On The Recent Equity Markets Turmoil

Today's Fed rate cut of 3/4 of a point indicated that the Governors believe they need to reassure financial markets that the end of the world is not nigh.

More specifically, due to the US markets being closed yesterday for a holiday, other equity markets around the globe delivered a sell-off overhang of at least 7%, waiting to hit the US financial markets at the open.

Now, if you were listening to/watching Jim Cramer on CNBC this morning, you'd think the Fed board is addled, asleep, and full of idiots. He was all bugged-eyed and self-righteous about having called this market drop way in advance.

Cramer alleged that it was impossible to understand the Fed's actions, or anticipate them. He expressed a lack of awareness of what triggered this morning's surprise rate cut.

But this is so simple.

First, the Fed doesn't exist to satisfy the raving maniac Cramer's desires for easy money and money manager bailouts.

Second, Bernanke has always said that evolving data will inform and influence his Fed's actions.

Third, Monday's global equities markets sell off constituted new, important information about investor sentiments that had gotten way ahead of economic realities. Thus, the Fed eased in order to avoid what anyone who remotely watches financial markets knew would be a crushing open in New York this morning.

Now, CNBC is chiefly a business entertainment network. That's why they had Jim Cramer hanging around on camera almost all this morning, posturing, bulging his eyes out and screaming.

But they also had three adults on the morning programs, too.

Rick Santelli directly took on Cramer regarding the latter's own market calls. Santelli reiterated his enduring, consistent view that the financial markets will behave according to their own animal spirits. The Fed can cut, and that's fine, but it doesn't mean the markets will magically believe that fixed income losses, and consequent equity damage at financial institutions, are at an end.

Santelli rebuked Cramer for having been giving bullish advice all summer and fall, to which Cramer screamed back,

"Have you watched my show?"

Santelli smirked, dismissively waved his hand and turned sideways, pointedly facing away from the camera. Cramer fell silent.

Santelli is right. Cramer's "Mad Money" show begins with a disclaimer absolving CNBC and anyone else except, well, Jim Cramer, from blame for following his financial advice. On the rare occasions I've been in a room with Cramer screaming from the television, I recall that he explicitly conditions his advice as being for viewers' own "mad money," i.e., spare money they can lose without serious financial injury.

Thus, Cramer plays a disingenuous little game. If he happens to get a short-term call right, he trumpets his great wisdom. If not, he reminds you that you were supposed to: do your own homework; only use spare funds not really intended to be saved, and; bought and sold according to some unspoken timing approach to which Cramer vaguely refers, but never clearly describes or defines.

Santelli knows this, and effectively called Cramer on it, chiding him for wailing about the Fed and fixed income markets in August and the fall, while simultaneously issuing 'buy' recommendations to his viewers.

Then we come to the second adult who made an appearance on CNBC this morning- Brian Wesbury.

As I have written several times, found under the label 'Brian Wesbury,' the noted economist has consistently forecast a 'not recession' for the US economy this year. Wesbury has warned of slowing growth, but not a recession. His observations of jobs, payroll numbers, and the Fed's easing, all combined to cause Wesbury to caution against betting on a recession.

This morning, while being grilled by CNBC co-anchors, and Cramer, Wesbury reiterated his stand. Cramer began to bully Wesbury, insisting that the latter 'admit he was wrong,' like Cramer alleged that he, too, admits when he 'get's it wrong.'

Wesbury pushed back- hard. He returned several times to his contention that recessions come from tight money periods, and we aren't in one. The Fed has eased plenty since the summer. Some will complain about the pace or extent, but it has not been tightening.

Wesbury noted that this alone pretty much dispels worries of recession. And he directly faced off against Cramer and retorted that he, Wesbury, has not changed his forecast that there will not be a recession in the current economic situation.

Rather, Wesbury admitted that he did not forecast a sudden equities market downdraft- but that this is not what he does for a living. He's an economist, not an equities market strategist.

Cramer was, once again, cowed by the target of his on-air bullying, and fell silent.

Finally, we come to the third adult on CNBC this morning- the venerable, solid, calm, unflappable John Bogle, once chairman of Vanguard.

Bogle behaved like he came right out of central casting to play the role of the wizened, esteemed and veteran market strategist. He warned investors/viewers not to do anything rash. That this was the time to, if anything, buy using dollar-cost-averaging approaches. He admitted that it sure is hard to 'do nothing' on a day like today. But that this is precisely what one must do.

I'm sure I'll be returning to this topic in the days and weeks ahead. This is assuredly a significant time in equities market investing. The strength and speed of this new year's market drop is truly stunning.

I've been discussing it with various friends with as much, or, in many cases, more experience than I have. And I was present, physically, on the steps of New York's Federal Hall on the day of the 1987 crash.

One thing on which my esteemed, experienced colleagues all agree, with me, is that this market event is different than others, including 2001. The concentration of assets in large hedge funds and other money management shops, with high-speed, computerized, instantaneous trading capabilities, seems to have compressed what might have been weeks worth of decline into only days.

Further, the surrounding informational environment has changed in the past seven years, as well. The availability of instantaneous, free and plentiful information online adds to the time compression of investor reactions to business news and opinion.

As I suggested to my business partner this weekend, as we discussed the situation, and our plans for the next few weeks, there are three different informational streams moving in parallel:

1. The real economy and information related thereto.
2. Investors' perceptions of the real economy and the evolving financial market situation.
3. Equity markets behavior as a function of investors' perceptions of the real economy and the markets' own behavior.

Right now, it seems that the preponderance of investors, institutional in nature, are focusing on numbers 2 and 3, rather than 1.

It's also noteworthy to recall, as I've written in some prior posts, that most institutional money is managed by mediocre investors. The broad middle of the equity markets is pushed, pulled and herded by pundits, brokers, analysts, etc.

The key to outperforming the broad equity market indices, such as the S&P500, is to be 'wrong' in the near term, but 'right' in the longer term. Specifically, the broad, mediocre middle of the investment community has to value our selections poorly at first, and, then, subsequently come around to our view, to drive the value of our portfolio holdings higher than the market.

Right now, at an inflection point, there's always the question of timing and allocation. Does one go short? Or merely not be long? For how long?

The speed of the recent equity market decline has probably caught many investors by surprise. But longer term fundamentals do not appear to be so bad. It's the near-term panic among less-skilled investors that is causing the incredible near-term volatility.