact bottom in the stock market, one of the greatest bull markets of any time. and right after that i had to let go.

people who i lovedded -- this is eight years after i started bridgewater. maria: wow. >> i was so broke that i had to borrow $4,000 from my dad in order to pay for my family bills. and yet -- so it was one of the most painful experiences of my life. and as a result of that, it also was one of the most beneficial experiences of my life because it changed my attitude from being confident and thinking i'm right to asking myself how do i know i'm right. and it made me want to have an idea meritocracy. it changed the way i made decision making so that i raised my probabilities of being right by having independent thinkers who would operate. so it's explained in the book -- maria: right. >> from that point forward, we understood how to be successful because it gave me the i hue pillty that -- humility that i need to balance with my audacity. it was the best moment of my life but also one of the most painful. maria: that is incredible. and what you just said was, you

know, you went broke. you had to borrow money from family. how did you battle back? take us back to that moment in time. you're down and out, you need to borrow money. you recognize things have change around you, it's not what you thought. how do you come back from that? >> well, pause, i paused, and i was at the point of having to make a decision. would i go have a job on wall street? would i go get that, or would i continue on with going after my goals? so i had to have very deep reflections. what would i do differently in order to move forward. and so there were three things that i did differently. first, i wanted to get the best people who disagreed with me and have quality, thoughtful disagreement to see if i was missing anything. because i was fearing being wrong. the fearing being wrong led me to find ways of improving my chances of being right by properly triangulating with others. the second thing is that i understood diversification. in other words, i wanted to make big returns. but i couldn't have those big

risks. so i had to figure out how to do that. and i understood how to balance risks better without reducing my returns. that's how we do it as explained in the book. and then the third thing is that i learned that many things that surprised me just surprised me because they hadn't happened in my lifetime before, but they happened before. so it made me study those, what happened in the past. and it led me to write down rules, principles. so one of the most powerful things that i did as a result of that was every time i would make a decision, i would write down the criteria for making the decision. and i could take those criteria, and i could take them back in history, and i could run them a hundred years in different countries and see how they would have worked. that was powerful. writing down those principles and then getting in sync with others of whether they were good principles and refining them over time. not only did it then let us build our algorithms around

that -- maria: right. >> in other words, when you put those principles in words, you can also convert them to algorithms which then had been invaluable in our decision making. it also let us have an idea meritocracy because we could agree on the making decisions. >> is the federal reserve playing with fire? ray dalio thinks so. >> the federal reserve has got to be extremely -- >> why dalio is warning janet yellen and the federal reserve to proceed with caution. all of that and more when "wall during our made to move 2017 clearance event, you can do endless online research. or, you can take advantage of our best offer ever on an xt5. don't wait. our 2017 models will be moving fast. you can drive a car... or you can drive a cadillac. come in now before the end of our made to move 2017 clearance event and leave with the perfect cadillac xt5 for your next adventure. choose a low mileage lease

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better backdrop for investing? >> i think if you're looking at the magnitudes of those changes, they're unlikely to be game-changers, okay? i think the real question is more what is the environment as a business-friendly, hospitable, friendly environment to increase productivity, and i really do believe that there's a lot of potential to have the sort of changes in coding -- maria: because of the much better business environment. >> because we have a pro-business environment. do we have an environment in which it's okay to make new things and be innovative. but it has to include the population as a whole. that's why, as i say, you're sort of in a situation where you'll either be able to write code, or you're going to be up employed, those who write code to make algorithms. and so the potential of thinking about how do you educate people to speak that new language and

then to have them employed, working next to people like myself who doesn't know how to write code -- maria: right. >> -- or yourself and think about how you can convert your thinking into algorithms so that this can be pervasive around the country, this could be a great potential. there are things, many things, that could be done. so i would be excited about those things, but i think that the actual changes -- i'll give you an example. what the fed's tightening for the balance sheet is -- maria: right. >> -- is about 2.5% of gdp, okay? that's taking a lot of money, essentially, out of the economy, okay? if we have an increase in the deficit which is fiscally stimulative, it also means that that increase, i would think, might add about another 2.5% that has to be sold in bonds. so part of what you're having in stimulus in fiscal is being taken away by monetary. so now imagine that 5% of gdp, something like that, could be

