Since leaving the gold standard in 1971, the default government response to any financial crisis has been to expand the money supply. This creates a persistent, long-term inflationary pressure that investors must factor into their strategies, particularly for fixed-income assets.

Many accepted financial rules are not timeless. Stocks only began consistently outperforming bonds after WWII, and inflation-adjusted US home prices were flat for a century before 1997. This reveals that much financial advice is based on recent history, not immutable laws, making it a poor guide for the future.

The classic diversification benefit of bonds hedging stocks relies on a specific economic pattern: growth and inflation moving in the same direction. When they diverge, as in stagflation, both asset classes can decline simultaneously, breaking the negative correlation.

Historically, surges in U.S. public debt have consistently led to periods of negative real interest rates. This suggests that the sheer weight of government debt creates a structural constraint, forcing markets to keep real rates capped, irrespective of short-term inflation or central bank policy.

In the current market, assets historically considered safe are failing to provide stability. Gold's price was already high, causing it to fall with stocks. The US dollar is flat. Government bonds are undermined by inflation fears and massive government borrowing, making them an unreliable refuge during crises.

The historical negative correlation between stocks and bonds, which underpins the 60/40 portfolio, breaks down when inflation rises above 2%. In this environment, they tend to move together, making bonds an ineffective diversifier and forcing investors to seek new solutions for equity risk.

The perception of government bonds as 'safe' is challenged by history. In the 35 years following WWII (1945-1980), a period of inflation and financial repression, investors in most global government bond markets saw the real value of their capital decimated.

Unlike historical precedents, the current geopolitical conflict has triggered a significant sell-off in US long bonds. This suggests a regime change where high sovereign debt and inflation fears mean bonds no longer serve their traditional flight-to-safety role.

During a war, assets like US Treasuries face a conflict. While their payment is guaranteed (safe haven property), the war itself can spike inflation, making the fixed coupon payments a money-losing investment in real terms. Investors must weigh the certainty of payment against the loss of purchasing power.