Today's comment is by Mike Burnick, Senior Editor, Global Markets Analyst and editor of Market Shock Trader. 

Don't look now...but two of the most popular emerging markets in recent years are in trouble. It seems the BRICs are crumbling under the weight of soaring inflation!

These fast-growing emerging market countries include Brazil, Russia, India, and China. This year, they are facing their biggest economic challenge so far this decade: Runaway Inflation.

Inflation is accelerating in the BRIC economies and central bankers are responding with tighter monetary policy. While higher interest rates may be the standard remedy to combat inflation, tight money policies usually wind up dealing a death-blow to stock market investors.

The China Syndrome

The biggest runaway success story in recent years has, of course, been China. "The next century belongs to China," say the bulls. And while there's a lot of truth to that, the fact is sky-rocketing inflation is cutting into the Chinese miracle.

Consumer price inflation in China (which is almost certainly understated) is running at an "official" rate of nearly 8%. That's the highest in nearly 12-years!

As a result, the People's Bank of China raised benchmark lending rates six times last year. The Bank has also ordered banks to set aside more reserves than ever before. Both of these monetary tightening moves are definitely NOT friendly to stocks. So it's no surprise that the Shanghai market index is down 48% year-to-date.

Still, China's got a lot going for it. This impressive economy has massive foreign currency reserves - that swelled by US$40 billion last month alone - to an estimated US$1.8 trillion!

China also has an undervalued currency. If policymakers allowed the currency to float more freely, it would almost certainly erase a large chunk of that country's imported commodity price inflation.

Unfortunately, other BRICs in the region don't have it so easy...

The "I" Is Being Incinerated

The "I" in BRIC, India has been one of the emerging world's most popular markets in the last few years. But now the country faces a big reversal of its recent fortune.

For starters, the Indian stock market, bond market, and currency are all getting incinerated as inflation soars, and investors lose confidence in the economy.

Wholesale price inflation is running at 11% in India - the highest level in 13 years and climbing. The Reserve Bank of India responded by raising interest rates, but it may be too little too late.

Investors are scared that a combination of accelerating inflation and more rate hikes could derail India's record 8.8% annual growth.

Overseas investors are pulling money out of India at a record pace now. Investors sold a net US$6.2 billion worth of Indian shares so far this year, sending its benchmark stock index plunging 30% in value.

Bond prices and India's currency, the rupee, have also come under intense selling pressure. The rupee, which had been one of the world's strongest currencies, retreated 8% in value this year. That's its worst performance since 1993.

What's Happening in Brazil and Russia

The other BRICs, Brazil and Russia, have so far held up relatively well.

This is mainly due to their resource-rich economies. Brazil is a big net exporter of agricultural products and metals. And thanks to a growing energy industry and new offshore oil fields, Brazil should become energy self-sufficient this year.

Russia, of course, is one of the world's largest oil producers, so it too enjoys a favorable trade balance amid booming exports, and growing foreign exchange reserves.

Is India an Early-Warning Sign for the BRICs?

Still, the BRIC economies are under stress of seeing their economies crumble under the threat of runaway inflation. India's troubles are perhaps just an early-warning sign. Inflation in China is running close to 8% in spite of higher interest rate.

Inflation in Russia just topped 15%. Brazil, which suffered a painful hyper-inflationary past, recently raised interest rates after inflation crept up to 5.4%.

Stock investors, seeing this threat on the horizon, are now pulling money out of the BRIC markets. As an Indian government official said recently, "Until inflation slows, this crisis is only going to widen."

Inflation is the biggest threat to emerging markets this decade, and threatens to derail the BRIC success story. How aggressively these nations deal with the problem, will be the key to how quickly they can get back on track again. But for now, it's safer to watch from the sidelines.

MIKE BURNICK, Senior Editor and Global Markets Analyst

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How Inverse Stagflation Attacks Your Stocks

As I said yesterday, this year we're facing an almost unheard of economic environment. It's similar to the ‘70s style stagflation - but these rising commodity prices are also mixed in with a housing bust and a credit crisis.

In short, it's a nasty combination. And analysts across the globe are trying to figure out what this new 21st century-style "inverse" stagflation will do to your stocks.

