“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…” – Charles Dickens, A Tale of Two Cities

I can't think of a better quote to describe the current state of the financial markets and the economy.

Two Markets

If you're looking only at large-cap U.S. stocks, it is the best of times, the age of wisdom, the spring of hope. New all-time highs are more frequent this year than any since 1929. Over the past month, they have been registered on an almost daily basis as the Dow races towards 18,000.

Meanwhile, bond market participants have been acting as if this is the worst of times, the age of foolishness, the winter of despair. This is best illustrated in looking at the enormous performance disparity in 2014 between the defensive Treasuries and higher risk areas of the market.

In the chart below, you'll notice that long duration Treasuries (TLT) are up over 23% this year while High Yield bonds (JNK) and Senior loans (BKLN) are barely positive.

Inflation expectations are also falling,  now back to March 2009 levels, as investors seem to be anticipating another deflationary pulse to come. Three rounds of quantitative easing (QE) and six years of 0% interest rates have failed generate sustainable growth expectations.

Two Economies

For the ultra-rich, it is the best of times. The share of wealth owned by the .1% is now almost the same as the bottom 90%, reminiscent of the “Roaring Twenties” In everything from New York City apartment prices to fine art to vintage cars and other collectibles (the toys of the uber-wealthy), records are being set.

Meanwhile, according to a recent Fed study, the bottom 40% of families in the U.S. have actually seen their incomes decline over the past four years. For these families and most of the middle to upper middle class as well, it has been among the worst of times as the cost of health care, education, and rent continue to increase while this has been the slowest wage growth recovery in history.