Five Things You Need to Know: Are Recessions Good for Freedom?

1. Are Recessions Good for Freedom?

It's the right  observation -- recessions often coincide with political change and calls for increased freedom -- but unfortunately the wrong conclusion.
 

"The more well-to-do a nation, the greater the chances that it will sustain democracy," wrote American political sociologist Seymour Martin Lipset in 1959, crystallizing the idea, now a received wisdom, that wealth is the inevitable handmaiden of political freedom.

But recent events may be starting to topple this notion. In the Middle East and North Africa, it certainly isn't miracle growth rates that lie behind the stunning recent outburst of fervor for political rights.

Writing in Foreign Policy magazine, Charles Kenny makes the case that democracy is best served with a side of economic stagnation. Kenny notes that while Lipset's idea (from the 1950s no less) that "wealth is the inevitable handmaiden of political freedom" is now "received wisdom," more recent global events suggest that democracy is more likely to spring forth from political turmoil grounded in harsh economic realities. Kenny looks at recent events in the Middle East and North Africa to argue that "if you really want to spark a transition from autocracy to democracy, your best bet may be economic stagnation mixed with the flow of ideas."

There's a lot going on in this piece. For one thing, Lipset was viewing sustainable democracy from the standpoint of post-World War II economic conditions. For another, Kenny is mixing in a more recent decade of economic stagnation and adding in a touch of media network theory to get to the "flow of ideas" component that seems crucial to his argument. It's sustainability versus wholesale change, apples and oranges. A Socinomics-rooted view takes issue with the causality being introduced by both sides.


2. Right Observations, Wrong Conclusions

Socionomics posits that social mood motivates social action, and that waves of social mood trends regulate changes in social behavior, including changes in the economy, political preferences, financial markets and even pop culture. If it is true that negative waves of social mood produce recessions and economics stagnation, then it also follows that political change is the result of negative social mood waves. As well, since positive social mood waves make us more likely to look favorably upon current political conditions, we are more likely to sustain those conditions.

Taking the Lispet and Kenny arguments from the Socionimics perspective, Lipset's observation that prosperity tends to coincide with political stability is correct, but the causal link is broken. Positive social mood produces economic booms, the conditions of prosperity and the tendency to view present political conditions favorably. Coincidence is not causality. Similarly, negative social mood produces recessions and economic stagnation and the tendency to desire political chance. Again, coincidence is not causality.

From the Socionomics Website is a clearer explanation:
 

Social mood is the engine of social action. It is always present. Social mood governs the character of social events. Neurologically, social mood is manifested via the herding impulse in the amygdala, a part of the limbic system.

Social mood waxes and wanes positively and negatively. A positive social mood is associated with a host of social phenomena, such as bull markets, bright colors, short skirts, re-election of incumbents, peace, and deregulation. A negative social mood is also associated with a host of social phenomena, such as bear markets, dark colors, falling hemlines, rejection of incumbents, discord, and regulation. A subtle but important point: Although social mood governs social events, it fluctuates independently of such events. In other words, wherever mood goes, events will follow. But, the events themselves have no impact on the direction of social mood; there is no feedback loop.

3. The Great Rental Migration
 

"The crisis has punctured the myth that “home prices always rise,” making many rethink the choice of homeownership. Thehomeownership rate has fallen to 66.5 percent from a peak of 69.2 percent in the fourth quarter of 2004, translating to 2.8 million lost homeowners. Most of these former homeowners became renters, leaving the rental rate as the mirror image of the homeownership rate."
-- Michelle Meyer, Senior U.S. Economist at BofA Merrill Lynch, Bloomberg guest columnist

Meyer, writing in a Bloomberg guest column today, shows a chart of homeownership versus rental rates dating back to 1980. It's quite the mirror image.



Meyer makes the interesting point that the rise in renters sets the stage for healthy gains in multi-family construction, an area of housing that didn't fully participate in the housing boom. In fact, multi-family housing nventory remains quite low, with vacancy rates nationally at 9.4%. Given it takes over a year to complete multi-family homes the inventory should remain lean into 2013, Meyer says.

When I scan multi-family REITs for technical opportunities via DeMark, I get the following. These are scanned on WEEKLY and MONTHLY charts for no upside exhaustion and for divergence from the S&P 500 Index DeMark patterns. On the DAILY most are within a day or two of a corrective move into support, so one way to play it is to build buy orders on declines into support areas listed.

Equity Residential (EQR) WEEKLY TD Sell Setup bar 7, support 56.38.
Avalon Bay (AVB) DAILY TD Sell Setup bar 8, support 121.76
UDR Inc. (UDR) DAILY TD Sell Setup bar 8, support 24.56
Colonial Properties Trust (CLP) DAILY TD Sell Setup 8, support 19.47
Associated Estates Realty Corp. (AEC) Qualified TDST Up breakout on both WEEKLY and MONTHLY basis, support 16.05

Some, such as Essex Property Trust (ESS) and Camden Property Trust (CPT) look identical to the S&P 500, so I would avoid those.


4. Gas! Gas! Gas!

The box on the Drudge Report sums it up succinctly. Gas prices are high!



Of course, nothing goes up forever. Or in a straight line. Or whatever old cliche you want to use. But is there evidence, technical or otherwise, that gas prices might be exhausted? Please? I am here to help. This is the chart of the gasoline RBOB futures. Without having to be an expert in DeMark price exhaustion techniques, just know that 13s are bad, or if you are not long gasoline futures and looking for a top, good.



So, at least we have that going for us. Also, bikes.


5. Phoebe Snow Dead at 58

Greetings fellow people of a certain age who, like me, may recall with varying degrees of fondness and sentimentality warm summer afternoon rides in the car going someplace with a parent who suddenly became very quiet when this song came on the radio. Phoebe Snow is dead at age 58.