In my opinion, the odds are that we're all facing a prolonged period of stock market weakness. Inflation is not bullish for earnings unless companies can make higher prices stick.

More companies are raising prices, especially the commodity producers. This whole process is now moving up the consumption chain and will result in higher prices for just about everything - mainly, but not exclusively, because of soaring oil.

Not every industry will successfully raise prices and that alone implies the broader market will continue to suffer. Or at best, these industries won't go anywhere.

Combined with the prospects of Obama winning the elections this fall and higher corporate and individual tax rates in 2009 or 2010, stocks are going to have a very hard time making any serious progress. Taking back the Bush tax cuts would be devastating for the United States and the global economy. More taxes would lead to a deflationary, draining business investment, consumer spending and depressed global demand for goods and services.

If the next government is stupid enough to hike taxes in the midst of a recession, the stock market will suffer incalculable declines. Adding more insult to injury, the Bernanke Fed might be compelled (or forced) to raise lending rates as inflation continues to accelerate threatening commodity inflation.

None of this suggests we're in a cyclical bear market. Rather, this is a secular bear market or possibly a prolonged period of stagnation.

Focus on alternative sectors of the market with low-to-negative correlations to common stocks over the next several years. This includes commodities, mostly gold, foreign currencies in Asia, alternative energy, distressed global blue-chips that pay dividends and hedge funds and managed futures managers that can profit in this mess.

Also, structured products that offer a capital guarantee also look interesting in this environment, including one tied to financial services and other distressed areas of the market.

ERIC ROSEMAN, Investment Director

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Watch Out! There's a New Credit Card Scam Out There!

There's yet another credit card scam making the rounds. It's slick because the scammers already have 95% of what they need to rip you off. They're depending on you to provide the other 5%.

Here's how it works: your phone rings and you pick it up.

Caller: "This is John Doe from the Anti-Fraud Department at VISA International. My badge number is 864890. Your card has been flagged for an unusual purchase pattern, and I'm calling to verify that you authorized this transaction. The card number is 5555-555-555-5555 and was issued by Citibank. Did you purchase a Sony DVD player for $497.23 from Advanced Marketing Concepts of Denver on June 14?"

You: "That's the correct card number, but no, I did not make that purchase."

Caller: "OK, we will be issuing a credit to your account. Advanced Marketing is a company we have been watching and the charges are always just under the $500, the purchase amount that we flag for further investigation. Before you receive your next statement, we'll issue the credit. Please let me confirm your billing address: Is it 123 Easy Street in Sucker, South Dakota? "

You: "Yes, that is my billing address."

Caller: "You're welcome, that's what we're here for. By the way, we'll be starting a fraud investigation right away. If you have any questions, you should call the toll-free number on the back of your card and ask for the Anti-Fraud Department. Please refer to this Control Number: XPJ395. That's XPJ395. Do you need me to read it again?'

You: "Yes, I wrote that down, thank you."

Caller: "OK, we're almost finished. I need to have you verify that you are in possession of your card. Do you have it in front of you?"

You: "Yes, I have it here."

Caller: "Please turn your card over and look for some numbers. There are seven numbers. The first four are part of your card number, and the next three are the security numbers that verify you possess the card and that it has not been lost or stolen. Would you please read me those three numbers?"

You: "Yes, the numbers are 578."

Caller: "That is correct. OK, that's all - do you have any other questions?"

You: "No, thank you again for catching this fraud."

Caller: "You're very welcome. You can never be too careful."

That's how the scam works: After confirming information the caller has received from stolen or hacked credit card databases, you're persuaded to part with your security code. This is the one piece of information needed to make a fraudulent purchase on most websites.

You say very little, and the caller never asks you for your name, address, or card number. That's because the caller already has that information. But armed with the security code, the caller can then proceed to make virtually untraceable unauthorized purchases over the Internet.

If you receive a call like this, do NOT give the caller the security code on the back of the card. If it's truly the anti-fraud department calling, they will already have all the information they need, including your security code. After all, they issued your card!

MARK NESTMANN, Privacy Expert & President of The Nestmann Group
www.nestmann.com

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