Top Five Learning Moments from Market Changes in the 90’s

The Financial Pipeline is marking 20 years of providing timely and helpful financial stories.

The Central Mission of the Financial Pipeline at its founding in 1996 was to help “the rest of us” cut through the balderdash, gobbledegook and self-service pronouncements of the financial markets. The glaring need that inspired us then has only intensified.

Among others that could be cited, the trends cited below that were in their infancy in 1996 have abetted astonishing extremes of opacity and obfuscation that threaten our financial health. Could even the most clairvoyant futurist have imagined the following:

1. Alan Greenspan, fresh from his successes of “saving the system” from the stock market panic of 1987 and the 1994 bankruptcies of Orange County and Mexico, initiated the transformation of central banking. What has happened to these guardians of “sound money?” Helicopter money, “whatever it takes” and seven years of zero interest rates now define the role of central bankers. Inflation running at two per cent has become the minimum acceptable target, as long as unemployment is tolerable, the currency is managed and the financial markets do not wobble. That this results in widening inequalities is OK, as long as the 99 per cent do not rise up, but merely grumble quietly.

2. In 1996, it was still possible to think of “national” economies and financial markets, although major globalizations were well under way in basic industries like autos and steel. Financial markets deregulation, trading algorithms, internet power, high-frequency trading mean that tiny ripples in some remote corner of the globe have the potential to rage through commodities, currencies, bonds and stocks. And conservative guardians of investment virtue like the Canada Pension Plan and the Ontario Teachers Pension Plan now have more than a third of their assets beyond the national boundary.

3. From their infancy in 1996, derivatives have morphed from the useful into the insane. Derivatives were used (cynically) to disguise subprime mortgage shenanigans from regulators and investors and this in turn was a major cause of the panic of 2007. Notoriously difficult to document, regulate and account for, derivative transactions rely on a web of global counter parties, and underpin staggering volumes of investment products and strategies.

Fortunately for the architects of derivative based strategies, there is no indication that central bankers are about to withdraw from their newly adopted commitment to infinite liquidity.

4. A fundamental tenet of investment righteousness is diversification – the judicious combining of different assets to create a better reward-risk tradeoff for the investor. The mathematics behind the assertion are that the less correlated the returns on the individual assets are, the less risky is the portfolio combination. In 1996, the conventional wisdom was that bonds and stocks would tend to move in opposite directions (negative correlation, as for example, a weak economy depresses earnings, but pushes long term interest rates down) and therefore a portfolio holding both assets would be much better in reward-risk terms.


In 2016, additional common approaches to diversification might be to own equities in different countries, have exposures to commodities, private equities and a plethora of ever narrowing slices of the securities markets – such as junk bonds, or biotech companies.

In actual fact, over the past 20 years, bonds and stocks have been positively correlated. Measured on a monthly basis, the correlation between returns on U.S. stocks and U.S. Treasury bonds was 0.22. This raises the question of whether, during the forthcoming rise in interest rates, security market returns will be increasingly correlated to a common variable – say the interest rate on U.S. Treasuries. If so, investors will have no place to hide. Would an analogy to the dinosaurs as the meteor approached be inappropriate?

5. Circling back to the original mission of the Financial Pipeline, every investor today has access to many times the information available when the website started in 1996. We suspect that investment wisdom has actually been submerged by the plethora of data. Touchscreens and mice-clicks breed ever shorter time for contemplation of underlying realities. And that, is where we began.

3 years ago