There is, in the nature of markets, a division not unlike that which obtains among men of differing temperament and station. The dealer in equities is, by the very character of his instrument, a man of sanguine disposition — he purchases a share in future prosperity, and his purchase is therefore an act of hope. The creditor, by contrast, demands repayment of a fixed sum at a fixed date, and his calculations are accordingly more austere. He has no occasion for hope; he requires certainty, or something approaching it, and when certainty withdraws itself, he says so in the plainest manner available to him, which is to say, in the price of his instrument.
It is therefore a matter deserving of careful inquiry when these two classes of market participant — the hopeful holder of equity and the cautious holder of debt — arrive, simultaneously and in full view of one another, at conclusions so entirely opposed. The credit markets, by the evidence now available, have communicated a note of unease. Spreads have widened. The price of insuring against default has risen. The signal, to any student of commercial history, is not ambiguous. The creditor does not widen his spread for ornament.
The equity markets, meanwhile, proceed as though no such communication had been received. Prices hold. Participants speak of resilience. One is reminded of the passage in my Theory of Moral Sentiments wherein I observed the remarkable capacity of the human mind to attend, with perfect composure, to the pleasurable intelligence whilst setting aside that which is disagreeable. It is not that the disagreeable intelligence is unknown; it is that the architecture of self-interest renders its reception inconvenient.
In my Wealth of Nations I had occasion to observe that the interest of the merchant is not always identical to that of the public, nor even, in the shorter run, to his own interest rightly understood. The merchant who sells equities profits from rising prices. The merchant who makes his living in commentary upon prices profits still more from the sentiment that prices shall continue to rise. Neither party has a material interest in attending to the creditor's whisper, however precisely that whisper may correspond to the underlying condition of commerce.
And yet the creditor's whisper has, across two centuries and more of recorded commercial history, proved the more reliable guide. When the price of borrowing rises in anticipation of distress, distress has a habit of arriving. Not always promptly. Not always in the precise form anticipated. But with a regularity sufficient to counsel against the easy dismissal that the equity markets appear presently to have adopted.
The equities market is, in this respect, like a householder who has received a letter from his creditor and placed it, unopened, upon the mantelpiece, preferring to attend to the morning's pleasanter correspondence. The letter does not cease to contain what it contains merely because it remains unread. Commerce, in the long run, is not so easily deceived as those who conduct it sometimes wish it to be.