No doubt about it, what you feel, the visceral nature of the combat on your screen, is tougher to figure out than whether the Alabamans are going to overtake the 20th Maine on Little Round Top in Gettysburg. (Blew this one, got them confused with the Pennsylvania Regiment not far away. About a year ago, I got totally focused on Gettysburg, probably because of Michael Shaara's terrific Killer Angels. I'd just recently read 'Bayonet! Forward': My Civil War Reminiscences, by the hero of that fight, Joshua Chamberlain, and was stunned at how confusing and kind of hopeless the whole exercise was. In the end it was just an existence contest, with the Union soldiers running out of ammo before routing the Alabamans with a bayonet charge.

I like to use military metaphors, I like to use movie metaphors and I like to use sports terminology because my goal is to get you to understand this stuff, to make it perhaps more fascinating than it may seem to you because it is fascinating to me. When I first started this column, I used a military analogy and a bunch of people figured me for either a warmonger or someone who was making light of the travails of the soldiers who have to go in and fight. But my dad served with General Krueger in the Pacific and made nine hot landings, and he liked the analogies, which was good enough for me. He still likes it, so I still use them.)

The smoke is thick. The Union soldiers are fixing bayonets and nobody really seems to know a thing. Who prevails? Maybe no one. And how did it get so hard?

The last three days have been days when your confidence has been shot down and then has shot up so fast that you'd think you're in a dark room trying to size yourself for a photo spread in a magazine. There's a reason why that is: Like the annoying but penetrating old

New York Telephone

jingle: "We are all connected."

(This is a piece about what makes the stock market, or, more particularly, this stock market, tick. I don't do enough of these context pieces; they're very helpful for the hundreds of thousands of you who are new to the game.)

What the stock market does, the economy will do; what the economy will do, the stock market does. What the stock market giveth, the

Fedwill take away. What the stock market removes, the Fed will restore. It has never been this complicated.

(The Fed's job is to have stable pricing and prevent inflation. Until there is a recession. Then the job switches to spurring consumer spending and getting the economy back on its feet. The Fed wants equilibrium.)

If you go back and read about the Great Crash of the stock market, you get stuck on one central point: the incredible irrelevance of the whole thing to the real economy. Only rich people played the stock market, it was small potatoes and had little impact on labor and the economy.

(Some people disagree with me on this, and I can't for the life of me figure out what they have read. The stock market was simply not an important part of American life in the 1920s. It's now a dominant part of American life, something that many of us are caught up in full-time but that millions of others think about and follow every day of the week. I first discovered this when I was on Good Morning America and then Squawk Box. These shows were great barometers of the interest in the markets -- people will stop me virtually anywhere now, in pretty much every city in this country, to talk about the market. It's remarkably pervasive and routine these days.)

Now, the stock market


the economy. Check that -- it


the economy. It's the engine behind the willy-nilly consumer spending. It's the engine behind the capital goods spending on technology. It's what makes us feel rich or feel poor.

(At Cramer Berkowitz, we fret that the consumer is spending too much. We watch the retail sales numbers closely, the car sales, the employment statistics, because we don't want the economy to overheat. But we know that the economy these days seems to be driven entirely by the gains in the stock market. If the Nasdaq were to stay down (as opposed to the 401k-spurred S&P) for more than three days, we would probably see some slowing in demand. The Fed wants to see that slowing. I think such a decline is certainly a possibility. We were a 1000 points lower in November of last year, when I could argue that things might have been a bit better than they are now, sans Y2K.)

Making it more difficult right now is the fact that there are two stock markets, the

Buzz Gould stock market and the 401k-IRA stock market.

(Why am I doing this Buzz Gould thing? Because a lot of what goes on behind the scenes doesn't allow for being written about. Some of the actions Buzz takes are unethical and illegal -- you can't foment a stock price rise, you can't use multiple brokers simultaneously, you can't legally mark up stocks. But it goes on. Just because no one will publicly admit to breaking the rules doesn't mean it doesn't happen. I developed a fictional character to tell you the way it is sometimes. Not everyone is like Buzz. But the Buzzes and the Batches certainly exist and they do this kind of stuff every day. If you don't think they do it, then quit your day job and go work at one of these places. We see it happen all of the time. It sickens us and I don't feel like keeping this kind of unseemly, reckless behavior a secret. I also can't identify who does it because that would get me in trouble. I just want it to be known that it is done.)

I would be willing to bet that right now people are literally betting against themselves with their personal holdings, that their 401k has been rallying all through this nasty NDX decline and that the discretionary accounts are all levered to the latter. When one goes up, the other goes down.

(We hear talk a lot about the New Economy and the Old Economy. At Cramer Berkowitz, we don't do that. We speak of S's and N's. The S's are the S&P stocks and the N's are the Nazzdogs. Within the N's are two subgroups, those with earnings and those that are conceptual stories. In every case, the price-to-earnings ratio of these stocks is very high, if they have earnings. In the S's, only the tech stocks that are members of the S&P have astronomical price-to-earnings multiples. The rest are valued fairly traditionally as long-dated assets, and their risks are balanced against the rewards of long-term treasuries.)

And that's how it should be. Here's why. The most important factors out in the world right now are interest rates and earnings. That's nothing new. It has always been like that.

(Earnings are the profits a company makes, expressed in per share intervals, so we can match them apples to apples. What good would it be if we didn't try to come up with a common denominator -- the per share figure? If we didn't, all comparisons would be pretty meaningless. Interest rates are the price of money, how much it costs to borrow.)

Right now, the earnings and potential earnings of the Nasdaq stocks are so great that we're willing to pay too much for them. We overpay for that earning stream.

(This is the "Well, who would ever buy Cisco (CSCO) - Get Report because it sells at 150 times earnings?" argument. It's an argument that says stocks have been valued as a function of their growth rates and historically we have been loath to pay more than two times the growth rate of a stock, considering anything above that too pricey. Except for now. Now we routinely pay five or even 10 times the growth rate, which makes a mockery of the science of valuation because it has lasted so long it's no longer considered an aberration. We had to pay it to keep our jobs because if we didn't someone else would and that someone would beat us.)

To read Part 2 of this column, click


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Cisco and Intel. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at