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Bank of Montreal chief economist Doug Porter cited evidence that the Canadian consumer is increasingly tapped out, and this has major implications for the domestic economy in the years ahead.

In a report titled “Canadian Consumer: Beware, Burdened and Bewildered,” Mr. Porter noted that debt-fuelled household spending has contributed more than 80 per cent of GDP growth since 2006. This trend is, however, not sustainable as the consumption share of GDP has been at record high levels in recent years and the debt to disposable income ratio is also making new peaks.

Domestic retail sales growth significantly lags the United States, and, for BMO, this is the most obvious sign of Canadian consumer fatigue. Auto sales are another sign of belt tightening as year-over-year vehicle purchases declined in 2018 for the first time in eight years and are set to fall by another 3 per cent this year.

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There are positive factors that will help maintain spending levels and avoid imminent disaster. Strong population growth is one, and rising wages another. Still, Mr. Porter does not believe that these positive forces will be enough to offset the apparent end of the household debt boom.

For investors and Canadians at large, much will depend on how quickly debt levels return to something resembling the historically average. Mr. Porter warned that any rate increases by the Bank of Canada would have larger negative effects on the economy because of the high debt levels. Governor Stephen Poloz is well aware of this so Canadians can expect borrowing costs to remain lower than usual until the consumer debt mountain begins to shrink.

The main risk – and thankfully this is no one’s base case scenario – is a rapid, disorderly household debt deleveraging process involving mass debt defaults and a collapse in spending. The full weight of the Bank of Canada’s financial powers and influence, importantly, would be leaning against this.

What Canadians can expect is that sluggish consumer spending will act as a drag on overall economic growth for years to come. Investors can plan for continued low borrowing costs but they should watch for deterioration in corporate balance sheets if the domestic economy really slows down.

-- 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

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Maple Leaf Foods Inc. It’s making a big bet on meat alternatives in a bid to tap into rising consumer interest in plant-based burgers. The problem: It’s an expensive wager that’s weighing on the share price, according to David Berman.

CGI Inc. For fiscal 2019, the Montreal-based tech company’s reported return on equity was 18.5 per cent, and return on invested capital was 15.1 per cent. However, the stock is not cheap and several analysts believe the stock is fairly valued at current levels. Jennifer Dowty takes a look.

Boston Pizza Royalties Income Fund John Heinzl thinks investors should be careful with restaurant royalty funds. The yields may be juicy, but the full-service restaurant industry is in a state of upheaval caused by heightened competition, higher minimum wages (which have led to higher menu prices) and regional economic weakness.

Target Corp. Target has refocused its attention to its U.S. home base and is doing very well. Third-quarter results released last week were so good they drove the stock sharply higher. Gordon Pape makes the investing case.

The Rundown

Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you

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Rob Carrick’s 2019-20 Globe and Mail Robo-Adviser Guide will help you assess the return information that firms provide on their website. The guide also includes detailed comparisons of the fees each robo-adviser charges. If you’re wondering what to expect in future returns from a particular robo firm, give more weight to low fees than stellar past results.

First-time investors get their fingers burned as cannabis bubble bursts

The average cannabis stock is now down by about 60 per cent over the past eight months, wiping out nearly $60-billion in market capitalization from a group of 90 Canadian and U.S. stocks, according to S&P Global Market Intelligence. Inexperienced investors are now dealing with disastrous financial losses, writes Tim Shufelt.

Big Mac of investment newsletters adding ‘a lot more’ to its Breakfast with Dave menu

David Rosenberg, Bay Street’s most famous pessimist, sounds positively upbeat as he describes his new business venture. What he wants to do, he suggests, is to offer investors a McDonald’s-sized menu – but for economic research, not burgers. Ian McGugan talks to the high-profile economist.

Trade wars, recession fears expected to weigh on banks

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After years of strong results from outside the country, Canada’s six largest banks are expected to report international growth is slowing amid trade wars and recession concerns. At home, the banks are expected to set aside more capital for bad loans, in part because of low energy prices. With Bank of Nova Scotia kicking earnings season on Tuesday, Andrew Willis previews what to expect.

Black Friday could be particularly dark for retailers

The U.S. holiday shopping period may heighten Wall Street’s perception of a growing divide between retailers adapting to online sales and those unable to shake their reliance on dwindling shopping mall traffic. Read more from Reuters.

Others (for subscribers)

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEO, President cash out $27-million ahead of this Fund’s proposed conversion

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Question: My friends contributed a total of $10,000 to a registered education savings plan (RESP) for their son and received $2,000 of Canada Education Savings Grants (CESGs). They have since moved to another country and their son is now attending university outside of Canada. Their mutual-fund company told them, correctly, that they can get their $10,000 of contributions back, but will have to return the $2,000 of CESGs. However, the fund company also said that the $6,000 of growth in the RESP has to be forfeited and given to a designated Canadian postsecondary institution. I thought my friends could withdraw the growth, too, and pay withholding tax, but the fund company won’t let them. Who’s right?

Answer: I forwarded this question to a couple of financial experts, both of whom said the financial institution appears to be mistaken.

“Your reader is correct,” said Mike Holman, author of The RESP Book. “If the family moves out of Canada, they can still receive EAPs [educational assistance payments] of the non-contribution money. They can’t receive any grants as they will be returned to the government. But they can get their original contribution amount plus any growth in the account.”

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However, a flat withholding tax would be applied to the growth portion of the account, Mr. Holman said. According to an RESP guide prepared by RBC Wealth Management, “withdrawals of investment income and growth will be subject to non-resident withholding tax at a rate of 25 per cent, unless reduced by a tax treaty.” RBC added that "tax legislation in the beneficiary’s country of residence may also apply.”

Dorothy Kelt of agreed that, if the family is making an EAP withdrawal and the son is enrolled in a qualifying postsecondary institution outside the country, they are entitled to the growth of the account, minus tax withheld by the Canadian government. “I think they’re just confused,” Ms. Kelt said of the financial institution.

When the subscriber (the parents in this case) is a non-resident and decides to close the plan, the growth must be paid out to a designated Canadian educational institution. However, that’s not the case here as the family wants to make an EAP withdrawal, not close the plan.

“I think this RESP provider is either mistaken on how to handle EAPs for non-residents or perhaps they think the family is trying to close the account. They need to clarify this with the provider,” Mr. Holman said.​

-- John Heinzl

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

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