taken away in the form of selling more bonds. that has an implication of itself. so monetary policy is going to be an important consideration, i think, at this time. maria: i think you make a really good point, because we are right now at a moment in time where the economic story is gaining traction. we saw a pretty good gdp the other day, we're looking at businesses trying to create more jobs. is the federal reserve going to stop that recovery just when it starts to get traction? >> i think that the federal reserve has got to be extremely cautious. the risks are asymmetric. in other words, the risk of a downturn is much worse than the risk of not being able to fight inflation. and that's for a lot of reasons. first of all, there's a limitation as to how much interest rates can be cut. there's a limitation of the marginal effectiveness of new quantitative easing, okay? and if you have a downturn now, you're going to have a social

economic split. we have asset prices that are much more sensitive. the durations of those assets have lengthened. and if i take the price -- the price is all built into the curve, the interest rate curve. so if you take the curve, the short-term rates, the bond yields and so on, and you take expected returns of equities and you drive that curve, that's, that curve is very sensitive throughout the curve, all assets, on what that yield is. if you raise, raise interest rates faster than is discounted in that curve, all asset prices suffer as a result of that. so we have asymmetric risks. we don't have much of a risk of inflation. the federal reserve has demonstrated for the last year and a half that everything that it has said about the rate of tightening it didn't pursue. if you look at how they said they would raise rates, they didn't raise those rates because the economy as a whole didn't operate in a way that warranted that. maria: right. >> when you look at inflation

and you hear their conversations on inflation, they can't explain why the inflation rate hasn't risen that they have theoretically said should rise. maria: well, there is a conundrum in this country right now. we're seeing job growth, economic growth a little more than the last eight years, but wages aren't moving. >> well, i think it's largely because -- you can see it when you look at the nitty-gritty level. and what we're defining it as a relationship between labor and inflation. whereas the work force, it's a new work force. maria: that's right. >> if you think, if you're thinking about this part of the work force are essentially the robotics or the -- maria: speaking of coding. >> -- that are now competing with other people. maria: that's right. >> and so it's changing the nature of those jobs. so if, if you're the federal reserve and you're not sure you understand that and you don't yet have inflation much expectations and, besides, don't get too precise about that inflation number and you have the other downside, i think that

you have to wait as you start to see the whites of inflation or at least understand why it is that you're going to be doing that. maria: yeah. >> so i'm concerned about the fed's rate of tightening. i don't think that they will actually be able to tighten at that rate that they're telling you. >> ray dalio is one of the most secretive hedge fund billionaires in the world, but now he's ready to dish out his secret sauce next on "wall

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it's a new kind of network designed to save you money. call, visit, or go to xfinitymobile.com. >> "wall street week" is back with more of maria bartiromo's exclusive interview with bridgewater associates' founder ray dalio. maria: is it the macro story that's still driving decision making around the world for you? a lot of conversation recently about emerging market, that they've been on a run, and that may continue. europe, not sure. i want to get your thoughts on

some of these markets and whether or not there are opportunities to go long. >> okay, sure. well, the united states in terms of pricing and everything is much ahead of the rest of the world. in terms of, also, the cycle. so that if you look at europe and the relative pricing of assets and where they are in their cycle, okay, i think there's greater value in europe, generally speaking. we're moving fast -- maria: even after the euro had the year that it had. >> that's right. in terms of, let's say, the companies. but you also have to play the currency different from the -- you have to think currency hedge, so when i refer to them, i refer currency hedge, but you can do it either way. maria: got it. >> so if we take that, so europe is more attractive. i'll go to china and asia, okay? maria: great. >> china is and has been facing four major issues. it has, needs to have a debt restructuring, it's in the

