Ben Carlson recently highlighted an uncomfortable truth: over the past five years, bonds have experienced one of their worst stretches in history. Yet, almost no one is screaming about it. Why aren’t investors sounding the alarm?
What really pushed me to dig into this wasn’t just Ben’s post though, but a tweet that touched on a related issue: one that long-time readers know I care deeply about.
Maybe I’m showing my age here, but I’ve been hearing warnings about money printing causing runaway inflation since 2009. For years, the dire predictions never materialized…until suddenly, they did.
And remember the whole transitory versus persistent inflation debate? I do. At the time, I didn’t feel like there was a clear-cut answer. In hindsight, maybe that was my own bias talking. But if I’m being honest, I don’t recall many of the so-called “persistent” inflation crowd going all-in and shorting bonds back then either.
Just to be clear, this isn’t a shot at Jake. I have a lot of respect for him, he’s thoughtful and genuinely insightful. But since 2023, I’ve noticed quite a few people trying to play the role of the “it was so stupid to own bonds” prophet. I can’t help but wonder where they were back in 2009, when being early meant being wrong for over a decade. And also, less profitable overall but..who’s counting, innit?
That’s the thing about markets: timing matters, and being too early is often just another form of being wrong. But my point here isn’t even about bonds, it is about stocks. For at least the past decade, I’ve heard the same arguments over and over: “stocks are overvalued.” Jake’s tweet got me thinking. Sure, at some point, stocks will go through a -40% period, and there will always be someone ready to say, “See, I told you so!”. But again, timing this thing after the fact is something completely different than just before.
When it comes to both stocks and bonds, it really comes down to valuation and timing. Was it obvious in 2021? Maybe. Is earning 4% on bonds today worth the risk? Well, that’s still part of the problem.
If it is not, what’s the alternative? I love Roger Nusbaum approach because he’s straightforward about it: it’s not enough to say “owning bonds is stupid.” If you’re going to move your money, you need somewhere else to put it. There are plenty of alternatives, but none of them are perfect and easy to stomach.
I think the majority of lads are comfortable with the notion that owing bonds IN THE RECENT PAST was stupid because stocks did so well. Just buy the fucking deep. Just endure a couple of months underwater, the market will bounce back fast. Who needs an alternative when stocks seem almost riskless?
Ben brought up another reason bondholders have been able to stomach the recent rough patch: just hold your bonds to maturity. It sounds simple, but it highlights something important: most people have a tough time thinking in real, not just nominal, terms.
Take Italy before the euro, for example. The country spent decades in a high inflation environment, but for most people it was fine because they were blind sighted by their (nominally) increasing salaries and the opportunity to invest in “risk free” government bonds paying double-digit returns. Those higher numbers didn’t mean greater wealth—once you adjusted for inflation, people were actually losing ground.
Let’s now take the U.S. in recent years. Even with high inflation, real wages have actually increased:
Still, the public narrative was all about how inflation was ruining everything. People got so focused on rising prices that many didn’t notice real incomes were improving…or that the (orange) solution being offered wasn’t necessarily in their best interest. At least regarding the inflation issue.
Back to bonds: in nominal terms, the pain was softer, especially with intermediate duration bonds.
But when we check in real terms, we are far from being out of the woods.
AGG doesn’t have a long enough history, at least on Testfol:
But if you look at IEF, we can see how the narrative around bonds might be regime-dependent:
Bonds have a reputation for being the safe, steady part of your portfolio. But looking at the data, they’re not always the low-volatility asset people think they are. That doesn’t mean they’re useless. Bonds still serve a purpose. They provide diversification and sometimes ballast when stocks are falling. But they’re not the magic fix that the 60/40 crowd sometimes makes them out to be.
And I do not think timing this market would lead to a different result than trying to time any market. Despite all the clouds I see on the fixed income horizon.
Before 2022, inflation surprises typically leaned to the downside. Expectations were well anchored (look at the 10-year forecast): when inflation went up, markets and policymakers assumed it would come back down, sometimes with the help of higher rates. And for decades, that assumption worked. Inflation shocks were brief, and the long-term trend was lower.
Expectations matter. A lot. Inflation is as much a psychological game as an economic one. If most people believe past inflation was a one-off, then inflation might stay contained. But if that belief shifts, if consumers start buying now because they think prices will be higher tomorrow, then we have a bigger problem. That’s how you get into a feedback loop: inflation feeding expectations, expectations feeding behavior, and behavior feeding more inflation.
This is where financial repression enters the picture. It’s a not-so-fancy way of saying governments (via Central Banks) use policy to keep interest rates below inflation, so debt becomes cheaper over time. Savers lose purchasing power, but governments and corporations get breathing room. It can be an effective tool to shrink debt loads, especially when voters don’t understand what is going on.
And right now, that’s what many governments are trying to engineer, whether they admit it or not. Sometimes it’s deliberate policy. Other times it’s just politically convenient: promise everything, run up the deficit, and let inflation do the dirty work. Inflate the debt away.
But here’s the thing: this strategy only works until it doesn’t. When confidence breaks, what Hyman Minsky called the “Minsky moment”, it tends to break all at once. And when it does, it’s not pretty.
That brings us back to bonds. They’ve long been sold as the safe, low-volatility part of your portfolio. But that story was more a convenient lie than anything else. We got our decades of smooth, stock-crash hedging, returns but the last 5 years might be more an integral part of the story rather than a random chapter.
While we are on this irrational thinking thing
This Monevator post provided me with additional food for thought.
We can debate all day about how inconsistent global regulators are, because they are. But it’s a little strange to complain when a regulator decides to sit on the sidelines with the same skepticism you have. Imagine if tomorrow the whole house of cards comes down: Bitcoin dips, a Bitcoin-backed treasury firm collapses, contagion spreads, and suddenly MicroStrategy’s “HODL” thesis becomes “Chapter 11.” If the fallout is that bad, would you really wish the regulators had jumped in earlier?
I’ve been toying for a while with the idea of highlighting the weirdest Polymarket bets on the podcast: some of those things are pure gold. So last night I finally went to check it out… only to find out it’s banned in Switzerland.
Now, I understand the intention. But what’s the point of banning something that’s literally a VPN click away? It’s the equivalent of telling kids not to peek into the cookie jar while leaving the lid off and walking away. You’re not stopping behavior, you’re just creating two groups: those willing to break the rules, and those who follow them and get left behind.
Regulating these things is not easy. Writing the right policy in a (still) open world is a complex matter. Personally, I lean more towards the “we are all adults and should take our responsibilities”, but I understand the slippery slope this leads to. Especially after writing a post that describes how chaps do not even get an important concept like inflation.
The additional issue is that the general public doesn’t care…until they care a lot (survivorship bias, not realising the ex-ante risk, etc…pick your poison). And when they finally do, they’re usually looking for someone to blame. Except themselves.
This kind of stuff forces you to reckon with an uncomfortable truth: sometimes, all it takes to be King of France is convincing enough people that you’re the King of France. That’s basically how Bitcoin worked. Or dog coins. Or fart coins. If someone pulls that off, can you really fault them?
Timing the market, any market, has its own, sometimes life-changing, perks. Let’s not forget it comes with a big fat set of risks.
What I am readin now:
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