Jim Cramer gave investors a reality check. He warned to never, ever, confuse the day-to-day actions of the stock market with the state of the real economy. As many saw in the horrendous decline on Monday, the market and the economy can vary drastically.
Cramer has survived eight separate crashes and countless bear markets in his investing lifetime. And he has always dreamed of the day that interest rates would be low, corporate balance sheets are strong, commodity costs are on the decline and employment is better.
"Unfortunately, whenever this nirvana scenario comes along, typically stocks are very expensive, too expensive for the risk, especially given the propensity for the Fed to raise rates with all of those positives," the "Mad Money" host said.
What makes this scenario much different is that the turmoil in China could actually prompt the Fed to put a rate hike on hold.
So, if everything is so great, why the heck did the market go down on Monday? Cramer spelled it out.
The first issue is the indecisive leaders in the Federal Reserve. For example, St. Louis Federal Reserve President James Bullard made it clear on Friday that higher rates are definitely on the agenda of the Fed and said he is sanguine about everything that is happening right now.
And while Cramer is certainly in favor of free speech, he found Bullard's comments to be akin to a defensive line coach criticizing the head coach at an NFL game.
"Keep it in the locker room. Otherwise it's irresponsible, reckless even, and someone has to call him out on it. Might as well be me," Cramer said.
To make matters worse, there was no reassurance from the Fed on Monday that it felt that Bullard was wrong. Silence is not golden.
The second issue is the damage that China has inflicted on the global economy. One year ago, the Shanghai Composite was at 2,200. On June 12 of this year it traded at 5,178. That is completely absurd to Cramer.
It is even more inconceivable that the Shanghai Composite has not repealed its entire gain, as it was built on tremendous account growth and loose requirements about borrowing on margin.
However, Cramer is unclear just how bad the real economy in China is. For example, Cramer sent a note to Tim Cook, the CEO of Apple, this weekend because he was concerned about China's impact on the stock.
Cook responded with assurance that Apple has continued to experience strong growth for its business in China through July and August. He also advised that he continues to believe that China represents an unprecedented opportunity in the long term.
That significant statement from Cook helped to drive Apple's stock back into the black at one point on Monday. However, in the end, Cramer reminded investors that Apple is a member of the , which means nothing can really withstand the beating that the S&P is getting.
But the real problem that prompted the decline is the fact that people want out worldwide. Investors fear deflation and a Chinese collapse. They fear defaults in the oil patch. They fear that the Fed will raise rates. Most importantly, they fear that what has happened before when large portions of the globe break down will happen again.
"That's why, unlike Fed President Bullard, I can't be all that sanguine about a market that goes down 1,000 points in two days. I don't think we are going to repeat the 2007 to 2009 decline, because this time it's not our country's finances that are in trouble, its China's. Our banks aren't broken, theirs are," Cramer said. (Tweet This)
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However, Cramer does recognize that the U.S. stock market has had a huge run in recent years. History is not on the side of the bulls, and the lack of leadership from China and the U.S. does not paint a pretty picture for the near future.
So, what should investors do?
Cramer recommended for those with cash on the sidelines for retirement, that it is a good idea to start investing that capital into the stock market. Do not invest all at once, though.
Looking back, this decline makes perfect sense to Cramer, even though it doesn't compute when looking at the real U.S. economy.