Cramer: One of the greatest disasters of our era

Jim Cramer welcomed investors back to Crazy Town on Tuesday. That is the strange world of the market lately where everyone is doing everything wrong. They are buying the wrong stocks, reaching the wrong conclusions and taking the wrong risks.

And it is all oil's fault.

In Cramer's opinion, investors are worshiping a false god of higher oil. Thus, even the slightest rise in crude prices allows stocks to go higher. To explain the crazy linkage between higher oil and stocks, Cramer shared three reasons why stocks tend to rally when the price of crude goes up.

First is that people believe that higher oil means less stress on the system. On average, the price of crude must be at $45 a barrel to keep most troubled companies alive in the U.S. As of Tuesday, there is a $9 gap to get to $45, and that is a big one. Nevertheless, the entire group tends to roar back on a bet that that oil will hold at levels north of $30.

"To me, this is silliness. We need to see some substantial movement upwards to sustain most of these oil companies because many will have to reorganize next year if oil stays here," Cramer said.

Wrong stocks + wrong conclusions + wrong risks = Crazy Town

The second reason is that when oil goes higher, it takes the heat off of the massive meltdown of the master limited partnerships (MLP) and pipeline plays. These are companies that investors often buy because of their high dividends, not growth.

"Put simply, this group has been one of the great disasters of the era. I cannot believe how poorly they have performed," Cramer said. (Tweet This)

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The entire group was rocked a few weeks ago when Kinder Morgan, which is a corporation not an MLP, slashed its dividend by 75 percent, to 12.5 cents from 51 cents. This action opened up a floodgate of fear for the entire pipeline and MLP space.

Recently Kinder made two large acquisitions that cost a fortune, and left the company with a mountain of debt. At the same time the credit markets became very unfriendly, and Kinder felt the stock was too low to offer equity.

Many investors liked the pipeline plays because they act as a toll road to carry oil and gas and weren't levered to the price of oil. But when Kinder Morgan axed the dividend as a solution to its problems, it totally busted the toll road analogy for all pipeline plays.

Finally, higher oil meant that there could also be more demand for the product than people realize. The price of crude has fallen to levels not seen since the Great Recession, when demand for it dropped dramatically. But now there is a new thesis that oil is unnaturally low given how much stronger the economy is.

"I don't buy this argument for one second because while demand might be greater than in 2008, the supply of oil is also much, much bigger, particularly here in the United States," Cramer said.

Nevertheless, these are the reasons why the market has a Crazy Town reason every time there is a slight uptick in the price of oil.

And while Cramer has seen some signs of rationality out there, at the moment he says investors must accept the Crazy Town nature of stocks. Tuesday ended up being a pretty good day, and it should have been the exact opposite.

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