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. 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 where your confidence has been shot down and shot up so fast, it's as if you were in a dark room being sized for a magazine photo spread. There's a reason why that is: Like the annoying, but penetrating old
New York Telephone
jingle says: "We are all connected."
What the stock market does, the economy will do. What the economy will do, the stock market does. What the stock market giveth, the
Fed will take away. What the stock market removes, the Fed will restore. It has never been this complicated.
If you go back and read about the Great Crash of the stock market in 1929, the central point is the incredible irrelevance of the whole thing to the real economy at that time. Only rich people played the stock market; it was small potatoes and had little impact on labor and the economy.
Now, the stock market
the economy. Check that -- it
the economy. It is the engine behind willy-nilly consumer spending. It is the engine behind the capital goods spending on technology. It is what makes us feel rich or feel poor.
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. 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
decline and that the discretionary accounts are all levered to the latter. When one goes up the other goes down.
And that's how it should be. Here's why. The most important factors in the world right now are interest rates and earnings. That's nothing new. It has always been like that. Right now, the earnings and potential earnings of the Nasdaq stocks are so great that we are willing to pay too much for them. We overpay for that earning stream. Because we all collectively do so, the Fed is worried it has a bubble on its hands.
The single most important, worldwide, real-life case study of this market is the destruction of the Japanese economy by Japan's stock market in the 1990s. That market, like the Nasdaq, went too high and the nation margined themselves to the hilt to play. In the end the loser was consumer confidence. Those people bank at the
First National Bank of Seely
. We can't have that happen here.
But beginning with the Nasdaq run off of 2500, that's exactly what we had and the Fed knows it. It knows it because the margin debt soared just like it did in Japan. As long as that debt hadn't taken off, the Fed was OK with the market. Remember -- the Fed is antiexcess. It rewards prudence and punishes profligacy. If there is ever a place where too much money is being borrowed to finance speculation, whether in gold or land or oil, the Fed's jackboot won't be far behind. That's why right now the Fed wants this new market down.
And why -- if it doesn't go down -- it will use its tools to destroy the old market, because the old market is based on credit. If you take short-term credit up too high, it stifles the economy and everybody from the airlines to the papers gets crushed. That's why every time the new market cracks, we shift at Cramer Berkowitz to the old market because the old market will rally big if the Fed doesn't have to brake the economy hard, and the Fed won't brake it hard if the new market behaves.
On Friday we thought that the silver lining of the collapse would be that the Fed would cease to be a factor. But yesterday's rally made a mockery of that theory. It destroyed it. The rally reliquefied the speculators and gave hope to those who want to see the new economy continue its astronomical growth.
Why do we even care about the new economy? Because all of those little four-letter jobbies with the billion-dollar market caps have their fates determined by the continual creation of new companies and their ability to be able to finance new hardware and software. You take away the capital-creation machine and you take away the earnings (and potential earnings) of the new economy.
So Friday's selloff seemed to be the answer to the Fed's prayers. Yesterday's rally was a crushing blow, though. If yesterday's rally continues, the new market will get re-energized and the Fed will tighten even more aggressively because the Fed must head off a Japan bubble. It has to. Or
Greenspan will be remembered in the same terrible light that the Japanese central bankers of the '80s are now recalled. He will go down as the man who financed the crash. He can't do that.
Oddly, because it is all connected, the only clue of what will happen is the stock market itself! If the new economy goes up, then we are in trouble. If the new economy chills for a bit, then consumer spending declines, confidence gets throttled back -- the Fed wins and we can have both good new and old markets. But if there is no short-term chill, the Fed will engineer a long one.
No wonder it is so darned hard right now. It's supposed to be!
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. 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