In 1924, a Wall Street analyst named Edgar Lawrence Smith sat down to prove something obvious.
Bonds were safer than stocks. Everyone knew it. The smart money knew it. The textbooks said it. His job was simply to run the numbers and confirm what the financial establishment already believed.
He couldn’t do it.
What Smith found when he actually looked at the data — across multiple decades, multiple economic cycles, multiple wars — was that common stocks had not just matched bonds over long periods. They had beaten them. Decisively. And not by luck. By structure.
He published his findings in a book called Common Stocks as Long-Term Investments. It quietly detonated the prevailing logic of Wall Street.
What Smith actually found
The conventional wisdom in the early 1920s was simple: bonds pay a fixed return and return your capital. Stocks are speculative. For serious, long-term wealth preservation, you held bonds.
Smith looked at actual historical data and found something different. Over long periods, well-diversified stock portfolios did something bonds structurally could not: they retained earnings and reinvested them, compounding value over time. A bond pays you a coupon and returns your principal. A profitable business takes what it earns, keeps a portion, ploughs it back into the enterprise, and grows. The base keeps expanding.
Smith called this the reinvestment of surplus earnings. Today we’d call it retained earnings or compounding. What it meant in practice was that stocks, held patiently, tended to outperform bonds — not because of speculation, but because of the underlying economic engine of a productive business.
John Maynard Keynes read the book and recognised immediately what it meant. Warren Buffett later described it as one of the most important investment texts of the 20th century. Benjamin Graham — who mentored Buffett — took it seriously enough to engage with its findings in his own work.
The Moody’s downgrade changes the bond calculation
Fast forward to May 2025.
Moody’s stripped the United States of its last remaining triple-A credit rating, downgrading US sovereign debt from Aaa to Aa1. It was the final domino. S&P had done it in 2011. Fitch in 2023. Now all three major agencies had concluded the same thing: the world’s largest economy is a bigger credit risk than it was.
The numbers behind the decision are not subtle. US federal debt is projected to reach 134% of GDP by 2035, up from 98% in 2024. The budget deficit is running at roughly 9% of GDP. Interest payments on existing debt have already exceeded the US defence budget.
When Moody’s made the announcement, the 30-year Treasury yield briefly crossed 5% — a level not seen since 2023. The bond market was pricing in what the ratings agencies were confirming: that lending money to the US government for 30 years carries more risk than it used to.
This is precisely what Smith’s framework would predict. Bonds are promises. Their value depends entirely on the creditworthiness of the issuer and the integrity of the currency in which they are denominated. When either of those erodes, the bond’s real return erodes with it.
A bond paying 4.5% in a world where the deficit is 9% of GDP and the currency is being quietly devalued is not the safe, conservative instrument it appears to be on paper. It is a bet that the government will keep its promise — in full, in real terms, over decades.
What Smith understood that most investors still miss
The insight in Smith’s work was not “stocks go up.” It was more precise than that.
A productive business is a claim on the real economy. It produces things. It earns revenue. It adapts. Inflation raises prices, which raises revenues. Technological change creates new opportunities, which productive companies pursue. Over long enough time horizons, ownership of productive enterprise tends to track — and often exceed — the underlying growth of the economy.
A bond is none of those things. A bond is a fixed promise denominated in a currency that governments control.
Mike Maloney, whose Hidden Secrets of Money series has traced the history of money and currency debasement across civilisations, makes a related point: throughout history, every fiat currency has eventually been inflated away. Holders of government debt — bondholders — are always the last to understand what is happening to them, because the nominal value of their holding stays the same while its purchasing power quietly disappears.
This is not a new phenomenon. It is the oldest story in monetary history. And it is playing out again right now in slow motion.
The bond market is not sending a comfortable signal
The conventional response to the Moody’s downgrade was that it was “largely symbolic” and “already priced in.” Market strategists pointed out that US Treasuries remained the world’s primary reserve asset regardless of what a ratings agency said.
That is probably true in the short term. The dollar’s reserve currency status creates a captive demand for US debt that does not exist for ordinary borrowers.
But there is a longer game here that Smith would recognise immediately.
The 60/40 portfolio — 60% stocks, 40% bonds — was the standard framework for decades. In 2022, it broke down completely when stocks and bonds fell simultaneously. It happened again in early 2025 during the tariff shock. The inverse relationship between stocks and bonds — the hedge that made the allocation logic work — is not as reliable as it once was.
Fidelity’s bond managers have noted publicly that the stock-bond correlation has been eroding. BlackRock has flagged that bonds may be “starting to once again” offer diversification — which is another way of saying the years between were an exception, not a guarantee.
What this means in practice: the 40% in bonds that was supposed to protect you was, in several recent periods, doing the opposite.
The question Smith forces you to ask
Edgar Lawrence Smith did not argue that stocks always win. He argued that over long horizons, the structure of equity ownership — claims on productive enterprise that retain and reinvest earnings — tends to outperform fixed promises denominated in government-controlled currency.
That argument has only grown stronger as governments have accumulated more debt, maintained more control over monetary policy, and created more structural incentives to inflate.
The Moody’s downgrade is not the story. It is a symptom of a longer story that has been building for decades: the gradual erosion of the creditworthiness of major sovereign borrowers, and with it, the real value of the fixed promises those bonds represent.
Smith’s message in 1924 was disruptive because it challenged an assumption everyone took for granted.
The assumption worth questioning now is the same one. Not “are bonds safe?” but: safe compared to what, over what time horizon, measured in what terms?
A bond that returns 4.5% per year while the government deficit runs at 9% of GDP is not the same instrument as a bond that returns 4.5% in a world of balanced budgets and sound money.
The number looks the same. The reality is different.
That is the hidden risk Edgar Lawrence Smith spent a career trying to help people see. He understood it in 1924. The bond market is relearning it in 2025 and 2026.