"If finance has a single rule, it is that arbitrage should keep prices in line"

All good in theory. In practice, less so. Markets can be swept by sentiment, detaching valuations from fundamentals. Economists have surgically documented persistent distortions. Purely mechanical flows, for instance, move markets even when they are known to investors in advance and unrelated to earnings prospects. When a stock is added to an index, its price inflates.

"Why does this happen? And who, in time, might correct the market?"

a growing body of work suggests that corporations, far from being passive observers, are some of the market’s most effective arbitrageurs. In 2000 Malcolm Baker of Harvard University and Jeffrey Wurgler, then of Yale University, found a tight connection between firms’ net equity issuance and subsequent stockmarket returns. Years in which companies issued relatively more stock were typically followed by weaker market performance. More tellingly, companies seemed to issue precisely when valuations were rich, and especially when other frothy signals, such as buoyant consumer sentiment, were drawing attention.

Almost every business finances itself with some combination of debt and equity. If one becomes unusually expensive, it can easily switch to the other.