The budget compromise last fall committed the country to billions of dollars in defense cuts. Regrettably, with the first bomb on Baghdad, that deal was blown. Even more regrettably, military spending has almost no effect on long-term economic growth, according to studies by economist David Aschauer of Bates College in Maine.
To stimulate the economy, the government should be pouring its money into dams, bridges, ports and roads. Every dollar spent on infrastructure, Aschauer says, adds $4 to national output within four or five years because it helps business operate more efficiently. To the extent that war eats up any of these funds, the nation’s potential for growth will have been set back.
Among investors, interest rates are being watched as closely as bulletins from the front. “We need much lower rates to have a sustainable recovery,” says Hugh Johnson, a senior vice president at First Albany Corp. Without them, any pickup may flame out. Rates dropped last week, raising the hope that the downturn is now in the process of being arrested.
This view brings hoots of derision from the bears, who argue that the real-estate bust, loan defaults, tightfisted bank lending and plunging consumer confidence will carry the economy and interest rates down all year. Which reminds me that there are only two kinds of investors: those who don’t know where interest rates are going, and those who don’t know that they don’t know'
Happily, mugwump investors needn’t buy either the bullish or the bearish case. They readily prepare for both. This year, at least, the potential losses in being wrong may be greater by far than the reward for being right,
The haven of choice is Treasury securities, both for fear of stocks and for fear of banks. By last year’s third quarter, individuals had bought 17 percent more Treasuries than they had a year earlier, reports the Bureau of the Public Debt. Here’s a quick primer on what to buy:
One-year Treasuries (minimum investment: $10,000; recent yield, 6.5 percent) are a bet that interest rates will rise. In a year’s time, you hope to reinvest your cash for a higher return. If you’re wrong, your income will shrink.
Five-year Treasuries (minimum investment: $1,000; recent yield, 7.6 percent) serve mugwumps well. If rates fall, you’ll have locked in current yields for a reasonable period of time. If rates rise, you don’t have inordinately long to wait before getting your principal back for reinvestment. To maintain the purchasing power of your capital, the interest should be wheeled into a money-market fund.
Ten-year Treasuries (minimum investment: $1,000; recent yield, 8 percent) are a pretty strong bet on declining rates. If you’re right, you’re in clover. If you’re wrong, you’ve a decade-long wait for your principal back while earning subnormal returns on your money. If you sell before maturity, when rates are up, you’ll get back less for your bonds than you paid. If you sell when rates are down, however, you will earn a capital gain. Bonds of long maturities, like 30 years, are generally the preserve of interest-rate speculators whose game it is to gamble on lower rates.
Mutual funds invested in Treasuries aren’t worth their annual management fees. Treasuries are default-proof, so you don’t need to diversify. Buy individual securities instead (or federally insured CDs which are just as safe).
If you’ll hold your Treasuries to maturity, buy through the nearest branch of the Federal Reserve. Just call and ask for an information packet. The government charges no sales commissions. If you’re speculating on interest rates, buy through a stockbroker–preferably a discount broker. Brokers can sell your bond before maturity, which the Fed cannot. You’ll also need a broker if you want a bond that matures in a year not currently available from the Fed. Those will be older Treasuries that have been on the market for a while. Look for the table of their yields in your newspaper and ask the broker how close to that yield he or she can get, after subtracting sales commissions.
So much for wump protection. With, say, half of your money safe, stocks look more interesting–at least, for money you don’t expect to touch for 10 years or so.
The market started running defense stocks up the flagpole some months ago–first, as the Soviet Union turned left and again when Iraq overran Kuwait. Now, investors have to weigh the value of new contracts against the likelihood that. total defense spending will still slow. Take McDonnell Douglas. The division that co-contracts for the showcase Tomahawk cruise missile should be robust, says analyst Howard Rubel of C.J. Lawrence. But its A-12 attack plane has been canceled and the company has to shrink in size. Rubel prefers Raytheon, mother of Patriots.
Stocks in general seem to be poised on tiptoe, especially the smaller-company stocks. The NASDAQ index of over-the-counter stocks rose 10.8 percent in January, compared with 3.9 percent for the blue-chip stocks in the Dow Jones industrial average. Small-company growth funds are beating all other diversified mutual funds. If that continues, it will be their best showing in nearly a decade.
The international stock funds slumped badly last year, on slow growth in several countries and the sharp rise in the price of oil. Investors suffered an average 12 percent loss in dollar terms, about twice the 6.3 percent decline in U.S. general-equity funds. Guy Rigden, chief international strategist at the British investment house UBS Phillips & Drew, sees the European markets as another rough ride in the first half followed by “a happy ending.” Americans socked a record $6.5 billion into foreign stock funds last year. Rigden thinks you should come out and play again.
