Money Angles

By Andrew Tobias

EVERY NIGHT, ACCORDING TO MY STOCKBROKER, BILL Clinton retires to his hotel room, puts on his pajamas, and jumps up and down on the bed yelling, "I'm going to be President! I'm going to be President!"

I hardly think he does this, but I do think he's going to win -- on balance, a good thing -- so the question arises: What about my money? What should I do differently? And the first thing to say is: Not much. The basics of personal finance never change. And the stock and bond markets have largely accounted for a Clinton win already. It's surprises that move markets.

If you're a money manager, you may already have scaled back your ownership of pharmaceutical stocks, already have moved into "infrastructure" plays. The "Clinton stocks" people have identified -- H&R Block (because the tax code might change yet again), Caterpillar (because you need heavy equipment to build infrastructure), Paramount Communications (because of its huge textbook operation) and a zillion others -- may still be good buys. But I've never met anyone who got rich in the '60s buying shares in "the company that makes schoolroom desks," which was one of the plays after Kennedy got elected; and while I believe Clinton will be far more the education President than Bush, I am not on my hands and knees under a kid's desk trying to make out the name of its manufacturer. (I got somebody else to look: Virco Manufacturing.)

As usual, the way for most of us to play the market is to let the pros play it for us, through no-load mutual funds. Our job is personal finance: contriving somehow to spend less than we earn, and then deciding, in broad strokes, how to deploy the balance. In this regard, I have long advocated a four-prong strategy. But how to weight those prongs right now?

Liquid Money. Before contemplating anything fancier, most people should get rid of all their high-interest debt (to earn 18% tax-free and risk-free, pay off your Visa) . . . buy their cars for cash (yes, it's legal to pay off a car loan; no, leasing's not generally a good idea) . . . stock up on "the economy size" when items are on sale (an "investment" in sale-priced soda, socks and soap can stretch $1,000 to buy $1,400 worth of the same stuff you'd have bought anyway -- a 40% tax-free return) . . . and stash away at least a few thousand dollars someplace liquid and safe. Like a bank.

Other places for liquid money: money-market funds and Treasury bills. But with rates as low as they are, it doesn't so much matter where it is as that it's there at all. Who cares that you're earning only 2%, after tax, on your ready money? (You may actually be earning more. If keeping a $2,500 balance earns you "free checking," saving $10 a month you'd otherwise pay in fees, that $2,500 is "earning" 4.8% tax-free.) Should the stock market ever again trade down near its book value -- as it seems to do at some point each decade -- it would be about 60% lower than today. Would you be so upset to have earned 2% on your liquid money? You'd be the envy of Wall Street!

So don't feel dumb if cash fails to burn a hole in your pocket. Feel powerful.

Only after you have all the liquid cash you need ("Honey, I was laid off today and the transmission fell out of the car, but it's O.K."), should you deploy the rest of your assets over these three prongs:

Inflation Hedge. The conventional wisdom is that Democrats equal inflation. But with U.S. factory capacity at a mere 77.2% and unemployment high, it may be quite a while before the economy strains capacity (which leads to higher prices) or before the banks start lending with abandon (which expands the money supply and leads to inflation). Right now, they're hardly lending at all. The Clinton goal, moreover, is to redirect defense and welfare spending (among others) toward investments in training and infrastructure that will make the country more productive -- as the interstate highway system once did. If that's the kind of deficit we run, it may not be inflationary. Productivity dampens inflation.

Still, one should always hedge against inflation, and the best hedge for most of us is a home. Owning someone else's home, if you can afford it, can be a good inflation hedge too. With interest rates low and loads of rental properties in foreclosure, it's possible in some parts of the country to lock in a significant "positive cash flow" -- taking in more each month than you pay out. This is not something to embark on lightly and is as much a part-time job as an investment. But some of us could use a little extra work these days. And I think there will always be demand for decent low-priced housing. Just as Reagan sparked a boom in the luxury-housing market, Clinton may help reinvigorate some of the lower-income parts of town.

Deflation Hedge. We're not in a recession, writes money-manager Ray Dalio in Barron's, we're in a depression. The difference isn't severity but cause. A recession is a standard contraction of the business cycle. Things heat up; the Fed throttles back to restrain inflation. A depression, by contrast, has to do with debt. After a decades-long cycle of ever increasing debt, people and companies and governments have to cut back just to service the debt -- and those cutbacks make it harder for others to meet their debt -- and it all comes tumbling down (as in the '30s), or (more likely today, with far more safeguards and buffers) it gradually unwinds. Dalio sees several more years of very sluggish growth as debt loads are slowly worked down.

