ECONOMIST ON THE MONEY Hoey's predictions stand test of time


NEW YORK -- It was in the abysmal days of 1981, when bonds were worth about as much as wallpaper and some people thought they were headed lower still, that economist Richard Hoey opined that the market was at a 100-year low. In 1982, when the country was in a steep recession, he forecast an imminent recovery, later adding it would last a postwar record seven years.

The duration of the bond market forecast alone would make Mr. Hoey stand out ("it was the most unhedged forecast given by a Wall Street economist ever," he asserts), but his business cycle predication has proved more notable, because it has passed a full test and the bond market forecast still has 92 years to go.

In a world where economists change their predictions more frequently than most people change clothes, Mr. Hoey's consistency is notable. He withstood temptation to hedge his seven-year-expansion prediction in 1987 following the October stock market crash, which had most economists forecasting a dramatic contraction because of a broad loss of wealth in securities.

"It was a skewed view from Wall Street professionals because of their own devastated wealth," he said.

Instead, he maintained confidence in what he termed "the psychic liquidity of housing wealth." Stocks make up only a small percentage of most people's capital, he noted. Far more important are homes. Following the crash, the Federal Reserve cut interest rates, driving down the cost of mortgages; this, Mr. Hoey argued, bolstered (at least for awhile) the supply of home purchasers and therefore general confidence.

In 1989, noting the widespread increase in credit problems and rising competition from abroad for capital, he predicted the expansion would end in 1990, and while his analysis may be debated, his conclusions came true.

How could he be so right? Mr. Hoey ironically notes that he "has the distinction of being on the scene of all the great credit crises of the last 20 years." And in a sense, he has.

In 1974, Mr. Hoey was economist and stock market strategist at W. E. Hutton (founded by a relation of the better known E. F. Hutton) when he predicted that a credit crunch was brewing and that some brokerage firms would fail. The forecast proved true. hTC W. E. Hutton closed, and Mr. Hoey was out of a job.

His next stop was Bache Halsey Stuart, one of the nation's largest retail brokers at the time. The following years were economically noteworthy for the increase in inflation, and that benefited no investment more than precious metals. Seeking to profit from the trend, the Hunt brothers of Texas attempted in 1980 to corner the silver market but failed badly. Their financial backer was Bache, and the ensuing turmoil resulted in the brokerage being acquired by the Prudential Insurance Co.

It was a lesson in the limits of inflation, and inflationary hedges, that Mr. Hoey apparently took to heart. It once again cost him his job. With Prudential's acquisition and the installation of new management, Mr. Hoey was once again on the street.

History was to repeat yet again. He landed at A. G. Becker, a

firm whose demise in 1984 came shortly after its involvement in a noted bank run that also presaged a minor credit crunch. Mr. Hoey then moved to Drexel Burnham Lambert, a firm that stretched credit to the limit before going bankrupt last year.

Currently, Mr. Hoey works for Barclays de Zoete Wedd, the global securities affiliate of the giant English commercial bank, and his travails may have ended. "Barclays is AAA, so I think it's solid," Mr. Hoey said.

Perhaps not surprisingly, he has become more confident about the larger issues of credit in the economy.

The rally in the stock market, particularly in bank stocks, the ability of Citicorp to find investors, and a recent increase in the money supply, all suggest the depth of the credit woes may have been reached.

"That doesn't mean we don't have a risk crunch, or weak real estate, or all these other related problems but it looks like the worst is passed," he said.

During the next two to three months, he predicts, the U.S. economy will be worse than expected. Inventories, which most economists have labeled lean, will turn out to be bloated when sales continue to be disappointing. Exports will similarly wane because of weakening economies (and rising inventories) abroad. Further blows will come from layoffs, state and city tax increases and the psychological impact of "psychic illiquidity in the housing market" -- the flip side of 1987 occurring because buyers are no longer in themarket for homes.

As to the longer term, however, Mr. Hoey is more upbeat. Inflation appears not to be a problem, and lower fuel costs will make it even less so. That will allow the Fed to avoid tightening credit. He predicts two to three months of severe contraction, followed by slower-than-normal, but nonetheless sustained, growth.

"The expansion will last a number of years, with no end in sight," he said.

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