Thursday, June 18, 2009

Pavlov's Dog and Jim Cramer's Call of the Bottom in Housing

Like Pavlov's dog, Jim Cramer announces "the bottom is in" every time he sees a housing chart. Sadly, this is a conditioned response, not reality.

In Pavlov's famous experiment, a dog hearing a ringing bell began drooling as if food was present. In a bizarre parallel to the classic experiment, Jim Cramer announces "the bottom is in" every time he sees a housing chart.

Pavlov began his experiment by showing his dog a bowl of food (powdered meat). The dog naturally salivated, what Pavlov termed an unconditioned response. Then Pavlov rang a bell when food was presented; the bell was a neutral stimulus. Finally, he rang the bell without any food present; the dog began salivating. This salivation is called a conditioned response, and the process is called classical conditioning.

Sadly, we can observe this behavior now in Jim Cramer, who nonsensically called a bottom as housing starts leaped. Here's Jim's call, dated 6/16/09:Cramer: Housing Has Officially Bottomed:

According to the Commerce Department, there were 47,000 more housing starts in May than the 485,000 expected, a number 17% higher than the month before. The two regions seemingly in the biggest hole, the South and West, jumped about 17% and 29%, respectively. Building permits, which can predict the market’s future to a certain extent, showed significant growth as well. Now Cramer – and probably the homebuilders, too – sense an end the morass that weighed so heavily on the markets.

What does a bottom look like? It’s the combination of ramping sales, and sales in certain areas are up ten times those of last year, and an end to falling prices. That’s exactly what we’ve seen for the past three months, Cramer said.

Here's how the conditioned response process works:

Since Jim saw viewer statistics jumped every time he called a bottom in housing, now he can't help it: every time he sees a housing chart now, he calls a bottom in housing:

Uh, Jim, we hate to tell you, but building more housing when there's a huge inventory of unsold houses and condos as interest rates are leaping up is not exactly bullish. (Psychotic disassociation from reality would be the official diagnosis.) We know this chart is just going to trigger more of your copious bottom-calling, but look at this and tell us what's so bullish:

This recent "improvement" in sales is a tiny blip up within a massive collapse. To call a bottom based on such a modest increase is truly psychotic disassociation; statistically, both the increase in sales and housing starts are minor enough to qualify as statistical irrelevancies, a.k.a. "noise."

Then there's the little matter of rising mortgage rates. Sales are announced when they're signed, not when they close, so oops, a whole passel of buyers might get bumped or simply bail when they calculate what the half-point rise in rates will do to their monthly nut. So in other words, the glowing sales numbers are highly likely to be revised downward once actual escrow closings are tabulated.

Then there's the little matter of unprecedented levels of debt in the U.S.:

The peak of mortgage resets lies ahead, too, which doesn't bode well for the fantasy the sales will chew through all existing inventory; if history is any guide, inventories will rise even further as resets cull many of the remaining homeowners who still have jobs, never mind those who have yet to lose their incomes, further swamping whatever dwindling sales actually close:

In conclusion: a conditioned response is not a substitute for reality. Just because the dog started drooling, Jim, didn't mean there was any food to chow down. And in a parallel fashion, just because you announce a bottom in housing doesn't mean there is any substance to your call.

A few classics in case you missed them:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century James Howard Kunstler

Depletion and Abundance: Life on the New Home Front Sharon Astyk

The Future of Life E.O. Wilson

Globalization and Its Discontents Joseph Stiglitz

On Peak Oil:

Beyond Oil: The View from Hubbert's Peak

The Party's Over: Oil, War and the Fate of Industrial Societies

The End of Oil: On the Edge of a Perilous New World

Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

On chemical/toxins overload:

Our Stolen Future: How We Are Threatening Our Fertility, Intelligence and Survival

On the demographic time bomb about to explode:

Fewer: How the New Demography of Depopulation Will Shape Our Future

The Coming Generational Storm: What You Need to Know about America's Economic Future

On collapse of advanced civilization:

Collapse: How Societies Choose to Fail or Succeed (Jared Diamond)

The Collapse of Complex Societies

A realistic appraisal of alternative energy:

Sustainable Energy - Without the Hot Air

Our previous lists of hot reading and viewing can be found at Books and Films.

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