Either way, the potential for still lower inflation is real -- and the gruesome possibility of deflation can't be ruled out (though it would seem more remote under a Democrat) -- so lower long-term interest rates are still possible. After all, from 1870 to 1967, Treasuries typically yielded from 2% to 5%. Today you get 7.6%.

It makes sense to have some of your assets in safe, long-term securities whose yield, locked in at today's levels, could begin to look more and more attractive if interest rates continued to decline.

Mild inflation fears are already built into today's rates. If Clinton were to appoint as Treasury Secretary someone like Warren Buffett or Paul Volcker, might those fears abate? Might long-term rates drop? One can never know these things, which is why it makes sense to hedge.

Big investors should consider long-term municipal bonds. Clinton plans to raise the top tax bracket, so the tax benefits of municipals will increase, raising their value. And there is currently a glut of tax-free bonds, so that, relative to Treasury bonds, they are a good buy. (Caveats: avoid bond funds, because too much of the income gets siphoned off in fees; avoid risky bonds unless you know what you're doing; be certain you understand the "call provisions" of your bonds; and always get competitive prices from more than one broker -- the transaction costs of buying and selling municipals can be murderous. Buy and hold!)

Smaller investors should consider U.S. Savings Bonds -- and soon, because the 6% floor, guaranteed for 12 years, could be reduced on new bonds at any time. Savings Bonds are great because they're free of local tax, let you defer federal tax until you cash them in, and may avoid tax altogether if they're used to pay tuition and you meet certain criteria (ask your bank for details). You have to hold them five years to get the full 6%, but you get at least 4% after six months.

Prosperity Hedge. There's a hoary old thing called Dow Theory, based on technical indicators, and on Oct. 5 it confirmed that we are in a "primary bear market" that began Feb. 20. The Dow Jones industrial average has risen from 777 in 1982 to today's 3200 or so, and it may just be in for a breather. Or a gasper. I have a lot less of my own money in stocks, relatively speaking, than I had when the Dow was 777.

But no stock-market predictor is infallible, to say the least, and over the long run, stocks always outperform safer investments. So it makes sense, especially for people under 55 or 60 -- and especially with the money in your retirement plan -- to invest steadily in a handful of no-load stock-market mutual funds.

One easy, sensible choice: Vanguard index funds, which mirror the results of the market as a whole (not bad, considering that most people do worse). Vanguard is noted for its low fees, which means most of the market's gains go to you.

Or follow the lead of Morningstar Inc., a team of experts who scout out the best funds. Here are seven they chose for their own retirement money: Lindner Dividend, Janus Venture, Fidelity Disciplined Equity, Gabelli Growth, Gabelli Asset, Vanguard World International and T. Rowe Price New Income.

I think a Clinton win will ultimately be good for your money because, just as it took a Nixon to go to China, I think only a Democrat can get Congress to move welfare toward workfare, trim Social Security benefits for those who don't need them, and provide the kind of investment incentives Clinton's been talking about. I also think he is more likely to give people a feeling of hope, and to project a vision. It's corny, but when people have hope, they try harder (and invest more).

There was little to like in Ravi Batra's The Great Depression of 1990, but one part of his thesis I did find haunting was that economies collapse when wealth becomes too concentrated. He had a chart showing U.S. wealth headed for the breaking point.

There's no question the Reagan-Bush era has been great for high-income guys like me. But if there's anything to the Batra thesis, a Clinton win may come just in time -- not for any massive redistribution of wealth, but to tip the playing field ever so slightly away from the wealthy and back toward everyone else.

Another plus: to the extent a President needs to persuade Congress and the public to take tough medicine (Perot's point), and of the need not to kill the golden goose (Bush's), Bush and Perot have helped lay the groundwork. We certainly don't need to "pay off the debt," as Perot keeps saying. It's no more unhealthy for the U.S. to have debt than for a family to have a mortgage or a business to have bank loans. But we do have to trim the deficit soon, so the debt begins growing slower than the economy as a whole, rather than faster. And we do have to direct the deficit away from consumption toward investment.

Clinton knows all this, of course. But the debates helped get everyone else to know it too, and that's got to be hopeful. (Before I go to bed at night, I jump up and down on my bed and yell, "We're gonna make it! We're gonna make it!")