Cycles give pattern to economy's turns In chaos, theory offers certainty

October 25, 1992|By Ian Johnson | Ian Johnson,New York Bureau

New York -- When some economic forecasters hedge their bets, they cite "turmoil in Europe" or "uncertain interest rates." When Richard Mogey looks ahead, he worries that sunspots will dim his predictions.

Sunspots, according to the executive director of the Irvine, Calif.-based Foundation for the Study of Cycles, could hurt an economic upswing by harming crop production, which he views as central to the nation's economic health. But even if the sunspots don't materialize, the economy is still in bad shape, since cycles don't allow for any other interpretation, Mr. Mogey says.

"Cycles tell us that it's time to pay the piper. We've run out of time. It seems a foregone conclusion that whoever is elected next will be the next Herbert Hoover," said Mr. Mogey, 44, a former computer analyst.

Many economists and political pundits basically share this assessment, but Mr. Mogey's use of sunspots, as well as other cyclists' theories, to predict the future are, despite some uncanny successes, less widely accepted.

But Mr. Mogey's 51-year-old non-profit foundation is a testimony to the enduring fascination of cycles, especially in unpredictable times such as the present. When economists' forecasts regularly go down the tubes and Wall Street analysts are about as reliable as a junk bond, cycles can seem a reassuring certainty.

The foundation was started by a victim of the last prolonged downturn in U.S. history, Edward R. Dewey, who pioneered some of the first serious research into cycles when he was a Commerce Department economist charged with figuring out why the stock market crashed in 1929.

Mr. Dewey's research wasn't far enough along to keep President Hoover's presidency from being engulfed by the Great Depression, and the Harvard-trained economist was soon out of a job. He pursued his research, however, and in 1941 he created the foundation after meeting natural scientists who had developed cycles for natural phenomena that matched many of his economic cycles. He died in 1978 after nearly 50 years of research in cycles.

The correlations between cycles in economics and nature may seem spurious, but Mr. Dewey was convinced that more than coincidence was involved in the coincidence of stocks' booms and busts with, for example, grasshoppers' population surges and decreases. The fundamental unifier was climate. Unfavorable weather can ruin agriculture, which in turn can inflate prices, forcing up interest rates and pushing down the stock market.

Weather patterns, however, aren't the only basis of the foundation's predictions. They are factored in, along with numerous other conventional statistics, such as trends in interest rates, to come up with cycles for stocks and other key economic data. The cycles are modified for extraordinary circumstances, and predictions are made.

One of the more celebrated of the foundation's predictions was based on Mr. Dewey's standard 40-month cycle for stocks -- 20 up months followed by 20 months of decline in normal times. (The phases can flip-flop, however, in extraordinary circumstances such as war.)

The foundation said in spring 1987 that stocks would peak in the summer then fall sharply. A few months later, the market took one of its biggest plunges, falling more than 500 points. According to that cycle, the market is set for another fall.

The foundation, supported by an endowment, tax-free donations and sales of its magazine, has eight researchers who have put together more than 30,000 cycles on natural, social and economic phenomena. Almost every occurrence, from the thickness of tree rings to soil erosion, fashion and liberalism vs. conservatism has been charted.

In addition to Mr. Dewey's work, the modern basis for cycle research stems from Soviet economist Nikolai Kondratiev, whose analysis of the Great Depression earned him a trip to a Siberian labor camp because he predicted that capitalism's plight was just part of a cycle and not permanent. Today, researchers such as the Massachusetts Institute of Technology's John D. Sterman continue to analyze Mr. Kondratiev's 54-year cycle of boom and bust.

"The economic malaise of the 1970s and 1980s has revived interest in the Kondratiev cycle," Dr. Sterman said.

Little of this fascination, however, has reached Wall Street. Though waves are popular among many analysts -- most Wall Street brokerages have "technical" analysts who study stock, bond and interest-rate patterns in hopes of being able to predict the markets' performance -- almost none dare to predict the future based on a recurring cycle.

One organization that does is Elliott Wave International, based in Gainesville, Ga. Purely focused on economics and more accepted by mainstream Wall Street than Mr. Mogey's foundation is, Elliott Wave uses the theory of Ralph Nelson Elliott, an accountant who devised a five-stage wave based on crowd psychology 60 years ago.

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