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

THE BALTIMORE SUN

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.

Mr. Elliott went into a coma in the 1920s and awoke to find the stock market in ruins. Like Mr. Dewey, he was fascinated by the 1929 crash and devoted years of study to it. But instead of tying the result to natural phenomena, he linked it to crowd psychology and formulated a five-stage theory. He initially applied it to the Dow Jones industrial average and then to other mass phenomena, such as fads and social trends.

Elliott Wave International advises its hundreds of clients on daily, monthly and long-term stock investments. It analyzes trading patterns and longer cycles and issues recommendations to paying subscribers in a daily fax and monthly newsletter.

According to the Elliott Wave, while the market generally moves up, three upward stages are complemented by two declines. Once this wave is completed, it is followed by a three-phase decline. The five-stage wave has followed the stock market on its upward trend since 1929, with the two declines being the early 1940s and late 1970s to early 1980s. According to the theory, we're now due for the three-phase decline.

The last surge, which carried the market to record heights this summer, is over, said Pete DeSario, a technical market analyst for Elliott Wave International. A tremendous drop -- the three-phase one -- is in the works, according to Elliott Wave.

"People aren't really conditioned to think in terms of real bear markets. Brokers are used to advising their clients to hold on because the general trend is upwards, despite crashes like in 1987. But this is just from a lack of perspective. A real bear is coming," Mr. DeSario said.

This might be mere doomsday talk but for Elliott Wave International's record. Robert Prechter, who founded the firm 15 years ago to apply Elliott's then-obscure theory, wrote a book in 1979 saying that the Dow Jones industrial average would top 2,700. With the market then around 800, he was laughed off but then proved right. And he was right again when he bucked the trends in predicting the 1987 crash and the 1990 recession.

But Elliott Wave International also shows the risks in predicting events based on cycles. Although one knows what the cycle looks like, its timing is always unsure. Elliott Wave began predicting a bear market more than a year ago, but the market soared until this summer.

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