“Now, O king, establish the injunction and sign the document, so that it cannot be changed, according to the law of the Medes and the Persians, which cannot be revoked.”¹

Daniel, as the Book tells it, found favour in the court of Darius. Piqued with jealously, Darius’s other advisors, playing on the king’s pride, persuaded him to sign a decree such that anyone who prayed to anyone but him, would be cast into the lions’ den. When Daniel fell foul in resuming his daily prayers, Darius “was much distressed and set his mind to deliver [him]”. But to no avail, the law could not be revoked. Beloved by Sunday schools the world over, the Law of the Medes and Persians has since become a byword for a rule which, once implemented, cannot be changed, even by its creator.

In one extreme telling, this could be the right approach for investment. Set your rules up and then, like Odysseus, strap yourself to the mast. But there is a counterpoint, memorably articulated by Ed Seykota in Jack Schwager’s classic Market Wizards: “Follow the rules without question. Know when to break the rules.” While people throughout history have often felt they are on the cusp of seismic change, when the prospectus for what, by some measures, will be the largest IPO of all time warns of “existential risks to humanity”,² it is a good time to examine whether some of your go-to heuristics might have run out of road. Here are three I’ve been mulling on.

The inversion of the yield curve presages recession

Various people claim this as their own invention, and across equally varied formulations. In the interest of brevity, let’s just run with Figure 1 which shows the gap between the 10-year and two-year US Treasury yields, whose spread, in my experience, the average sell-sider riffs on. I have highlighted episodes of curve inversion in red and the National Bureau of Economic Research (NBER) recessions in grey. I have also annotated the length of time between the start of the inversion (e.g. +16 months) and the start of the recession.

There is enough there to make you a bit nervy when the line drops below zero. You can make the statement that 10 out of 10 historic recessions experienced an inversion in the 24 months prior. And there is a qualitative rationale as well. Banks borrow short to lend long. An inverted curve should therefore be a disincentive for lending, therefore a negative credit impulse, therefore an economic headwind. Or put a more general way, the near end of the curve tells you about the cost of capital, the far end tells you about expected growth in cashflows. An inversion means IRR (internal rate of return)-type project ‘go/no-go’ decisions are flagged ‘computer-says-no’ more often.

Figure 1: US 10y-2y US Treasury yield curve and NBER recessions

Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. The month labels show the length of time between the start of the inversion and the start of the recession. Source: Bloomberg. Date range: Dec 1940 – Sept 2026.

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But the case is not watertight. The recessions of 1945, 1948-49 and 1953-54 went unsignalled. Fair enough the first two of these were under the US Treasury’s managed bond market, and the third may still have been influenced by it. But then there are the false signals of episodes three and eight. And for four and 10, is two years an early warning system, or just plain wrong?

Such objections have been turbo-charged by the most recent inversion. The curve first went negative in July 2022, and then proceeded to post the deepest dive since the early 1980s. Despite that, more than four years later, we are, like Boggis, Bunce and Bean, still waiting.

Why might the rule no longer work? The Treasury market now finds itself subject to geopolitical cross-currents which were absent, or at least less discussed, 10 years ago. The weaponisation of the dollar, the multi-polar world, financial repression and the merger between monetary and fiscal authorities, and fiscal sustainability. You will no doubt have differing views on whether these represent real forces, or just column inches and chin scratching, but it is feasible to me that even the conjecture is muddying the waters of whether the US yield curve is still a true proxy of the capital cost / growth interaction.

My verdict: I will still notice an inversion, but it’s gone from being a biomarker of terror, to a bit more than a raised eyebrow.

In the end, valuation is a gravitational pull which cannot be resisted

Now this is deep into famous last words territory, and a place where I’m uncomfortable. Even monkeys fall from trees, as the late, great Barton Biggs reminded us on the eve of the Dot-Com bust. Historically, it has often been when the traditional tools have been most rubbished that they come back to wreak a terrible vengeance. The idea that a stock price is highly unlikely to trade at 50x its earnings forever has the kind of elegant intuition that appeals to my granny. And she’s a wise lady. From there it is not much of a leap to assume that at least some of these names will find normality the hard way (big, sudden price declines) rather than the easy way (growing earnings).

And yet it’s been a long old run down for a strategy that employs this philosophy as its lodestar. Figure 2 shows the indexed excess return of the Fama-French HML (High Minus Low) factor, the same idea but on a price-to-book (P/B), rather than price-to-earnings (P/E) basis (albeit inverted, i.e. the performance of companies with a high book value yield, minus that of stocks with a low one). Between 1926 and 2006, the strategy had a compound annual growth rate (CAGR) of 5%. Since then, the equivalent figure is -2%. All alpha tends to codify eventually, and then it’s just beta. Perhaps this dog has had its day.

Figure 2: Indexed excess return of Fama-French value (HML)

Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Source: Fama/French via CRSP. Date range: June 1926 – Aug 2026.

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Let me be clear, this is not to say intrinsic value does not exist, rather just a question of how it is measured. Around Christmas last year, I was buttonholed into a debate, proposing the motion (I didn’t get to choose) ‘valuation is a paradigm doomed to failure.’ It was a fun evening, but I had an acute case of esprit de l’escalier afterwards when I realised that the key point I should have made (but didn’t) was, what do we even mean by ‘valuation’? If we mean, “some objective measure of true worth which people will eventually realise” then clearly, unless you’re a deep post-modernist, you would have to agree. But if we instead mean, “an arbitrary level on a specific ratio which Graham and Dodd said was important 80 years ago”, the case is shakier.

