A bond trader once told me, in a moment of enthusiasm and pride, that the stock market is a Ponzi scheme. He meant to draw a contrast between two categories, where debt at some point has to be repaid – in theory at least, by the borrower – while equity only changes ownership and moves with the next domino to fall. There is some truth to this perspective, although idealized and simplified, considering the mix of liquid market flows and signals in debt markets, increasingly a line of dominos as well, by the trader’s definition.
Nonetheless, the fundamental difference between equity and debt is as described, and might be further summarized as follows: The equity market is driven by technicals (capital supply and demand) and mapped by fundamentals (underlying economics); the debt market, the other way around. Again, the distinction is imperfect, but for purposes of argument and further thought, we can leave it at that and take a look at the divergence.
Where the debt market and its low and falling rates is signaling a turbulent perspective and a flight to relative safety in a weak economy, the stock market is surging, which would ordinarily signal the opposite. The divergence has been puzzling, as there is generally a view that the two markets are connected, and although they gather signals from multitudes of sources, there is consistency in the resulting patterns.
But what if the phenomenon this time is altogether different at its root? What if both markets now have abandoned fundamentals, if you will, and are all in on technicals? Maybe the statement that we’re getting from both sides is that there isn’t a strong view at all on the economy, because no one really knows, and in the meanwhile there are funds to put to work, maybe more so now than ever with the money printing that’s been going on in its assorted guises. And while buyers are buying debt to drive down interest rates to their supposed limit, the other side of speculation is buying stocks because you can’t make a return on nothing.
Who knows? Nobody does. But it’s a possibility. If so, what we are witnessing is not a split between the two at all, but in fact a convergence. If so, it’s all a string of dominos, perhaps, all technical factors, to put it in sophisticated terms; or, all a Ponzi, more crassly. If so, when economic fundamentals become less mysterious, or when the money printing stops, or both, perhaps that will be when the essence of it all will be revealed more clearly.