In the wake of one of the steepest first-quarter rallies in world equities in more than a decade, it's been tempting to hail the return of more "normal" times, where the cyclical ebb and flow of the economy dictates predictable investment patterns.

But skepticism remains sky high, and it still doesn't feel right to many investors.

This stock market rally, like so many others over the past three years, is a by-product of central bank money splurges - most recently this year from the European Central Bank and Bank of Japan, following two separate bond-buying programs by the Federal Reserve and Bank of England since 2008.

Yet to date these waves have quickly drained away without meaningfully re-hydrating the underlying economies, leaving stock markets high and dry each time and prone to withering corrections. The policies may well have staved off a disaster, but that's not the same as generating robust growth.

Ironically, more normal times may only become apparent when there is no more need for this emergency money pumping and the underlying economies can stand on their own two feet.

In the meantime, get used to the shady world of the "new normal", the phrase coined by bond fund Pimco to describe years of persistently sub-par growth, stock market false starts and the constant need for new monetary stimuli.

HSBC's global economists insist this long, Japan-style economic funk across the developed world is still the reality and last week warned clients to resist the temptation to chase this year's equity surge as "business as usual".

"In a world of economic permafrost, markets have a tendency to move from despondency to euphoria and back again when little in economic reality has actually changed," wrote HSBC's chief global economist Stephen King and his team. "And that's exactly what we've been living through in recent years. Sentiment and reality, however, are not the same thing."

AUTHENTICITY TEST

But is there an easy way to hold periodic stock market boomlets up to the light to check their authenticity?

The most obvious metric over the past six months has been the disconnect between super low top-rated government bond yields and surging equity prices and the extent that this reveals both the government bond market intervention as well as innate skepticism about the economy.

In now elusive "normal" times, core government bond yields should rise and fall with equity prices.

Intuitively, economic growth lifts company profits and stock prices. And, in turn, that growth erodes spare capacity and generates price pressures that prompt investors to demand higher bond yields to compensate for future inflation risks.

But this correlation, which Credit Suisse says attended all "significant" equity rallies since 1998, has broken down badly over the past 18 months. Successive bouts of central bank bond-buying and cash injections have indeed pumped cash into risky assets such as equities, but they have simultaneously pinned underlying bond yields to the floor.

In asset management, there has yet to be a wholesale shift to equities from the "safe-haven" and negative real yields of the shrinking pool of triple-A bonds. To be sure, some of that inertia is structural among pension funds and central bank reserve managers, but there is also basic concern the economy is far from repaired.

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US equity vs bonds: link.reuters.com/hyv47s

QE timelines and world stocks: link.reuters.com/ruv47s

Econ surprises and equity/debt: link.reuters.com/fuw47s

Equity and inflation outlook: link.reuters.com/gyb37s

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ONE'S WRONG

Either way, one of these signals would appear to be wrong about the real economy. But which one?

The temptation is to view manipulated government borrowing rates as the bum steer. But repeated disappointments from the underlying economy and persistently high unemployment rates suggest the "new normal" scenario is still most compelling, leaving the stock market likely way ahead of itself again.

Richard Cookson, chief investment officer at Citi Private Bank, puts it bluntly. "Although everyone and his dog seems to think that bond yields are about to soar, we don't."

And yet this is why the sudden jump in bond yields early last month was for many the most exciting market development of the year. Could it be the bond market was at last confirming the recovery flagged first by effervescent stocks?

The 40 basis points jump in 10-year Treasury yields, though only returning rates back to October levels, was confirmed at least by Reuters March asset allocation polls showing fund managers cutting U.S. bond holdings to a six-month low.

But as soon as that move gathered steam Fed chief Ben Bernanke warned about the economic outlook on March 20. It was interpreted by many financial traders as flagging another potential bout of Fed bond buying and reversed most of the bond yield jump, casting doubt on the Fed's faith in the recovery and throwing another spanner into the market signaling works.

Yet, for bond managers such as JP Morgan Asset Management's Nick Gartside, the biggest central bank liquidity flood since 2009 means the equity/bond debate is almost redundant and in this environment investors just need to decide what bonds they want - government, corporate or emerging markets.

"The decision for investors will not be whether or not to be in fixed income, but where best to allocate to take advantage of the opportunities," he said.

(Graphics by Scott Barber; Editing by Hugh Lawson)

• A Permanent Economic Emergency