Central Bankers' Next Panic Move

It may seem like panic in the stock markets just started this month, but the truth is governments and central bankers have been in "panic mode" since March.

We just didn't see it in the markets until a few weeks ago.

But if you look back, you can tell central bankers were panicking because they kept intervening to manipulate their stock or currency markets.

Here's a quick play-by-play of those panic attacks and the real messages behind them:

  • March 17 - Central bankers in the United States, the United Kingdom, Canada and the Eurozone all join forces with Japan to orchestrate a "coordinated intervention" to drag down the Japanese yen's value.
    Translation: "Emergency! We have to do something about that "strong yen" or else Japan's economy is doomed."
  • Aug. 3 - The Swiss National Bank unexpectedly cut interest rates to "as close to zero as possible." Swiss bankers said they would increase the supply of francs to money markets to curb their "massively overvalued" currency.
    Translation: "This "strong franc' is killing us. Before long, no one will be able to afford our chocolates and fancy watches. We've got to do something. Let's try shooting this "final bullet' in our gun and see if that works." (And, unfortunately for Switzerland, it didn't.)
  • Aug. 4 - The Bank of Japan (BOJ) intervenes once again to push down the strong yen's value by selling yen and buying dollars.
    Translation: "Ok, now we're desperate. We've got to see this yen turn around or we're toast!"
  • Aug. 8 - The European Central Bank (ECB) buys Italian and Spanish bonds.
    Translation: "We need to throw Italy and Spain a bone, even though we don't have enough firepower to bail out Italy like we bailed out Greece. But we'll put on our best poker face and try."
    Translation: "Um, well we have to do something -- let's announce we're keeping rates low. We were going to do that anyway."
    Translation: "Well, we've tried everything else, let's say everything is fine to calm the markets down! Then we can always dive into QE 3 next month or the month after if things get really bad!"

Nothing Has Worked

Did any of these emergency moves actually work? Did central bankers manage to stop volatility in the markets?

Heck no!

In fact, they made it worse. Investors have finally sensed panic from the guys in charge. That's why so many stock and currency traders keep hitting the sell button and dumping all their holdings.That's why the Dow Jones Industrial Average earlier this month lost all its gains for 2011 in a matter of days.

That's also why stocks dropped immediately following the Fed's announcement that rates would stay steady until 2013.

It's not just the United States, either. Stocks in Europe, Canada, and even Asia also have fallen off a cliff recently.

And this is just the beginning...

Central Bankers Will Continue the "Trend of Intervention"

The Fed is at the point where it has to do something.

With all of these unusual moves unfolding in the markets, the heat is really going to be on the central bank to perform a miracle to calm the markets once again.

The Fed doesn't have the luxury of cutting rates any further, and it's planning to keep rates low for the foreseeable future.

So that only leaves one option: quantitative easing.

Everyone will be pressuring U.S. Federal Reserve Chairman Ben S. Bernanke and his team to intervene with another round of quantitative easing. It's a done deal considering U.S. stocks erased all their gains for 2011 in a matter of days.

Some way, somehow, the Fed will have to push up the liquidity in the markets. That means running the printing presses and again creating more money to bail out the stock market.

It may or may not be called "QE3," but in essence, that's what it will be.

If it gets bad enough, U.S. central bankers may have to call on other Group of Seven (G-7) nations to help bail it out. The G-7 has already pledged to step in if global stock indexes continue to fall off a cliff.

The continued money printing - paired with the slap in the face from Standard & Poor's U.S. credit rating downgrade - means the dollar doesn't stand a chance in the long term.

Everyone views the U.S. dollar as a safe haven in times like this, but a few months or even years down the line, the dollar - and anyone who holds dollars - will pay the price for the Fed's actions.

Meanwhile, riskier currencies like the Aussie dollar will finally get another nice bounce higher as the dollar starts to fall.

The Good News Behind the Fed's Moves

These quantitative easing Band-Aids will only last for so long.

I still believe we're heading for a major stock market collapse. We may not even see the big crash this year, but it's coming. It will happen because the Fed can only pour so many trillions of dollars of assets onto its books before it all caves in.

When that happens, foreign investors will finally back away from the U.S. markets. Investors will turn to the greener pastures of China, Singapore, Norway and Switzerland as they shake the dust off their feet and leave the United States.

But in the meantime, I take some comfort in the fact that all these emergency interventions are creating some impressive volatility out there in the markets.

For a f orex trader, volatility is absolutely essential. To trade currencies, you need the market to trend up or down - that's when you catch the best profit moves.

And in this type of market, there are plenty of trading opportunities if you know where to look.

In the next couple weeks, I'll be introducing you to various ways to find these opportunities here in Money Morning.

[Bio Note: With the outlook for the dollar and the euro growing increasingly bleak, many readers have asked us about currency trading. So we decided to respond by bringing on a new currency expert - Sean Hyman. Hyman is a veteran currency trader with more than 20 years of experience. He also currently serves as Investment Director for World Currency Watch. Watch for his columns on currency trading in Money Morning.]

News and Related Story Links: