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A thoughtful and sobering 75-page research report from Deutsche Bank strategist Jim Reid predicts a new Age of Disorder which, for investors, means “simply extrapolating past trends could be the biggest mistake you make.”

Mr. Reid breaks modern economic super-cycles since 1860 into five eras. He believes the most recent cycle – a second era of globalization that began in 1980 – has now ended and the next few decades will represent a much different investment environment.

A new cold war between the U.S. and China, fought primarily with economic weapons, is among the strategist’s central predictions. China’s share of the global economy averaged between 20 and 30 per cent for the past two millennia, fell to four per cent in the 1960s and is now 16 per cent.

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China will continue to reassert its dominance in the global economy, according to Deutsche Bank, and will do so on its own terms – Mr. Reid believes it is naïve to think that China will willingly integrate neatly into a worldwide trade architecture designed primarily by Americans.

The strategist also predicts the widespread adoption of ‘carbon border adjustment taxes’ designed to punish imports from countries avoiding renewable energy sources.

Intergenerational tensions will also mark the Age of Disorder. Rising home prices and lagging wage growth mean that younger generations “have every right to be aggrieved,” writes Mr. Reid. He notes that median wage growth for younger families has diverged significantly from older generations since 1980.

In demographic terms, the Millennial and Generation Z cohort will soon have enough voting power to choose leaders who better reflect their interests. Deutsche Bank lists an increased focus on climate issues, much higher inheritance taxes, less protection for pension incomes, and higher property and corporate taxes as potential outcomes. Higher inflation – which decreases the existing debt burden at the expense of investment asset values – is also possible as younger generations take charge.

In this report, Mr. Reid is talking about longer-term issues rather than business cycles. “Economic cycles come and go,” he writes, “but sitting above them are the wider structural super-cycles that shape everything from economies to asset prices, politics, and our general way of life.” As a result he doesn’t provide tactical ideas for investor portfolio positioning.

That said, lower corporate profit margins are the obvious consequence from higher taxes, environmental regulation and de-globalization. Higher inflation, if it occurs, points to outperformance for commodities. This would particularly be the case if political tensions led western nations to compete with China for scarce resources.

More wealth re-distribution through taxation favours consumer discretionary companies. The technology sector should continue to provide new winners, even if the currently dominant companies are hit by government intervention in their businesses.

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-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Empire Company Ltd. (EMP.A-T) This stock is now seeing positive price momentum and analysts believe this will steadily continue, with modest returns expected. Empire is currently trading at a reasonable valuation, in-line with its historical averages, even as it hits record highs; however, the multiple has room to expand as operational milestones are reached. Jennifer Dowty has this profile of the stock. (for subscribers)

The Rundown

An investors' survival guide for the unstable, uncertain and volatile months ahead

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The market’s resilience is now facing a major test. Many businesses have reopened; unemployment has fallen and consumer spending improved markedly. But recent signs suggest the economic rebound is levelling off and activity could take much longer than expected to return to normal. Volatility is returning, as months of smooth increases give way to the sort of violent swings witnessed during the stomach-churning sell-off early this year. Concerns about lofty valuations have moved to the forefront. What should investors expect next and how should they prepare their portfolios? David Berman takes an indepth look. (for subscribers)

Investors should brace for an extended period of stock market volatility

A market indicator that several top strategists use to predict periods of turbulence in stocks is signalling that investors better brace themselves for a prolonged period of volatility. And we’re not talking about just the next few weeks here – more like at least 18 months. Scott Barlow explains. (for subscribers)

Why one of Canada’s leading pension experts says it’s time for retirees to get out of bonds

It is high time for retirees and pension funds to dial back their exposure to “dead-weight” bonds, according to one of Canada’s leading pension experts. Keith Ambachtsheer, the president of KPA Advisory Services in Toronto and director emeritus of the International Centre for Pension Management at the University of Toronto, argues that bonds at their current, dismal yields can no longer deliver the returns needed to fund retirements – not unless you assume savings rates well above what most of us would regard as practicable. Ian McGugan tells us more (for subscribers)

Attention millennial investors of the pandemic: It’s time to sell your tech stock winners

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if you’re a young investor who cleaned up in tech stocks this past summer, Rob Carrick thinks you should consider selling much of your holdings to lock in profits and pivoting to a more traditional investing strategy. Long-term investing success is rarely built on a narrowly focused group of stocks chosen because they’re trendy in the moment. (for everyone)

Mining stocks shine their way into the S&P/TSX Composite index

Mining is on the rise, with Canada’s major movie chain falling, as the country’s primary stock index plans its latest changes. The S&P/TSX Composite will add five companies, but remove two, next week as it performs a quarterly rebalancing. David Milstead reports. (for subscribers)

Tesla investors should be watching for M&A for S&P inclusion

Tesla Inc. investors were disappointed after the company was snubbed in the S&P 500′s latest round of inclusions, but the electric automaker’s entry could still happen at any time and a merger by others in the benchmark index might help. John McCrank of Reuters reports. (for subscribers)

Equity market turmoil seen unlikely to provoke rapid Fed response

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The U.S. stock market pullback has raised hopes that the Federal Reserve will ramp up asset purchases to boost the economy, but the sell-off was not steep enough to warrant any action, according to market participants, strategists and an advisor to the U.S. Treasury. Matt Scuffham from Reuters reports. (for subscribers)

These 4 ETFs are strong options for income investors during uncertain times

In uncertain markets, such as we are currently experiencing, income investors need to focus on three key points: cash flow, safety, and diversification, says Gordon Pape. Exchange-traded funds (ETFs) are a good way to meet these three goals. They enable you to spread your risk over a large portfolio of securities and many offer very attractive yields. He outlines some ETFs that are worth considering in the current environment. (for subscribers)

Others (for subscribers)

The highest yielding stocks on the TSX, plus risk data

Monday’s analyst upgrades and downgrades

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Monday’s Insider Report: Board chair invests another $3-million in this REIT yielding 9%

Brexit risk premium returns to UK markets

Ask Globe Investor

Question: I have shares in my tax-free savings account and registered retirement income fund that I want to donate to charity. My broker said I would first have to transfer the shares in-kind to my non-registered account, which would be considered a sale, and I would therefore have to pay income tax. Is this true? Also, if I sell some other stocks in my non-registered account at a loss, can I use the loss to offset my taxes?

Answer: Your broker is correct that you must transfer the shares to a non-registered account before you can donate them. Alternatively, you could sell the shares and withdraw the cash to make a donation. However, there seems to have been some miscommunication with your broker regarding the tax implications.

When you make a withdrawal from your TFSA – whether in-kind or in cash – there are no tax consequences. However, if you make a withdrawal from your RRIF the value of the withdrawal is added to your income and taxed. This is probably the tax your broker was referring to.

Keep in mind that, if the value of your RRIF withdrawal exceeds the government-mandated minimum percentage based on your age, your broker will withhold tax on the excess. The tax withheld will be credited toward your taxes payable when you file your return. The tax withheld varies based on the amount of the withdrawal.

From a tax perspective, then, given the choice between donating assets from a TFSA or RRIF, you would be better off withdrawing shares (or cash) tax-free from your TFSA, rather than making a taxable withdrawal from your RRIF.

To answer your second question, if you withdraw shares (or cash) from your RRIF, you can’t use a capital loss from the sale of stocks in a non-registered account to offset tax on the RRIF withdrawal. A capital loss can only be used to offset capital gains. The loss must first be applied to capital gains in the current year; any unused losses can be carried back up to three years or forward indefinitely to offset capital gains in those years.

That being said, you can likely use the value of the donation receipt to offset some or all of the tax on the RRIF withdrawal, said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management.

Depending on the province or territory, your gift would produce a charitable tax credit worth at least 40 per cent of the donation amount. This assumes you have already made $200 in charitable donations, as the charitable tax credit is significantly higher above this threshold.

“In many cases, especially with seniors in low or middle tax brackets, once someone is donating more than $200 a year, the value of the donation credit actually exceeds the tax payable on the RRIF withdrawal, resulting in excess tax credits which can be used to reduce taxes payable on other income, such as Old Age Security and Canada Pension Plan benefits,” Mr. Golombek said.

Finally, you may wish to investigate a third option: If you hold stocks that have appreciated in value in a non-registered account, consider donating them to charity. When you donate listed securities or mutual funds that have appreciated in value, you don’t have to pay any capital gains tax. I wrote about this in a previous column (tgam.ca/clinic-in-kind).

--John Heinzl

What’s up in the days ahead

What’s the right percentage of Canadian equity content for your portfolio? Rob Carrick will look at some different views on this based on what robo-advisers, asset allocation ETFs and balanced mutual funds are doing.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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