1 00:00:00,760 --> 00:00:04,160 Speaker 1: Good morning everyone, Bloomberg Surveillance Michael McKee and Tom King 2 00:00:04,760 --> 00:00:10,520 Speaker 1: do your Bloomberg eleventh to Washington, d C Bloomberg to Boston, 3 00:00:10,600 --> 00:00:14,480 Speaker 1: Bloomberg dwell on It to San Francisco, Bloomberg nine to 4 00:00:14,600 --> 00:00:20,320 Speaker 1: the country at Damn Channel one nineteen. Good morning everyone, 5 00:00:20,320 --> 00:00:23,079 Speaker 1: Bloomberg Surveillance. Michael McKeon time. Can we welcome all of 6 00:00:23,120 --> 00:00:28,920 Speaker 1: you worldwide? On economics, finance, UH and investment Mike at Churn, 7 00:00:29,040 --> 00:00:31,479 Speaker 1: going on before Jobs Day tomorrow. Some of it is 8 00:00:31,480 --> 00:00:35,040 Speaker 1: a holistic sense of our political economy. I hadn't been 9 00:00:35,040 --> 00:00:39,200 Speaker 1: any real um conviction in the economy at this point, 10 00:00:39,600 --> 00:00:43,680 Speaker 1: in the markets, at this point, um futures little changed 11 00:00:43,720 --> 00:00:46,120 Speaker 1: on the day. Okay, well, very good, and now an 12 00:00:46,280 --> 00:00:49,720 Speaker 1: interview on a larger economy. Here is our Eric Schafsker 13 00:00:50,159 --> 00:00:53,000 Speaker 1: with the one Ray Delio on behalf of our Bloomberg 14 00:00:53,040 --> 00:00:57,120 Speaker 1: television viewers and our Bloomberg radio listeners worldwide. Welcome, Thank you. 15 00:00:57,680 --> 00:01:00,400 Speaker 1: Let's get right to it. Ray. People who know you, 16 00:01:00,440 --> 00:01:03,760 Speaker 1: who follow you, know that you've developed models to explain 17 00:01:03,840 --> 00:01:07,039 Speaker 1: how the economy works. And anybody who's even remotely familiar 18 00:01:07,040 --> 00:01:10,760 Speaker 1: with Bridgewater UH knows about the machine for example, knows 19 00:01:10,760 --> 00:01:14,080 Speaker 1: about the importance of the business cycle and furthermore, the 20 00:01:14,120 --> 00:01:17,240 Speaker 1: importance of the long term debt cycle. What are those 21 00:01:17,280 --> 00:01:19,920 Speaker 1: models telling you right now, Well, let me just take 22 00:01:19,959 --> 00:01:22,920 Speaker 1: a second and just review the model. So everybody knows UM. 23 00:01:23,040 --> 00:01:26,360 Speaker 1: So I'm saying that over a period of time, productivity 24 00:01:26,400 --> 00:01:29,080 Speaker 1: matters the most. What you learn is what you can 25 00:01:29,080 --> 00:01:33,000 Speaker 1: get to spend. But around that there are two debt cycles. 26 00:01:33,440 --> 00:01:35,760 Speaker 1: There's a short term debt cycle that lets you spend 27 00:01:35,800 --> 00:01:38,160 Speaker 1: more than you earn over a short period of time, 28 00:01:38,160 --> 00:01:40,680 Speaker 1: but when you pay back you have spend less. And 29 00:01:40,720 --> 00:01:43,640 Speaker 1: that there's that cycle, the five to eight year cycles, 30 00:01:43,680 --> 00:01:46,160 Speaker 1: the business cycle we're used to that. Everybody understands that. 31 00:01:46,760 --> 00:01:50,640 Speaker 1: And then there's a long term debt cycle that UM 32 00:01:50,680 --> 00:01:54,240 Speaker 1: goes on fifty seventy five years, and UM it goes 33 00:01:54,280 --> 00:01:59,440 Speaker 1: through its limitations when you have too much debt relative 34 00:01:59,480 --> 00:02:01,800 Speaker 1: to incomes so you can't service it anymore, and when 35 00:02:01,840 --> 00:02:05,440 Speaker 1: interest rates go to zero so they can't be stimulation. 