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                                                                                MONEY ANGLES, Page 53

How to Invest In a Clinton Win


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 dec ade -- 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!")