Jim Cramer: Think About 22 Years Ago

Editor's Note: This article was originally published on Real Money on Nov. 16. To see Jim Cramer's latest commentary as it's published, sign up for a free trial of Real Money.

Which analogy works best for trading this fiscal cliff resolution, the debt ceiling debate last year, with the hideous declines that ended the moment a deal was at hand, or the European debt talks where we figured that each midweek ECB meeting would bring better news and finally one did?

I think neither. As the president and the Speaker and their retinue start the talks today on resolving the crisis, I turn to 1990, specifically to 22 years ago right now, in 1990, when then President Bush was asking Secretary of State James Baker to hold talks with Iraq about getting Saddam Hussein to pull his troops out of Kuwait.

Believe it or not, at the time we actually thought this could happen. We actually thought that you could sit down with Tariq Aziz, the Iraqi foreign minister, and hammer out some sort of deal.

We always figured it would have to be done in secret and for some ridiculous reason we thought it would have to be done over the weekend. The shorts had been making a killing ever since Saddam had invaded Kuwait earlier that summer, with the Dow dropping to 2,350 from 2,900 as the stalemate went on. But they always feared the Aziz-Bush talks and didn't want to see that juicy 19% decline from the top be obliterated.

I was one of the shorts. I would dutifully bring in my shorts on Friday so I could sleep well over the weekend, knowing that I wouldn't have to wake up on Monday morning to a headline that says "Saddam Agrees to Pull Back, U.S. Will Rebuild Kuwait." At a certain level you had to believe he would do something rational like that. I mean, did he really think he could beat us in a war?

Fast forward 22 years. Today I believe we will see similar fears by people who are now in my shoes. You can hear their thoughts, same as mine back in 1990. "What happens if they do something rational? What happens if they find common ground? What happens if they start caring about all of the people who will be forced out of work immediately or who will have to pay much more in taxes?"

Those concerns could cause people to cover their shorts, betting that the consequences of going over the cliff are unthinkable, as unthinkable as what Saddam would face if he had to go to war with the United States.

Of course, it turns out that there never was a deal back then and we had to go to war and we won and that was it. The market was bottoming right then, 22 years ago, because the decline had compensated for the war already, but we didn't know that at the time. We just knew that whenever there was a resolution the market would be higher so why take any chances.

I think that we will be similarly hopeful that the two sides reach some deal and some shorts who have done so well during this 8% decline will feel like they don't want to lose that terrific gain.

But what if both sides were like Saddam, both believing in the principles of their own conviction to the point that everyone gets hurt?

That's what I worry about now.

Of course, it is possible that we are already where we were 22 years ago right now, bottoming as we await a violent resolution to the matter.

But what seems more likely to be the case is that we are at one of those Friday junctures before we hit bottom, perhaps the one at Dow 2,748 or Dow 2,616, or Dow 2,483, all covering levels that led to a false sense of hope along the way to the bottom at 2,360.

We actually don't know yet which level we are at vs, where we will be when this ends -- violently or peacefully -- but 1990 teaches us that you have to respect the hope that springs eternal, or at least on Fridays.

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