36 00:02:06,160 --> 00:02:10,240 Speaker 1: We have run out of monetary policy number one and 37 00:02:10,320 --> 00:02:13,920 Speaker 1: we have to go to monetary policy number two. Monetary 38 00:02:13,960 --> 00:02:16,880 Speaker 1: policy number two is quantitative easing. This happened in the 39 00:02:16,880 --> 00:02:21,040 Speaker 1: Great Depression happened recently, and that means the purchase of 40 00:02:21,080 --> 00:02:24,440 Speaker 1: financial assets by the central bank and the sellers of 41 00:02:24,440 --> 00:02:28,280 Speaker 1: those financial assets then by other financial assets, and they 42 00:02:28,320 --> 00:02:32,040 Speaker 1: cause those other financial assets to rise in price and 43 00:02:32,120 --> 00:02:36,280 Speaker 1: have the effect of lower ing those expected returns. And 44 00:02:36,280 --> 00:02:41,680 Speaker 1: when those other expected returns are low in relationship to cash, 45 00:02:42,480 --> 00:02:45,280 Speaker 1: one is almost indifferent. And so when you buy that bond, 46 00:02:45,919 --> 00:02:49,080 Speaker 1: when the Fed makes puts that money in the system, 47 00:02:49,160 --> 00:02:53,600 Speaker 1: that person is going to then go not it's indifferent, 48 00:02:53,760 --> 00:02:57,600 Speaker 1: and that that's called pushing on a string, and pushing 49 00:02:57,600 --> 00:03:01,239 Speaker 1: on a string began. And we're going into a situation 50 00:03:01,600 --> 00:03:05,160 Speaker 1: which is generally worldwide somewhat analogous to that. So there 51 00:03:05,200 --> 00:03:08,639 Speaker 1: again we're approaching it. So if I just take country 52 00:03:08,639 --> 00:03:14,440 Speaker 1: by country, now, if I could give you um okay 53 00:03:14,560 --> 00:03:19,800 Speaker 1: um so, Japan was there first for a couple of decades, 54 00:03:19,919 --> 00:03:22,360 Speaker 1: for a couple of decades, pushing on a string because 55 00:03:22,360 --> 00:03:26,560 Speaker 1: they hit interest rates at zero and now to the 56 00:03:26,600 --> 00:03:29,440 Speaker 1: most aggressive quantitative easing program the world has ever seen, 57 00:03:29,840 --> 00:03:33,200 Speaker 1: and and they're trying to stimulate to get two percent 58 00:03:33,240 --> 00:03:36,000 Speaker 1: inflation and they're going nowhere, it's not working, and it's 59 00:03:36,000 --> 00:03:40,360 Speaker 1: not working. So Europe is there Okay, Europe, if you 60 00:03:40,440 --> 00:03:43,720 Speaker 1: look at them across the curve, we have interest rates 61 00:03:43,720 --> 00:03:48,080 Speaker 1: at zero or slightly negative depending on where. Okay, that's 62 00:03:48,120 --> 00:03:50,720 Speaker 1: so interest rates, it's certainly not going to work. And 63 00:03:50,760 --> 00:03:53,800 Speaker 1: then the purchases of those financial assets are getting transmitted 64 00:03:53,800 --> 00:03:56,640 Speaker 1: and currency movements and the like, and the effect of 65 00:03:56,760 --> 00:03:59,920 Speaker 1: raising those assets is not is very limited. So we're 66 00:04:00,040 --> 00:04:03,200 Speaker 1: there in Europe, very close to being there in Europe. 67 00:04:03,800 --> 00:04:06,240 Speaker 1: In the United States we have a little bit more room. 68 00:04:06,240 --> 00:04:09,400 Speaker 1: We're very close to zero interest rates. And then if 69 00:04:09,440 --> 00:04:12,840 Speaker 1: you take the spreads, the spreads are are relatively low, 70 00:04:12,920 --> 00:04:15,000 Speaker 1: so a little less than the two percent bond. You know, 71 00:04:15,200 --> 00:04:19,040 Speaker 1: we think equities expected returns probably around four percent, So 72 00:04:19,080 --> 00:04:22,920 Speaker 1: there's some spread, their some ability. The issue is if 73 00:04:23,040 --> 00:04:26,320 Speaker 1: that creates a symmetric risks to the down side. To 74 00:04:26,360 --> 00:04:29,960 Speaker 1: the downside meaning um, it's tightening is always going to 75 00:04:30,000 --> 00:04:32,720 Speaker 1: be effective. It's easy. You raise interest rates and things 76 00:04:32,760 --> 00:04:34,440 Speaker 1: will slow down because everybody's got a lot of debt. 77 00:04:34,600 --> 00:04:38,360 Speaker 1: Not a problem. The situation is the risk on the downside, 78 00:04:38,360 --> 00:04:41,000 Speaker 1: because if you have a movement on the downside, it's 79 00:04:41,000 --> 00:04:43,840 Speaker 1: a risky situation. So we're going to have to see 80 00:04:44,560 --> 00:04:48,839 Speaker 1: um and you'll see increased exploration of the movement to 81 00:04:49,600 --> 00:04:53,400 Speaker 1: make to make other forms of stimulation, which I'm calling 82 00:04:53,440 --> 00:04:58,280 Speaker 1: monetary policy three. Monetary policy three will not be just 83 00:04:58,440 --> 00:05:04,279 Speaker 1: through quantitative easing. We've got quantitative easing by financial assets 84 00:05:04,279 --> 00:05:05,760 Speaker 1: from people who have it, and it stays in the 85 00:05:05,800 --> 00:05:11,120 Speaker 1: financial community. We're going to have to move toward increasingly 86 00:05:11,880 --> 00:05:16,240 Speaker 1: the making of purchases that put money directly in the 87 00:05:16,320 --> 00:05:20,400 Speaker 1: hands of spenders, because the linkage between having money in 88 00:05:20,400 --> 00:05:25,840 Speaker 1: the financial assets and having spending is becoming weaker and weaker. 89 00:05:26,120 --> 00:05:28,360 Speaker 1: Can I just pause for a moment, short, So, what 90 00:05:28,400 --> 00:05:32,160 Speaker 1: you're effectively saying to me is that monetary policy one 91 00:05:32,200 --> 00:05:36,240 Speaker 1: interest rates says, sort of run its course. It's become ineffective. 92 00:05:36,520 --> 00:05:41,400 Speaker 1: Monetary policy to quantitative easing, if I take you correctly, ineffective. 93 00:05:41,800 --> 00:05:44,839 Speaker 1: Central banks are now going to have to print money 94 00:05:44,880 --> 00:05:47,880 Speaker 1: and hand it to consumers in one fashion or in 95 00:05:47,920 --> 00:05:53,120 Speaker 1: another um they're going to have to go more directly 96 00:05:53,200 --> 00:05:55,840 Speaker 1: to spenders. How does that work? Well, it can work 97 00:05:55,880 --> 00:05:59,600 Speaker 1: in either a combination of fiscal and monetary policy. It's 98 00:05:59,640 --> 00:06:02,520 Speaker 1: some there's a continuum of how it's worked in history. 99 00:06:02,800 --> 00:06:06,640 Speaker 1: In some cases, you can have the federal government run deficits, 100 00:06:06,680 --> 00:06:10,960 Speaker 1: which the central central Bank essentially monetized by lending them money. 101 00:06:11,200 --> 00:06:15,400 Speaker 1: And that that's one path some and then there's a continuum. 102 00:06:15,480 --> 00:06:18,200 Speaker 1: And on that continuum, the far side of that continuum 103 00:06:18,240 --> 00:06:23,920 Speaker 1: is called helicopter money. What helicopter money means is the 104 00:06:24,000 --> 00:06:27,640 Speaker 1: process of essentially putting it directly in your hands. The 105 00:06:27,680 --> 00:06:33,000 Speaker 1: central bank has the capacity legally to essentially get money 106 00:06:33,040 --> 00:06:36,040 Speaker 1: in your hands. There's illegal in the lass change from 107 00:06:36,040 --> 00:06:38,320 Speaker 1: place to place to put it directly in your hands, 108 00:06:38,360 --> 00:06:40,919 Speaker 1: to