Cramer: It's the Fed versus China and Putin and stocks hang perilously in the balance

Published Sun, Oct 2 202210:29 PM EDTUpdated Mon, Oct 3 20224:15 PM EDT

It turns out that the irrational just stayed irrational longer than we thought it would. When we talk about investing strategies, we often talk about probabilities and that they almost always do work out. The idea that the market can go down endlessly without a respite seems unlikely. We get oversold. Good things do happen. We catch a break with an earnings report or a piece of news from commerce or labor or housing that makes things better. It's why you want to stay long stocks — even as you want to put new money in the 2-year Treasury and get a 4.2% yield — because it just seems a little preposterous with healthy banks and a healthy consumer that things can stay this bleak for so long. But things aren't working out like that right now. There are so many rational things that could happen, but the irrational just stays, well, irrational. And nothing seem to be able to change it. Take Russia. We know that 13% of the world's calories came out of production when the Russian and Ukrainian borders shut down. That drives up the price of food incrementally. But even more important is has driven up the price of fertilizer, as Russia and its closest ally Belarus are major players in the market. Or who would have thought that Europe's most important environmental issue — energy — was somehow almost entirely dependent on one country — Russia — that has been run by a madman ever since he won the second war in Chechnya with a level of brutality that seems very familiar. There was nothing in Vladimir Putin's character that seemed worth trusting, but Europe decided that Russia was a good actor that could produce all the energy it needed. There was no need to have back-up plan. Electric generator plants were mothballed. Solar became the de facto energy strategy even as it isn't particularly sunny in many parts of Europe. You think we made mistakes here in the United States? At least we have abundant natural resources. The idea that Europe isn't over here negotiating the credit to produce the liquefied natural gas needed and speeding up the building of new gas export terminals is truly ridiculous. It's pretty clear that unless Putin is killed, we aren't going to see a reversal of the situation any time soon. This week we will have more Russian meddling when OPEC+ meets on Oct. 5 in Vienna. Russia is actively trying to get a million barrel cut, which will just cause more pain and inflation for the West. Yes, Russia's actions and the West's feeble response, save that of the U.S., was irrational. And because of the brave Ukrainians, it stays irrational. It's a nightmare for Europe because the better the Ukrainians fight, the more likely that Europe suffers a winter of freezing or nuclear variety. We all can't seem to understand why Putin isn't killed. But why should he be? We don't even know if he is unpopular. He's willing to slaughter lots of innocents on the altar of irrationality because there's no course to win anymore, just a course to destroy. It turns out that the Russian president's pernicious nature has made it the most important country in Europe. Now we are less intertwined with Europe than in years past, but we know that our software and industrial companies have considerable operations there. And they have gone haywire, hobbled by currency — the euro is so shaky — and an energy-reduced recession. It's all come together badly for so many of our companies that we haven't begun to fathom it. We just know it is bad, bad for stocks and Federal Reserve Chairman Jerome Powell can't do anything about it. When it comes to stocks, in some ways China's Covid policy is the most ruinous. In two weeks we will have the 20 th Party Congress coronation of President Xi Jinping and it simply doesn't matter what he does to try to pump up the economy. His erratic decisions involving Covid shutdowns are causing a slowing of that country that, if it were a democracy would have led to historic protests and rallies against the current regime. Instead the population and Xi just seem to be hoping for the best, given the lack of efficacy of Chinese vaccines. Here's what we missed: We had always thought that China of all countries — unconstrained by a free press and genuine two-or-more party governing — would always do the rational thing. But with vaccines that are only 43% effective and a strain of Covid that isn't as virulent as it is contagious, you can stop the lockdowns even if you won't use the 99% effective U.S. vaccines. It makes no sense. And let me tell you from what I see when it comes to all sorts of tech. China, it turns out, is just much more important than anywhere else in the world when it comes to orders, when it comes to growth, when it comes to earnings. We tend to want to think that the slowdown in everything tech is from the declining work from home, but that's not true. It's from the end of the Chinese growth story. So many of our companies are much more dependent than we thought on China. So an irrational decision to keep a country from being sick in a stupid, decidedly un-Chinese-like way is making it so the number of stocks you can buy is cut dramatically. But you know what is rational, despite the endless catcalls? The Fed's big rate increases. It has done a remarkable job slowing the use of a whole host of commodities. The Fed has begun to impact commerce in a positive way. FedEx (FDX) reported a decline in commerce. We are getting a some lowering in housing costs. There are inventory gluts that have helped lower prices at the consumer level. We even had a weak number from Carnival (CCL) and a light visitor numbers to Las Vegas last month. But there is nothing that is slowing down wages. Too many buyouts. Too many people just plain old retired. Too much money allowing people to not have to work. Now we know that the Fed can throw people out of work. But there are so many workers needed that there are still bidding wars for talent outside of California and a tremendous shortage in people who know how to make things. Remember, we would love to make things here, but they cost too much because of labor so we can't solve the China manufacturing issue. We have priced ourselves out of everything but the energy market, and there we are handicapped by the Democrats' aversion to pipelines which are incredibly deflationary but are perceived to be too pro-fossil-fuel for their liking. So the Fed has to do the rational because everyone else is doing the irrational. And that just doesn't leave for a lot of room for the stock market to go higher. There's too much not in the Powell's purview that he must work hard to slow everything — from eating and going out to job hopping and buying homes and cars — and then, and only then, can it be safe to do anything but long-term investing. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

China's President Xi Jinping and Russian President Vladimir Putin pose with Mongolia's President during their trilateral meeting on the sidelines of the Shanghai Cooperation Organisation (SCO) leaders' summit in Samarkand on September 15, 2022. China holds the "dominant position" in its relationship with Russia, and Chinese President Xi Jinping is no longer prepared for Russia to "act as it pleases", said a political analyst following Xi's first meeting with Russian President Vladimir Putin since the war began.

Alexandr Demyanchuk | AFP | Getty Images