From Baseball Cards to Blue Chips

By Alexander L. Taylor III

Investors look for new strategies to cope with disinflation

Quickly dying are the days when cocktail-party chatter revolved around the rapidly appreciating value of a suburban house on a half-acre lot. Already dead is the tennis-court talk about coin collections and Krugerrands. Millions of Americans are now taking a crash course in a new savings strategy: how to make money during a period when the rate of inflation is declining, a phenomenon known as disinflation.

Sorting out the potential winners from the probable losers will not be easy. In the heated struggle for customers, banks, savings and loans and stockbrokers are jousting with new competitors, such as money-market funds and diversified financial-services companies like Sears, Roebuck and American Express. The result has been a flood of novel investment and savings devices. Moreover, there has grown up a cacophony of conflicting claims that is bewildering investors. Even many money advisers in banks, brokerage houses and other financial institutions are having a difficult time keeping up with the myriad of different investment possibilities that have become available.

This new investment atmosphere has been brought on by continued high interest rates and an abrupt slowdown in inflation. Consumer prices rose 10.3% in 1981, and most economists expected only a slightly lower rise this year. Instead, prices inched up at a yearly rate of just 1% during the first three months, and most experts now expect that the 1982 inflation rate will be between 5% and 6%. Further evidence of the slowdown came last week, when the Government reported that wholesale prices rose at an annual rate of only .9% in April.

Only two years ago the U.S. was gripped by an inflationary panic. With prices rising at an annual rate of more than 17% in the first quarter of 1980, there was a rush to spend cash and borrowed money to buy hard assets that might hold their value. In January 1980 gold hit an alltime high of $875 per oz. in New York, and silver sold for $50.35, also a record. Diamonds became an investor's best friend, price of a one-karat flawless stone headed toward $61,100. A handful of fine-arts fans applauded when Juliet and Her Nurse, a 19th century oil painting by British Artist J.M.W. Turner, was sold for $6.4 million during 6 1/2 minutes of frenzied bidding. A 1952 Mickey Mantle bubble-gum baseball card sold for $3,100 in September 1980.

During periods of disinflation, the wise consumer is a saver and lender, not a spender and borrower. No longer does it make sense to go into debt to buy things because Joans can be paid off later in cheaper dollars With a 16.5% prime rate, borrowing is very expensive. And since prices are rising slowly, there is little chance that the item bought will be worth a lot more in the future. Says Joel Crabtree, a senior vice president of Chicago's Continental Illinois National Bank & Trust Co.: "There's less premium on holding hard assets, like diamonds, antiques, artworks or gold. Now would seem to be the time to seek a return in terms of money rather than hold property for appreciation."

Startling evidence of disinflation has already turned up in the marketplace. Gold and silver have been on a two-year slide and last week were selling for only $331 and $6.66 per oz., respectively. People who paid $61,100 for a one-karat investment diamond are finding that it is worth only about $18,000. Some forms of fine art, like Impressionist paintings and antique American furniture, have kept their value. Others have fallen in price: Old Master paintings now command 18% less than they did 20 months ago.

Real estate is no longer a nearly riskless investment. Instead of rising 10% to 15% a year, the median sales price of an existing home has fallen 1.3% from its high last year, to $67,200. Moreover, those statistics understate the amount of decline because they do not include attractive financing concessions that many sellers are now making. In California buyers with cash can sometimes get a 10% discount. A few New York City developers are offering special mortgages on cooperative apartments, like 12.5%, compared with a bank rate of 17% or more. For someone who borrows $100,000, that means a saving of $4,500 in one year.

While yesterday's high flyers are out of fashion, traditional investments like bonds, stocks and even bank accounts are back in favor. Many financial advisers suggest that their clients look at bonds. Says James Sinclair, a onetime gold bug: "The next big play out there is not gold, but Treasury bills and bonds." By buying an AAA-rated corporate bond issued by a blue-chip company like American Telephone & Telegraph or International Business Machines, an investor can count on making 14% on his money for ten years or more. If inflation stays at about 5%, that represents a good return. Some moneymen recommend buying U.S. Government bonds. Although they pay only 13%, the securities are practically risk free and, unlike corporate bonds, hold no danger that the Government will decide to redeem them early if interest rates decline quickly.

The stock market, meanwhile, has turned bullish with the Dow Jones industrial average moving up from around 795 in March to close last week at 857.78. Market players have already bid up issues that represent basic necessities like food, beverages, drugs and household cosmetics, which could benefit from disinflation. Pillsbury has moved from $36 a share to $46 in less than a year, and Procter & Gamble is trading near its yearly high of $87. Canny strategists are focusing on industries that should recover as the recession ebbs. Those include: home appliances, paper, forest products, aluminum and automobiles.

Speculators who want to gamble on the market's direction, or more cautious investors who merely prefer to hedge their portfolios, can now buy stock market futures. Pioneered last February by the Kansas City Board of Trade, they have become so popular that the New York Futures Exchange began trading them two weeks ago. With a stock market future, an investor in effect bets on which way the stock market will move by buying or selling a contract that is based on one of the popular market averages (minimum deposit: $3,500).

Banks and savings and loans are trying to attract depositors with new accounts that compete with the high-paying money-market funds. The latest gimmick is a so-called sweep account like Chase Manhattan's Chase One, where customers have to keep at least $7,500 in a checking account that pays 5.25%. Any extra money is automatically swept each night into a money-market fund that now yields 14% annually. These accounts work best for affluent depositors who keep large amounts of cash in a checking account.

In a barrage of advertisements, banks and S and Ls are also promoting other new accounts designed to separate a saver from his money. On May 1 many of them began offering 91-day savings certificates in minimum denominations of $7,500. The new three-month certificates, which last week paid about 12%, are expected to be more popular than six-month ones because they mature more quickly. Next week, Government regulators will begin considering yet another savings device, a short-term five-to-seven-day certificate that would pay a negotiated interest rate on amounts of $15,000 or $25,000.

If investors have learned anything during the past five years of high inflation, it is that no money strategy is foolproof. If interest rates rebound and go higher, or if inflation shoots up again, consumers will once more have to rethink their investment programs. But for now, stocks and bonds, rather than baseball cards and old coins, seem the best place to put spare cash. --By Alexander L. Taylor III. Reported by Lee Griggs/Chicago and Frederick Ungeheuer/New York

With reporting by Lee Griggs, Frederick Ungeheuer

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