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The U.S. and China are immersed in a heated trade spat, England (I hesitate to include the rest of the U.K. at this point) is set to leave the European Union, and Japan is battling with South Korea over trade deals. For now the global business structure appears to be unravelling.

Catherine Mann, Citi’s global chief economist, covered all of these issues in an 84-page research report called “For better or worse, has globalization peaked?” Ms. Mann cites global data including exports plus imports as a percentage of GDP and elasticity of trade – how much GDP growth is associated with trade growth – to conclude that globalization peaked in 2007 and has been in retreat since.

Citi recognizes that increasingly global markets and manufacturing supply chains have increased economic inequality in developed countries but considers that a failure of national policies.

“The retreat in globalization coincides with stagnant productivity growth and widening inequalities – a smaller pie, more poorly distributed. A renewed commitment to globalization, married with the distributional objectives of domestic policies and business decisions, is needed to revive prospects for workers, firms, and the global economy.”

Ms. Mann also argues that the negative effects of globalization on labour and wage growth have been overstated. “Globalization is blamed for the loss in manufacturing jobs in advanced economies but investment in technology and a shift in preferences towards services versus goods are larger contributors.”

The Financial Times’ Alphaville site (free to read with registration) implies that the U.S. dollar’s role as the world’s reserve currency is a contributor to falling global interconnectedness. The column notes that while the United States is 15 per cent of the global economy, the greenback accounts for half of all global trade invoices, 66 per cent of global securities issuance.

The problem with this arrangement is that the U.S. Federal Reserve only manages borrowing costs and the value of the dollar with its own interests in mind. But the effects of Fed policy spread quickly across the world.

“When the U.S. is out of sync with the rest of the global economy, the Fed sets interest rates which are inappropriate for borrowers outside the country – but which nevertheless are affected by them. This, in turn, weakens the U.S. economy, further weighing on global growth and so on.”

There is no global currency positioned to replace the U.S. dollar in global markets although former Bank of Canada governor Mark Carney has suggested a basket of dollars, euros, yen, and offshore yuan as a potential option.

Trade disputes and the potential for a new reserve currency structure are both indicative of a fragmenting global economy. In practical terms, the primary outgrowth will be higher consumer prices as tariffs and less competitive markets lead to shoddier goods at higher prices in many sectors. This type of inflation is already occurring in the U.S.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

Want to know where the loonie’s headed? Ask the Fed

The loonie is treading uncharted waters to some extent, still driven primarily by bond yields and central bank monetary policy but almost completely ignoring energy prices. Canadians looking to judge the next move for the dollar should watch U.S. Federal Reserve chairman Jerome Powell. For most of the post-crisis time frame, the value of the Canadian dollar was easily understandable in terms of bond spreads – specifically the yield on the two-year government of Canada bond minus the yield on the equivalent U.S. Treasury bill. Scott Barlow takes a look at the charts and how the relationship between the bond spread and the loonie has weakened. (For subscribers).

This $100-million fund manager has overseen returns of 19% over the past year. Here’s what he’s buying and selling

While many investors are focused on when the next recession will hit, value manager Talbot Babineau is thinking about his next home run. “We are focused on individual securities and their underlying fundamentals and what’s impacting their intrinsic value versus the [market] noise,” says the chief executive of Toronto-based IBV Capital Ltd., which has about $100-million in assets. Brenda Bouw chats with Mr. Babineau to find out where he’s investing now.

Bye-bye to net-net: How regulators have killed a legendary stock-picking strategy for value investors

Old-school value investors frequently look for stocks that pass the net-net working capital screen favoured by the original value investor, Ben Graham. Simply stated, this screen looks for companies where the stock market value is less than the balance sheet value of the current assets minus, not just the current liabilities, but all the liabilities – hence the name, net-net working capital. Robert Tattersall looks at how some financial rule changes will cut down on the number of companies that will pass the net-net working capital screen.

Five reasons why value investing may never regain its appeal

John Reese takes a look at five key reasons why value investing hasn’t worked, and gives a few options for investing in growth stocks.

Why Canada could be a good hedge for investors believing a global recession looms

Heightened recession fears amid lingering U.S.-China trade tensions and disappointing data have led to another round of bond yield declines and fuelled expectations of further central bank easing globally, including by the Bank of Canada. But Canada could outperform other developed economies amid a slowing global expansion. Canada could also continue to beat economists’ expectations about domestic growth, which should prevent the Bank of Canada from following in the footsteps of the Federal Reserve with a rate cut this year. In fact, Canada could prove to be a good hedge for investors believing a global recession is coming. Read Rachel Moir’s assessment of the Canadian economy.

How the ultra-high-net-worth investor prepares for a recession

Robert Janson’s clients are always fixated on protecting their money. Most of them, after all, have a lot to lose with investable assets exceeding $10-million and stretching into the billions. Amid persistent predictions of an impending recession, the president and chief investment officer of Toronto-based Westcourt Capital Corp. has had a growing number of queries from his ultra-high-net-worth (UHNW) clients on what precautionary measures they should take to weather an economic storm. Here’s what Mr. Janson and other advisers are suggesting to the rich during these uneasy market times. Tara Deschamps reports.

Her investment is up 22 per cent - should she sell in case the market crashes?

Shaky stock markets and growing concern about recession raise a question if you’re an investor who remembers the carnage of 2008-09. Should you take profits on your stock market holdings and hold cash, or ride out whatever’s ahead? Rob Carrick takes a look at this question (for subscribers).

Others (for subscribers)

“Short the loonie”: Goldman Sachs

U.S. 30-year bonds ‘on fire,’ sends yields to record low

National Bank shakes up its Dividend All-Stars portfolio

‘Fastest levels of commercial insolvencies since the crisis’ means don’t buy Canadian bank stocks until 2020: Analyst

Peter Thiel’s Founders Fund sells remaining Facebook shares

Eight wealth-creating stocks in the U.S. real estate sector

Wednesday’s Insider Report: CFO cashes out $6.7-million from this large-cap dividend stock

Wednesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: CEO invests $200,000 in this security yielding over 11%

Tuesday’s analyst upgrades and downgrades

Others (for everyone)

A shared strategy has three U.S. bond kings lagging their peers

Globe Advisor

Making the most of an RESP

Two ways to invest in the growing technology sector

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Ask Globe Investor

Question: In your recent article about apartment real estate investment trusts, the yields averaged about 2.4 per cent, which is peanuts. Why would you recommend stocks that pay such tiny yields?

Answer: It’s true that apartment REITs typically have lower yields than other types of REITs, many of which yield 5 per cent or more. But in exchange for accepting a smaller yield, investors are expecting more share-price growth from apartment REITs as these companies use their internally generated funds to acquire buildings and renovate suites, which in turn allows them to charge higher rents.

The REITs featured in the column – Canadian Apartment Properties REIT (CAR.UN), InterRent REIT (IIP.UN), Killam Apartment REIT (KMP.UN) and Minto Apartment REIT (MI.UN) – have all posted very strong share price gains, so investors have been quite happy to accept their lower yields.

There is at least one apartment REIT, Northview Apartment REIT (NVU.UN), that pays a higher yield of about 5.6 per cent. But Northview has been hurt by the resource-related downturn in Western Canada and by weak results in Northern Canada. Also, Northview’s payout ratio is high, at about 95 per cent of adjusted funds from operations (a real estate cash flow measure) based on 2019 estimates. That helps to explain why Northview hasn’t raised its distribution since 2015, whereas many other apartment REITs have been hiking their distributions annually.

John Heinzl

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What’s up in the days ahead

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