Happy 101st Birthday, Charles!_#26.22

June 1, 2026

Jun 01, 2026

My father-in-law, Charles, turns 101 today. Happy Birthday!

He is remarkable in many ways—curious, engaged, bringing cheer to everyone around him. He makes his children, grandchildren and great-granddaughter laugh.

Sailing past the century mark invites reflection on the many changes he has seen since 1925—some for the better, some for the worse; some more or less expected and some totally unforeseen.

One interesting speculation is whether one would have been able to invest more profitably knowing what great economic trends and political events were coming during the last 101 years.

It’s difficult to draw a definite conclusion but one thing is clear: Stocks don’t always beat long-term bonds over long holding periods.

The key to stocks beating bonds appears to be negative real short-term interest rates, caused by inflation and financial repression. These were ingredients in the Great Inflation and they, plus unprecedented fiscal stimulus, characterize the current period since the Global Financial Crisis of 2007-09.

Looking 101 years into the future, Charles (or his parents) could have profited if they had been able to foresee inflation trends and market-distorting government policies.

Four long periods since 1925. How best can one subdivide a long sample? Using trends in government financial policies and inflation, a reasonable division includes: 1) The Great Depression until WW II, 1925-42; 2) Post-WW II inflation and the Great Inflation, 1942-82; 3) The Volcker Disinflation, 1982-2007; and 4) The era of massive, ongoing government support, including uninterrupted growth of federal debt, large-scale asset purchases by the Fed and short-term interest rates pinned at zero for years on end.

Three investments during four periods. Theory suggests that: 1) A short-term risk-free asset (for example, a 1-year Treasury Bill) should produce lower returns, on average, than risky long-term assets (bonds and stocks); 2) The short-term real interest rate (i.e., after subtracting the inflation rate) should be positive, on average, in a healthy, growing economy. The first panel confirms that a constant-maturity 30-year Treasury bond and a diversified stock portfolio provide higher returns than the risk-free asset in most periods (note the two exceptions, however). The second panel reveals that the short-term risk-free interest rate was positive in the first and third periods but was negative in the second and fourth.

1) The Great Depression: Bonds beat stocks. A very long-term bond portfolio performed better than stocks during the Great Depression (defined here as 1925-42), providing a 5.7% annualized return during the 17-year period from May 1925 (just before Charles was born) to May 1942 (when the US was ramping up for WW II), compared to 4.0% for stocks. Because the price level fell during this period, the real after-inflation returns were slightly higher than nominal returns. Fig. 1 depicts the year-by-year evolution of a hypothetical $100 investment in each of the three investments. (The Treasury returns are estimated based on other bonds available during those years.) From the 1929 peak, stocks declined through 1942.

2) WW II, financial repression and the Great Inflation: Stocks beat bonds. The annualized return on stocks was 11.5%—7.0% after inflation—during the 1942-82 period. (See Fig. 2) The 30-year constant-maturity Treasury bond portfolio, on the other hand, performed abysmally, losing an average of 2.9% per year—7.5% annually after inflation— for four decades! Fig. 2 shows that a $100 investment in stocks in May 1942 was worth $7,821 by May 1982, but $100 invested in 30-year bonds was worth only $30 in vastly depreciated dollars in May 1982. The 30-year yield increased from 2% to 13%; inflation was 4.5%.

3) The Volcker disinflation: Bonds beat stocks. A very long-term bond portfolio performed substantially better than stocks during the Volcker disinflation (defined as 1982-2007), returning 17.8% (14.6% after inflation) while stocks returned 13.6% (a real 10.4%). The table and Fig. 3 show that investment returns for all three assets were better during this quarter century in both nominal and real terms than during any of the other three sub periods during Charles’ 101 years. Note that the real short-term interest rate averaged 3.8% over 25 years, contradicting conventional wisdom that “restrictive” Fed monetary policy (higher real short-term interest rate) would hamper the economy and financial returns.

4) Today’s era of massive, continuous government support: Stocks beat bonds. Unprecedented government interventions into the economy began with the 2007 financial crisis, as the Fed cut its overnight interest-rate target to zero and began buying trillions of dollars of long-term bonds with the explicit aim of driving yields down and asset prices up (stocks, houses, etc.). Federal budget deficits exceeded anything seen since WW II; fiscal policy became even more stimulative during and after COVID. Together with a return of interest rates to historically normal levels since 2022, federal debt is spiraling higher on a trajectory that is unprecedented outside of wartime. Meanwhile, the average 1-year T-Bill yield has been below the inflation rate for most of the period. Bond returns have been poor. Both of these outcomes are reminiscent of the period leading up to and during the 1960s/1970s Great Inflation.

Why were stock—and especially long-term bond—returns so variable across subperiods? A hall-mark of the long periods when bonds beat stocks (1925-42 and 1982-2007) is a positive real short-term interest rate (that is, T-Bill yields above inflation). Stock returns also were strong then (especially 1982-2007). Conversely, when the average short-term real interest rate was negative (1942-82 and 2007-26), stocks beat bonds handily—bond returns were negative in real terms during both those periods.

Bonds suffer when inflation and long-term interest rates are rising and the government distorts markets (financial repression during and after WW II; abnormally low short-term rates since 2007). Stocks may prosper at those times because real assets (companies and their growth options) are an inflation hedge. Since 2020, fiscal policy also has been skewed toward support of consumer spending and business investment, running the economy hot and stoking inflation. Another channel boosting stocks is low short-term interest rates themselves, effectively “chasing” investors out of safe assets into risky assets.

True rewards. Charles has had a remarkable 101-year life so far even though he couldn’t foresee the future. The greatest rewards in his life—good health, good friends, a loving family—have little to do with financial markets or the economy.

Figure 1