process of having a debt restructuring, it needs to have an economic restructuring, it's in the process of doing that. it has to have a capital markets development and restructuring. it's in the process of doing that -- maria: these take a long time. >> and balance of payments. every country has been through those, okay? the circumstances in china -- united states had three times the defaulted on its debts, three debt crises that i remember. a balance of payment crises and so on on. but when i look at that, if a country's debt is denominated in its own currency and they have capable leadership, you know how to restructure those balance sheets. you can always put it on the balance sheet. that's how we succeeded. the central banks bought, essentially, $14 trillion worth of assets that they took onto the balance sheet. so china can manage all of those things, and it's going to have -- and it's developing these new economies. so i'm very optimistic about

china, though it will be going through, now after the 19th people's congress, it'll be going through what i'm calling a squeezing of the bubble. and that will have a bit of an effect. maria: let me ask you this, because you talk about asia. what do you do with a threat like north korea? i mean, here you are allocating capital to these growth stories in the world, and then you've got the unknown, something you can't control, in north korea. how do you approach that? >> north korea or iraq war or world trade center or kennedy assassination, cuban missile crisis, you can name these things all along. these are the things that you, you know, you don't know about. you can't play those things, i think, well. the earthquake, the crash, okay? what might happen. many all of those -- in all of

those things, there's beta and there's alpha. beta is what your strategic allocation mix is. do i have balance in that. in other words, no systematic risks. in terms of risk on or risk off. the same is true for alphas. can i have my alphas so that i have a balance of those alphas so that i don't have those risks? that ability to not be exposed, in other words -- or do you want to make your portfolio all dependent on risk-on, risk-off? maria: you can't do that. >> i mean, the traditional -- you can't do that. the traditional form of asset allocation which is something like a 60/40 portfolio, and on a day to day basis you can see risk on, risk off. okay, is that it? do you want to go through a 2008 again? i don't know. you know, these are things. so balance, you can have balanced beta and balanced alpha, and that's, i think, what you have to do. maria: you just said china looks

good, it is not bubble hot. is the u.s.? >> no, the u.s. isn't bubble hot. unlike 2007 when we looked at 2008, we could see at the time when we did the calculations of individuals, companies and so on, we could see that they were not going to have the cash flows to service their debts. that's not the case now. in terms of changes in balance sheets of blanks, at corporations -- of banks, at corporations and so on. there is a financial arbitrage going on now. what it means is companies are liking at the return of equity -- are looking at the return of ec questionty in relationship to the interest rates that they have and then with the similar duration, they're saying i can produce that return on equity, and i can fund it by this. and so we're having buybacks, more buybacks, debt-financed buybacks. but if i look at the problem in terms of paying that debt, it's not a problem. for a number of reasons. not only is it funded better, but also the maturities of the debts have been lengthened, and

the average interest rate is lower. so if you do the cash flows and you say what is the debt service payment that can be made, i don't see those problems ahead as systematic problems. that doesn't mean there are not bits and pieces here, but it's not anything like that. maria: ray, an incredible amount of insight from you. thank you for your leadership, thank you for the book. good to see you. >> good to see you. maria: thank you so much for joining us, the author of "principles," check it out. ray dalio, bridgewater associates' founder. more "wall street week" right

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ahead. turning to earnings, nike is going to be reporting its quarterly numbers on tuesday, then later on in the week pier one will report as well as blackberry and rite aid, all among the earnings stories. on the political front, president trump is expected to give a speech in indiana next to champion tax reform. then on wednesday the republicans are expected to release the framework for tax reform. they are talking about a $1.5 trillion tax cut. we'll get all the details next week. i suspect we're going to see a move down to 20% in the corporate rate. mornings with maria will be live from washington on wednesday, so join me from 6-9 a.m. eastern right here on on the fox business network. coming up next week, you'll want to be here. we'll talk with kathy ireland. she's going to tell us how she created this small business and went from model to mogul. so join us. and i'll see you sunday morning on the fox news channel, "sunday morning futures." we've got a big program as we look ahead to the tax cut plan.

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