After all, when the great men were writing, you didn’t even have spreadsheets. Just knowing the P/B of every stock in the S&P took serious perspiration. In a world where an economic revolution is coming out of companies that didn’t even exist 10 years ago, if you use the old valuation metrics, are you turning up with an abacus to a quantum computing fight?

Take SpaceX as the current bellwether of a value investor’s nightmare. Today it trades at 110x forward P/E. That’s one way of looking at it. Another is that it’s on 15x 2030 consensus. Now the Value guy will scoff at that, “I don’t believe those earnings”, I can hear people shouting at the screen. Fair enough, implied earnings growth of more than 600% in three-and-a-bit years is punchy. But just as space is infinite, if the industry that exploits it is real, then, even if you’re a sceptic, you’re still looking at a small probability of a very, very big payoff. Moreover, this is a rare instance when, at least from a public markets perspective, there is pretty much only one stock that capitalises on this theme. There’s a true intrinsic value, no doubt, but as things get massive, are classic valuation multiples still adequate descriptors? My old science teacher used to say, “physics works. Apart from when things are really, really small. Or really, really big”. Perhaps this is the latter?

It’s a hard judgement. “Revised models justify stretching.” The infamous Dot-Com “price-to-eyeballs”. These make one nervous about ditching tools which have a storied empirical and philosophical backing. Still, there’s enough there that I am open to making a little more room in the portfolio, at least than I would previously, for these kind of euphoria-multiples.

A positive stock-bond correlation means fixed income is dead as equity insurance

The argument goes something like this. Per Figure 3, you are now in a positive stock-bond correlation world. Therefore the value of bonds as equity insurance within the portfolio is less, possibly zero. Fools that you were, you got used to the hot bath of negative correlation in the first two decades of the 21^st century. But that was always an aberration; 250 years of data says that, in general, the two asset classes move together, more often than not.

Figure 3: Trailing 10-year US and UK stock-bond correlation (1763 to present)

Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. Source: Bank of England, GFD, Man Group. Date range: Aug 1763 – Aug 2026.

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But like an average, a Pearson correlation coefficient can cover a multitude of sins. One such sin is that two assets can be positively correlated most of the time, but negatively in short periods of acute stress, an equity bear market, for example. The covariance matrix is notoriously unstable. This makes it feasible that, while over a long period of time you have a positive number, in short windows you care about within that, it might not be the case. Moreover, the correlation coefficient does not take account, at least not enough, of the impact of carry. Figure 4 shows the 15 instances over the past 100 years that the S&P has drawn down by 25% or more. The first 11 of these occurred against a broadly positive correlation backdrop, per Figure 3. Despite that, in eight of these 11, the bond return was positive. The equity sell-off of 1980-82 is particularly stark. Despite one of the most pronounced monetary tightening cycles in history, your total return on a 10-year Treasury was +18%, while the stock market fell 27%. This doesn’t naturally tally with intuition, until you remember that at points during this drawdown, you got a yield of 16%. It takes a lot of negative duration impact to wipe that out.

Figure 4: US 10-year Treasury performance in all 15 of the 25%+ equity drawdowns over the last 100 years

Past performance is not indicative of future results. This analysis is based on our research and is intended for illustrative use based on considerations listed in this paper and should not be construed as a recommendation and should not be relied on. 100% equity represented by S&P 500, UST10 represents the US 10-year Treasury shown as monthly bond series before 1968 and daily total return from 1968 to present. Source: Bloomberg. Date range: Sept 1929 – Jan 2022.

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There are certainly legitimate things to say about the new positive stock-bond correlation world which, to be clear, I think will persist. It means that the portfolios you can build are less efficient, which means you can run less leverage. There are more drawdowns short of the 25% threshold of Figure 4, which can still feel painful, and the equity ballast picture in those is less rosy. Moreover, the experience within the 25%+ drawdown will feel more volatile, even if the overall result is green. Still, we should be careful not to overlearn the lesson of 2022, in my view. We’re not coming off the zero bound anymore. Remember the words of criminal mastermind Hans Gruber from Die Hard, on the hunt for US$640 million in bearer bonds:

“When they touch down, we'll blow the roof. They'll spend a month sifting through rubble, and by the time they figure out what went wrong, we'll be sitting on a beach, earning twenty percent.”

Sitting on a beach earning 20% is still a stretch, but the point stands that chunky yields are now a part of the portfolio construction playbook. Positive stock-bond correlation is one feature to consider. Carry is another.

The allure of sitting on one’s hands

Not to put it too negatively. I’m a believer in thinking hard and thinking once – it’s often the tinkering that kills you. But at the same time, it’s worth going through the exercise of considering the base truths on a semi-regular basis. Those too dogmatic about not interfering with the process would do well to consider the fate of the other advisors of King Darius, who held him to the irrevocable Law of the Medes and Persians. “And the king commanded, and those men who had maliciously accused Daniel were brought and cast into the den of lions – they, their children, and their wives. And before they reached the bottom of the den, the lions overpowered them and broke all their bones in pieces.”³

1. Daniel 6.8 (English Standard Version)
2. Financial Times, 'Anthropic warns of “existential risks to humanity” in IPO prospectus' (29 September 2026)
3. Daniel 6.8 (English Standard Version)