Put the Federal Open Market Committee (FOMC) minutes released today (Wednesday) in the back of your mind.
The prospects for the 2015 stock market raise a lot of questions. The FOMC meeting minutes provide no answers.
The 2015 stock market faces falling oil prices, a stronger U.S. dollar, and fears of a 2015 stock market correction.
This is setting the stage for a volatile 2015. Money Morning Capital Wave Strategist Shah Gilani believes there could be a 15% to 20% stock market correction "in short order."
"We have the central banks in the United States and across the world papering over the world's problems and I think we're going to have to see some more of that in 2015," Gilani said at the end of last year on FOX Business' "Varney & Co." "But underlying that, I think the valuations have gotten far ahead of themselves... my expectation is that we're going to have a very, very, exceptionally volatile year and I wouldn't put it past the markets globally to see some significant pullbacks."
Put simply, 2015 is uncertain. And the U.S. Federal Reserve's reticence is not helping. But there are a number of directions the Fed could go.
Ignore the FOMC minutes. Here are three potential forecasts for the Fed in 2015.
Fed 2015 Forecast No. 1: The Fed Talks Up the Markets with Dovish Fedspeak
You would think the end of the taper would mean the end of coy language from the Fed. That was hardly the case.
As the Fed winded down QE3 last year, Fed Chairwoman Janet Yellen and Co. peddled the same tired line - over and over again.
It was drilled into the markets that the Fed would taper bond purchases until the end of 2014. Rates would increase a "considerable time" after the end of the taper.
"Considerable time" became a line about how the Fed would be "patient in beginning to normalize the stance of monetary policy." According to the Fed, being "patient" is "consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time" (emphasis added).
Despite what some financial news outlets reported, the Fed didn't drop "considerable time." They shifted it. Very little has changed in the Fed language and this is what we're likely to see a lot of in 2015 - a lot of talk and little action.
Money Morning Chief Investment Strategist Keith Fitz-Gerald said the markets in 2014 hung on Fed rhetoric. This is likely to be a theme in 2015 as well.
"I don't think the Fed is in a position where it can take its foot off the gas," Fitz-Gerald said last month on the radio program "Straight Talk Money." "They may not call it stimulus but you can bet they're going to do every bit of manipulation that they can to keep the markets moving, and whether that's accommodative statements, whether that's keeping certain language in their monthly meeting notes - I don't know what that looks like."
How to Prepare: Tune out Fedspeak. Follow the same investment strategies you would otherwise. Fed rhetoric may be enough to stave off a quick intra-day drop but it won't be enough to instill long-term confidence in uncertain markets. Put your money in strong companies with good management addressing global unstoppable trends. For example, defense stocks. Try to ignore the policymakers and central bankers, and listen to those with real skin in the game.
"I want to place my bets with the world's best CEOs, with the growing brands, with the growing cash flow, with the growing profit margins," Fitz-Gerald said. "That's going to give me the sense that politicians can't or won't."
Fed 2015 Forecast No. 2: The Fed Doesn't Raise Interest Rates
The conventional wisdom is that the Fed will raise interest rates in 2015. But it's just as likely that they won't.
You see, this bull market has been heavily tied to Fed easy money. Having pumped $1.7 trillion into the economy through three rounds of QE, the Fed doesn't want to see their rally go anytime soon.
"I don't think they're going to spook the markets," Money Morning's Gilani said on "Varney & Co." "It's part of the whole wealth effect that they've wanted to create. They're not going to destroy that themselves."
The recent decline in oil prices only adds fuel to the loose monetary policy fire.
"With oil falling as precipitously as it has, we're going to start looking at deflation," Gilani said. "That gives the Fed even more room to stay more 'patient,' so I don't see any rise in 2015 at all."
How to Prepare: Low rates in 2015 will really begin to shine a light on bad investments. Persistently low rates encourage bad behavior, and monitoring companies that abuse loose monetary policy help you identify which stocks to avoid. Take for example International Business Machines (NYSE: IBM). IBM stock was growing during the low rate environment, but not because the company innovated effectively in an ever-changing tech landscape. Instead they were using cheap debt to buy back shares.
It makes the stock price look good, but underlying that is an increasingly unstable balance sheet. Cash-rich companies like Lockheed Martin Corp. (NYSE: LMT) will always be a better place to put your money. Avoid the IBMs of the world that massage their budget figures with cheap debt.
Fed 2015 Forecast No. 3: The Fed Employs QE4 as Deflation Takes Hold
The Fed wants inflation. Inflation works to their benefit because it helps diminish the real value of U.S. debt.
And former Fed chairman Ben Bernanke is a student of the Great Depression. During the financial crisis, he pledged to fight the kind of deflation that destroyed the U.S. economy in the 1930s.
But for all intents and purposes, the United States is in a period of deflation. Oil prices are falling. The dollar is becoming stronger. Jim Rickards, author of The Death of Money, said last month on RT's "Boom Bust" this is the Fed's "worst nightmare."
"The combination of Fed tapering and a stronger dollar, which is what we've seen over the last year and a half, is very deflationary," Rickards said. "Those policies have to be reversed. I would look for possibly a QE4 [in 2015]."
To this point, the United States has been okay with deflationary conditions, but only because of a misreading of the current U.S. economy.
"The U.S. has tolerated a strong dollar and gone through tapering because we mistakenly believed that our economy was getting a lot stronger based on [Q2 2014] GDP."
But Rickards pointed out that that GDP growth was misleading. It came largely on the backs of inventory accumulation.
What's worse is labor force participation is shrinking, Rickards said. Seven million people work part-time and want full-time work. The economy isn't strong, and the U.S. won't tolerate the European Central Bank and the Bank of Japan cheapening their currencies for much longer.
How to Prepare: Investors will generally turn to precious metals for inflation. For deflation, you can also invest in hard assets. In this case, cash is king. Rickards picks out some strong portfolio hedges in The Death of Money.
"Cash has a place, at least for the time being, because it is an excellent deflation hedge and has embedded optionality, which gives the holder an ability to pivot into other investments on a moment's notice," Rickards wrote in his book. "A cash component in a portfolio also reduces overall volatility, the opposite of leverage."