have you spend it, in other words, to not 109 00:06:41,080 --> 00:06:44,599 Speaker 1: bypass to bypass the financial markets to do that. So 110 00:06:44,960 --> 00:06:47,279 Speaker 1: there's a range of ways that that can be done. 111 00:06:47,400 --> 00:06:50,520 Speaker 1: History is loaded with them. We're just not acquainted with 112 00:06:50,560 --> 00:06:53,440 Speaker 1: them because they haven't happened in our lifetimes before. In 113 00:06:53,440 --> 00:06:56,080 Speaker 1: other words, these long term debt cycles come once a lifetime, 114 00:06:56,760 --> 00:07:00,880 Speaker 1: and people are not once a century even so they're rare. 115 00:07:01,080 --> 00:07:03,680 Speaker 1: And but but if you go back over history and 116 00:07:03,720 --> 00:07:05,880 Speaker 1: you see them, they've happened many times. So let's look 117 00:07:06,040 --> 00:07:08,080 Speaker 1: a little more short term, because that's going to take 118 00:07:08,120 --> 00:07:10,440 Speaker 1: some time to play out. I take it and and 119 00:07:10,240 --> 00:07:15,040 Speaker 1: and examine what's going to happen in the next little while. Um, 120 00:07:15,120 --> 00:07:18,080 Speaker 1: you have been saying for some time that you anticipate 121 00:07:18,120 --> 00:07:20,520 Speaker 1: the Fed's going to have to ease again and possibly 122 00:07:20,560 --> 00:07:23,040 Speaker 1: even embark on a new rount of quantitative easing, that 123 00:07:23,160 --> 00:07:25,760 Speaker 1: the next big move there will be minor moves like 124 00:07:25,840 --> 00:07:28,800 Speaker 1: you may get another twenty five basis point move, but 125 00:07:28,840 --> 00:07:32,680 Speaker 1: the Knox, yeah you could up, you could you could 126 00:07:32,680 --> 00:07:35,680 Speaker 1: see another twenty five basis point rise and raids. I'm 127 00:07:35,680 --> 00:07:37,120 Speaker 1: not saying that you can see. I just want to 128 00:07:37,120 --> 00:07:39,520 Speaker 1: be clear. The next big move, I believe will have 129 00:07:39,600 --> 00:07:42,840 Speaker 1: to be toward quantitative easing rather than a big titan, 130 00:07:42,920 --> 00:07:45,400 Speaker 1: and you won't see a big the next move, because 131 00:07:45,400 --> 00:07:47,920 Speaker 1: we could be up, could be down to the tick. 132 00:07:48,120 --> 00:07:50,920 Speaker 1: Yeah you could get an uptick. The next early is 133 00:07:50,960 --> 00:07:53,040 Speaker 1: a couple of weeks from now. I don't think I 134 00:07:53,120 --> 00:07:55,240 Speaker 1: think that they'd be a I've always said and I 135 00:07:55,360 --> 00:07:57,920 Speaker 1: continue to say, I think it would be a serious mistake. 136 00:07:58,080 --> 00:08:01,160 Speaker 1: I think that the Federal Reserve is around to the 137 00:08:01,240 --> 00:08:05,680 Speaker 1: notion that we're living in a world economy and that 138 00:08:05,800 --> 00:08:09,440 Speaker 1: the circumstances that are now happening are surprising them have 139 00:08:09,600 --> 00:08:12,520 Speaker 1: surprised them because they're not paying enough attention to the 140 00:08:12,560 --> 00:08:15,200 Speaker 1: long term debt cycle. In other words, what is there's 141 00:08:15,240 --> 00:08:18,240 Speaker 1: a reason that their attitudes have changed. And then I 142 00:08:18,280 --> 00:08:21,040 Speaker 1: think it's great that their attitudes have changed about that risk. 143 00:08:21,440 --> 00:08:23,640 Speaker 1: But if you look at their around the world, our 144 00:08:23,760 --> 00:08:28,080 Speaker 1: risk is not inflation and our risk is not overheating economies. Okay, 145 00:08:28,120 --> 00:08:30,920 Speaker 1: so you