Inflation Rears Its Ugly Head...at the Supermarket

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

Dear A-Letter Reader,

The relentless plunge we've witnessed in the U.S. dollar is finally beginning to translate into higher import prices - thanks to America's gaping foreign trade deficit.

It's no wonder why the Fed remains vigilant about inflation. According to the latest data, import prices are soaring at a record rate: Up 11.4% year over year - the biggest increase in over 10 years!

Sure, surging oil prices have a lot to do with this. But food prices are soaring too, and so are industrial and precious metals. Now, we see the prices of manufactured goods (previously considered "cheap" imports) climbed nearly 1% last month. That's the biggest single monthly jump in prices since January 1996.

Producer Prices Doubled-Up on
Expectations Last Month

Producer Prices paid by business and industry are surging higher as a result. The November Producer Price Index (PPI) out last Thursday displayed a shocking 3.2% jump. That's more than double expectations that called for just 1.6% increase.

Meanwhile, the Core PPI in November (excluding food and energy) jumped to 0.4%. That doesn't sound like much, but again it was twice the 0.2% expected. So both headline and core producer price inflation significantly exceeded forecasts last month. In fact, it was the fastest increase in the PPI in nearly 35 years (since 1973 to be exact)!

Creeping inflation isn't just a growing problem in the U.S. either. The Bank of England reported this week that inflation expectations are at an 8-year high.

The European Central Bank has said publicly that they are "seriously concerned" about inflation so much that they're still refusing to cut interest rates.

In China, inflation surged to nearly 7%, marking an 11-year high. China's inflation is being spurred mainly by surging food and energy costs too. So this is really a global phenomenon.

Speaking of surging food costs, my last trip to the grocery store gave me sticker-shock! Food prices are through the roof.

After Declining for 30 Years,
Global Food Prices Doubled Since 2005

In fact, just since 2006:

• Wheat prices have nearly tripled, to US$9.42 per bushel.
  
  
• Corn has soared more than 150% to US$4.33 per bushel.
  
  
• Soybeans are nearly twice the price, surging from US$5.87 a bushel in '06 to US$11.52 now - that's a 34-year high!
  
  
• Prices of cocoa, coffee, palm oil, and rice are going parabolic too.

According to a recent story in The Economist, the International Monetary Fund's (IMF's) index of food prices (actual prices of a basket of food items) declined steadily for the past 30 years.

The index was actually slightly lower in nominal terms in 2005 than it was in 1974. And in inflation adjusted (or real) terms food prices declined about 75% since 1974!

Since 2005 however, the IMF's food index has just about doubled in price - that's on both a nominal, and a real basis.

There are many reasons for the big surge in food prices; strong demands from emerging economies, and the increasing trend toward using crops for biofuel production, are just a few.

But whatever the root causes, it's certainly feeding back into higher long term inflation expectations, regardless of what the government stats say. There's good reason to believe that commodity prices - and food prices in particular - will continue to move higher in 2008, and beyond.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. In fact, I have positioned investors in my Global Market Investor research service to profit from the upside in agricultural commodities. To learn more about this emerging investment trend that still has years to run in my opinion, read my special report on global market trends.

Why Haven-Seekers Flock to Switzerland

Relatively low tax rates, respect for financial privacy, and attractive, low business tax laws have earned Switzerland its international reputation as a "tax haven."

Corporations are attracted to Switzerland for its low corporation taxes. Also, this country has proven itself to be politically stable, conservatively managed, financially sound and highly accomplished in its financial operations for centuries.

But Switzerland is not necessarily a tax haven for Swiss residents or domestic companies. However, Swiss tax rates are much lower than in the surrounding EU nations, such as France and Germany. Indeed, those two countries, and the illogical, high-tax bureaucrats at the EU headquarters in Brussels, constantly complain that low Swiss corporate taxes are unfair competition. Of course, they would never think of lowering their own taxes in order to compete.

Even though Switzerland taxes foreign investors, you can avoid many Swiss taxes by choosing certain types of investments that escape those taxes. The tax system is strictly "territorial," meaning the government does not tax income that is earned outside Switzerland.

This month a new and authoritative report confirmed Switzerland to be "a tax paradise" for corporations and holding companies registered there. Switzerland rated highly for its favorable, low tax rates and how easy it is to pay taxes there.

The report, "Paying Taxes 2008 - The Global Picture," is a study by the World Bank and the professional financial services firm, PricewaterhouseCoopers (PwC). The report rates the tax systems in 178 countries according to how much businesses are forced to pay in tax.

Switzerland was 24th worldwide in terms of total tax rate - all taxes that businesses pay - and second in Europe, behind only Ireland. (The United State with one of the highest corporate tax rates of 35% ranked 102nd in level of business taxes and 76th in ease of payments). You can read the report by clicking here.

Meanwhile, this tax praise for Switzerland comes at a time when the EU and Switzerland continue to bicker over Switzerland's tax policies. Brussels wants the Swiss authorities to end the practice that gives companies tax breaks on profits generated in the EU. EU authorities claim these tax breaks violate a 1972 free-trade treaty.

Switzerland has repeatedly refused to negotiate with the EU over the issue. The center-right Swiss government rightfully says that corporate taxes are a cantonal issue and are not covered by the trade agreement.

Research earlier this year confirms Switzerland is attracting companies for tax reasons. It found that a record number of firms had set up shop in the country in the first six months of 2007. Canton Obwalden, which drastically slashed corporate tax rates at the beginning of 2006, recorded the fastest growth.

BOB BAUMAN, Legal Counsel

P.S. Click here to find out more about how Switzerland can benefit your banking, investments and asset protection.

Wealth

Why I Like Banks

Back in September, I bought my first chunk of U.S. and Canadian bank stocks. Unfortunately, I was a little too early and falling knives cut me sharply over the last 90 days.

I'll disclose now that I own Bank of America (NYSE-BAC), National Bank of Canada (Toronto-NA) and Royal Bank of Canada (NYSE-RY) in my RRSP or Canadian Registered Retirement Savings Plan. So far, I'm down 18% on BAC and just 5% on NA. I've owned Royal Bank for a few years and I'm way up from my initial entry price although she's also been hit badly since July.

Bank of America is especially attractive to me because it offers a huge 6% dividend. That's better than bonds on a nominal and tax-adjusted basis and three times greater than the yield on the S&P 500 Index.

Citigroup Gets Slaughtered - for Now

I had a pretty good idea I'd be too early buying the banks. The news just keeps getting worse every week with losses mounting on both sides of the border. Yet, I'm attracted to these companies at such low prices and especially, the massively negative investment sentiment.

I just bought more of Bank of America last night and for the first time, Citigroup (NYSE-C) and Wells Fargo (NYSE-WFC). Both stocks trade near multi-year lows and pay high effective dividend yields that I believe will not be reduced or cut amid sub-prime losses. Again, I might be early, but I'll buy even more if prices head even lower.

Distressed equity investing is very difficult to stomach for even the most seasoned investor. But it's also the time to start building positions in quality brand-name companies that won't disappear tomorrow or any time soon.

Time will tell if I played this strategy with smarts, or alternatively, threw good money after bad.

ERIC ROSEMAN, Investment Director