Former heavyweight champion Mike Tyson once said, “Everyone has a plan until they get punched in the face.” Iron Mike was talking about boxing, but he could easily have been discussing the markets. The plan is to keep buying stocks, because the Fed will jump in to save the market from falling. Sooner or later, this plan will meet reality just like the face of a challenger meets Tyson’s fist.
One of the issues with these central bank interventions is that they reduce the vigilance of investors. The interventions or talk of the interventions do their job. After central bank action or jawboning, markets generally calm themselves and rise.
The fact that they work is the problem. Whenever the markets begin falling, the central banks quickly step in to offer more cheap credit or talk thereof. Markets rise, and people begin to think that the central banks have everything under control.
The existence of the Bernanke/Draghi put encourages investors to remain exuberant and take increasingly larger risks. Eventually, something will happen that is not part of the plan. It could be a bank failure in another part of the world, a market-shaking fraud revealing itself or many other surprise contingencies. The central banks will not be able to control the resultant panic, and we will have a much more horrible crash as thwarted selling pressure return with a vengeance.