12 Reasons Why One Advisor Is Betting Treasurys, Not Stocks, Is The Investment Of 2016

While the traditional Barrons' flock of sellside ~~penguins~~ advisors is out and about, for the second year in a row predicting that, after being wrong on its consensus forecast for 2015 of double digit growth in the S&P500, the broader market will rise 200 points to 2220 by December 31, 2016...

... we are more inclined to go with the contrarian call by Prerequisite Capital Management which believes that Treasurys (deflation), not stocks (inflation) are the way to go in 2016.

Here are their arguments why.

Deleveraging has hardly started: Both in the developed world and Emerging Markets.
Capital Misallocation & Oversupply: Caused by (a) the cost of capital being held too low for too long, (b) policies that have caused saving & investment (global current account) imbalances to persist much longer than they naturally would have persisted
Demographic headwinds: Aging populations etc
CAPEX peak and credit conditions tightening: Escalating credit spreads, lending officer surveys show tightening standards for Commercial loans
Turn in the Earnings Cycle: Profits and margins starting to compress globally and in USA.
Tide going out on Buybacks: Growing recognition of corporate irresponsibility
Global Capital Flows shift: Material regime change in pattern of capital flows last 12 months potentially representing an unwind of the last 7-15 years, engendering instability especially in Emerging Markets (highly elevated risks of banking crises & other shocks in the seasons ahead). Global trade also weakening strongly.
Prevailing expectations towards higher yields: ZEW survey related inflation and interest rate expectations at peak optimism, ‘late-stage’ bear market psychology towards key commodity markets still absent(with vicious supply dynamics still reinforcing to the downside particularly in energy and industrial metals)
Velocity still falling (both structurally and tactically): broader liquidity still tightening globally (overwhelming liquidity supply)
Speculative’ Positioning remains substantially negative towards Bonds: stronger ‘commercials’ persistent in multi-year accumulation of Treasuries. ‘Late-stage’ bull market psychology towards multi-decade rise in Bonds still absent(& under-owned)
Geopolitical Escalation and increasing trade barriers growing at the margin.
Fed & Central Banks backed into a corner: trapped by excessive reliance on low interest rate policies (last couple of decades) and QE (over the last 7 years), unable to unwind such programs due to the extreme fiscal constraints of both the public and private sectors.

And some charts why it is TSYs that Barron's "pundits" should - but won't - be pitching.

First, Tightening Lending Conditions, which according to Prerequisite means "we may possibly be about to see bond prices go much higher."

Then a rollover in margin, both profit and debt "increases the probability that the US Stock Market cycle is indeed turning down, and that NYSE Margin Debt will likewise fall from here. (Which is all usually bullish for Treasury Bonds)"

PCM notes that capital flows - namely global FX reserve growth vs global economic growth - have decoupled. They say that "the contraction in Global FX Reserves is more indicative of a ‘regime change’ in global capital flows, which increase the near-term risks of growing instability in world markets & economies."

Next, there is spec positioning in commodities. A simple correlation shows that specs are still positioned far too bullishly, which also explains the stratospheric forward energy P/E mulitples.

Then there is the observation of capital flows becoming more concentrated: "When conditions improve, capital tends to ‘disperse’ more within the economy and the capital markets (rising grey and green lines). However, when times get more challenging or participants are starting to get worried, capital will tend not to disperse, but concentrate into a few key areas (falling grey and green lines)."