still feel the same way about the trajectory 146 00:08:30,960 --> 00:08:33,960 Speaker 1: of the Federal Reserve and its stary policy. If the 147 00:08:34,040 --> 00:08:37,240 Speaker 1: asymmetric if the risk that we've talked about it, they're 148 00:08:37,240 --> 00:08:40,480 Speaker 1: asymmetrically to the downside for the global economy and for 149 00:08:40,480 --> 00:08:44,200 Speaker 1: the effectiveness of monetary policy. Because of this compression of 150 00:08:44,240 --> 00:08:47,480 Speaker 1: the spread between the return on fixed income you know, 151 00:08:47,559 --> 00:08:51,200 Speaker 1: and risk assets. What does that mean for asset prices, Well, 152 00:08:51,200 --> 00:08:55,720 Speaker 1: it means that asset prices correct to a point where 153 00:08:56,160 --> 00:09:00,040 Speaker 1: the risk premiums come back. Now, that's right, and the 154 00:09:00,040 --> 00:09:03,400 Speaker 1: words the correction that's happened in the stock market. Let 155 00:09:03,400 --> 00:09:05,719 Speaker 1: me be clear, I'm not barish on the stock market. No, 156 00:09:06,400 --> 00:09:09,640 Speaker 1: I'm not barish on the stock market. I'm saying that 157 00:09:09,760 --> 00:09:12,800 Speaker 1: what we have is as you have those risk premiums. 158 00:09:13,280 --> 00:09:16,120 Speaker 1: But let's say I expect probably stops a lot about 159 00:09:16,120 --> 00:09:19,079 Speaker 1: a four percent return, in other words, long term return 160 00:09:19,120 --> 00:09:21,679 Speaker 1: four percent. That's a problem for a lot of savers. 161 00:09:21,720 --> 00:09:25,439 Speaker 1: But nonetheless, the choices are funds like the university we're 162 00:09:25,440 --> 00:09:27,520 Speaker 1: at right now, yes, and pension funds and a lot 163 00:09:27,520 --> 00:09:30,840 Speaker 1: of savers. It's a big problem that is like a 164 00:09:30,880 --> 00:09:35,840 Speaker 1: slow growing cancer because it will not happen overnight, but 165 00:09:35,960 --> 00:09:38,120 Speaker 1: it'll mean that we won't have enough money to fund 166 00:09:38,160 --> 00:09:41,959 Speaker 1: those things. But nonetheless, investors make a choice of assets, 167 00:09:42,040 --> 00:09:45,280 Speaker 1: and the choices there are cash which has zero return, 168 00:09:46,360 --> 00:09:50,040 Speaker 1: a bond which has less than two percent return, and equities, 169 00:09:50,080 --> 00:09:53,720 Speaker 1: as we calculated says something like a four percent expected return. 170 00:09:54,160 --> 00:09:56,520 Speaker 1: So when you look at those assets, what what happen 171 00:09:56,600 --> 00:09:59,000 Speaker 1: is as they sell off, it has the effect of 172 00:09:59,040 --> 00:10:02,880 Speaker 1: making those assets or attractive and and then draws us 173 00:10:02,920 --> 00:10:05,920 Speaker 1: in or draws others in. The issue here that we're 174 00:10:05,960 --> 00:10:09,480 Speaker 1: dealing with is the possibility of the negative feedback loop 175 00:10:09,559 --> 00:10:12,400 Speaker 1: that comes from that and the ineffectiveness of monetary policy. 176 00:10:12,480 --> 00:10:16,040 Speaker 1: So when stocks go down and it has a negative 177 00:10:16,080 --> 00:10:19,280 Speaker 1: wealth effect, that has a negative effect on the economy. 178 00:10:19,360 --> 00:10:21,560 Speaker 1: And when that has a negative effect on the economy 179 00:10:21,600 --> 00:10:24,000 Speaker 1: and you don't have the ability to ease, what I'm 180 00:10:24,000 --> 00:10:28,320 Speaker 1: worried about is should the situation become weak enough in 181 00:10:28,360 --> 00:10:31,880 Speaker 1: the economy, like Japan's situation, the fraud. Like you said, 182 00:10:31,920 --> 00:10:35,280 Speaker 1: two decades, you will have a situation where then they 183 00:10:35,320 --> 00:10:37,280 Speaker 1: have to do something else. I'm going to take this 184 00:10:37,320 --> 00:10:40,439 Speaker 1: opportunity just to remind everybody that this is rat value. 185 00:10:40,480 --> 00:10:42,600 Speaker 1: Of course, the Fatih chairman co c i O of 186 00:10:42,600 --> 00:10:46,440 Speaker 1: Bridgewater Associates and we're simulcasting live on Bloomberg Radio, welcoming 187 00:10:46,440 --> 00:10:49,920 Speaker 1: everybody to the conversation. UM, let's go beyond stocks. If 188 00:10:49,960 --> 00:10:53,520 Speaker 1: the long term average annual return for stocks is four percent, 189 00:10:54,120 --> 00:10:57,080 Speaker 1: and obviously it's less for government bonds and cash at 190 00:10:57,080 --> 00:10:59,840 Speaker 1: the moment and for the time being a zero Uh, 191 00:11:00,080 --> 00:11:02,640 Speaker 1: what makes sense as an investment strategy? What do you buy? 192 00:11:02,679 --> 00:11:05,360 Speaker 1: What you know? What do you short effectively? Maybe you 193 00:11:05,360 --> 00:11:08,960 Speaker 1: know broadly speaking where what what's gonna work? Well? I 194 00:11:08,960 --> 00:11:12,760 Speaker 1: think what is working perhaps more appropriately today? UM? I 195 00:11:12,760 --> 00:11:15,360 Speaker 1: think there are two ways that the average investor should 196 00:11:15,440 --> 00:11:19,720 Speaker 1: think of investing. One is, um, are you going to 197 00:11:19,760 --> 00:11:22,679 Speaker 1: create a good strategic asset allocation mixed that is a 198 00:11:22,720 --> 00:11:25,640 Speaker 1: balanced portfolio. That means that you're not going to go 199 00:11:25,720 --> 00:11:30,760 Speaker 1: to the betting table and bet against active investors like me. Look, look, 200 00:11:30,800 --> 00:11:33,560 Speaker 1: I'm scared of being wrong in the markets. It is 201 00:11:33,600 --> 00:11:35,920 Speaker 1: not easy to win in the market. It is more 202 00:11:35,920 --> 00:11:38,800 Speaker 1: difficult to win in the markets than to compete in 203 00:11:38,840 --> 00:11:40,800 Speaker 1: the Olympics. Hang on a second, Hang on a second. 204 00:11:41,080 --> 00:11:44,120 Speaker 1: You guys have an extraordinary track record of winning. Yeah. 205 00:11:44,360 --> 00:11:46,360 Speaker 1: Is it harder to compete in the markets today than 206 00:11:46,400 --> 00:11:49,240 Speaker 1: it has been since you found a Bridgewater? No? I 207 00:11:49,280 --> 00:11:51,320 Speaker 1: don't think so. Really, not the way we do it. 208 00:11:51,640 --> 00:11:53,280 Speaker 1: And the reason I'm saying not the way we do 209 00:11:53,360 --> 00:11:56,160 Speaker 1: it is we don't take systematic biases. I think for 210 00:11:56,240 --> 00:11:59,440 Speaker 1: a lot of people, they're systematically long everything, you know, 211 00:12:00,000 --> 00:12:02,480 Speaker 1: and so we have a world in which there when 212 00:12:02,480 --> 00:12:05,880 Speaker 1: the world gets bad, it's bad for them. In two 213 00:12:05,920 --> 00:12:08,240 Speaker 1: thousand and eight, it was great for us. I don't know. 214 00:12:08,320 --> 00:12:10,559 Speaker 1: We had nearly a ten percent return in two thousand 215 00:12:10,600 --> 00:12:13,200 Speaker 1: and eight. So we have the opportunity to go either way. 216 00:12:13,360 --> 00:12:16,400 Speaker 1: We just may be wrong if we're wrong, So so 217 00:12:16,760 --> 00:12:19,720 Speaker 1: I'm so scared about being wrong that it has helped 218 00:12:19,760 --> 00:12:20,120 Speaker 1: reduce