Urgent Report

Urgent Report

The Three Factors Choking the U.S. Recovery The stock market may have rallied, but the economy is threatening to erase those gains. This report shows you the three factors choking the recovery – and gives you 3 ways to protect your money until the real recovery sets in. By William Patalon III, Executive Editor, Money Morning

The stock market has soared 58% since its March 2008 low – and the media is proclaiming that the recovery has begun. Not so fast. There are three major factors threatening to stall the recovery before it even gets started. And the “jobless recovery” you’ve been hearing about is just one of them. That’s why now it’s more important than ever to protect your money.

Table of Contents: • Are American Workers Facing a Jobless Recovery? • The Housing Market Continues to Struggle • Rising Inflation Looms on the Horizon • How to Protect Your Portfolio

This report unveils the 3 factors holding back the U.S. recovery. And, it shows you not only how to protect your money, but how to profit until the economy rebounds for good.

Are American Workers Facing a Jobless Recovery? Since the recession started in December 2007, the economy has shed a staggering 6.9 million jobs, the highest number of job losses since the Great Depression. High unemployment has put a serious damper on the economy. It’s simple – if people don’t have jobs, they can’t spend money. The reduction in consumer spending ripples through every sector of the economy – touching 1

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such key business areas as housing and manufacturing, and influencing the prices of such everyday items as gasoline and food. The most commonly quoted number in the media is the “official” unemployment rate, which now stands at 9.7%. But to get the real picture, you have to add in what the government refers to as “discouraged” workers and “marginally attached” workers – those who have stopped looking for work, or who haven’t looked for work recently. Add those in and the U.S. unemployment rate starts to approach 17%. And it gets even worse. If you include the people that the government doesn’t even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate reaches a jaw-dropping 20.6%, according to figures compiled by John Williams of Shadow Government Statistics. If that’s true, an astonishing 25.5 million people are currently out of work in the U.S. Analysts have been cheered by the recent decline in initial applications for jobless benefits (down by 12,000 to 545,000 in the week ended September 12). Overall, payrolls lost “only” 216,000 jobs in August, which was lower than economists’ forecast and the smallest number of job losses in the past year. U.S. President Barack Obama said recently that unemployment is “bottoming out,” and cited increases in exports and heightened manufacturing activity as evidence of long-awaited economic expansion. However, declining initial claims doesn’t mean new jobs are being created. There are still an astonishing number of people unemployed. In fact, a September survey of economists indicated the unemployment rate would soar past 10% in 2009, according to Bloomberg News. “It’s nice to see another move down in initial claims but the continuing number is definitely kind of sticking at pretty high levels,” Michael Feroli, an economist at JPMorgan Chase & Co. (NYSE: JPM) told Bloomberg. “As long as we’re continuing to see pretty high initial and continuing claims, we’ll still have negative job growth.” The fact is, economic pundits know that either the unemployment situation in the U.S. improves in the second half of 2009 or the entire economic recovery could be snuffed out.

The Housing Market Continues to Struggle The housing market is still feeling the pinch as well. Housing starts increased by just 1.5% in August, and are down by a whopping 29.6% from a year ago. More alarmingly, new permits – considered a gauge of future activity – were down a whopping 44% from a year ago, according to the Commerce Department.

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Adding to builders’ anxiety is the pending expiration of an $8,000 tax credit for first-time homebuyers, which is set to end in November. White House Spokesman Robert Gibbs said the administration’s economic team is evaluating the tax credit’s effect on new home sales and will soon make a recommendation on extending the credit to the president. If the credit is not extended past November, builders fear the upward trend in housing sales could be stalled or even reversed. A revision to the latest data showed new-home sales exceeded forecasts in July, extending a string of gains to four straight months, putting a much-needed dent in inventories, according to the National Association of Home Builders (NAHB). But, the NAHB report indicated much of the increase might be due to falling prices of new homes, with median prices down by 11.5% since July 2008. “The real reason home sales are picking up is that home prices have collapsed,” Mike Larson, a Weiss Research analyst commenting on the NAHB index told The Wall Street Journal. “That collapse has made housing affordable once again in many markets.” If prices begin to rise again, home sales could grind to a halt quickly.

Rising Inflation Looms on the Horizon In the last year alone, the Federal Reserve has injected over $2 trillion into the financial system via increased loans to banks. The Term Asset-Backed Securities Facility (TALF) program has added another $25 billion and they’ve pledged to pay back $1.75 trillion in mortgage-backed securities, Treasury notes and bonds. In addition, they’ve lowered the benchmark Federal Funds rate to nearly zero. Factor that in with Congress’s $787 billion bailout, and the money supply has increased 110% in the past year. This is a huge jump from the 6% average annual increase that has occurred in the 95 years since the Fed was created. “That can only lead to serious inflation, perhaps even hyperinflation. This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace,” said Money Morning Contributing Editor Peter Krauth. Over time, this erosion will lead to a big increase in the prices of many goods. At what point will inflation become enough of a concern, and at what point does U.S. growth become sustainable enough, to warrant a change in Fed policy? Bernanke has provided very few clues about what his so-called “exit strategy” will involve, or how it will be implemented. At some point, Bernanke will have to raise the Fed’s benchmark rate from its current record low range. However, doing so to soon could undermine the fragile recovery, while waiting too long could lead to a surge in inflation. 3

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The Federal Open Market Committee (FOMC) has voted unanimously to keep the benchmark Federal Funds Rate at its record low range. But as the economy recovers, there is likely to be more disagreement over whether or not the withdrawal of monetary stimulus is moving at the appropriate pace. “We at the Fed are ready, willing, and able to tighten policy when it’s necessary to maintain price stability, ” said Janet Yellen, President of the San Francisco Federal Reserve Bank. “We don’t want to wait until we’re at 5% unemployment and 2% inflation because if we wait that long, given the lags in monetary policy, we’d clearly overshoot.”

How to Protect Your Portfolio There seem to be more questions than answers surrounding the future of the economy. Despite soaring unemployment, looming inflation and a struggling housing sector, the stock market has rallied 58% from its March 2009 low. Are we about to face a major market correction or will the rally continue? One of the best ways to hedge against a struggling dollar and an economy that may be stalling is by investing in commodities. Money Morning Contributing Editor Peter Krauth thinks spectacular gains are in store for gold and silver stocks. “The biggest bang-for-buck still lies with the junior gold sector,” said Krauth. The best proxy for this is the S&P/TSX Venture Composite Index (CDNX), otherwise known as the Toronto Venture Exchange. It consists of about 75% resource stocks. The CDNX has been steadily carving new highs almost uninterrupted since March, now posting a whopping 80% gain since its December 2008 low. That’s an impressive performance, especially for an index. You can also play gold and silver more directly with exchange-traded funds (ETFs). Consider the SPDR Gold Trust (NYSE: GLD). Each share of GLD represents 1/10th of an ounce of gold. It’s highly liquid, and provides you with the quickest and easiest way to get exposure to gold. Investing in silver might be an even better option: The metal is currently trading at less than 15% of its 1980 high, the equivalent of $130 per ounce. If that’s a move you like, the iShares Silver Trust ETF (NYSE: SLV) seems the best way to play silver directly.

Editor’s note: The U.S. Treasury has just approved a new currency experts are calling “Gold Dollars.” This new currency can be used just like regular dollars, but is backed by physical gold. Not many investors know about this change yet. This report gives you all the details on “gold dollars,” and how you can use this program to your benefit.

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Related Links: Money Morning: Fed: Recession “Very Likely Over,” but Threats Remain MarketWatch: S.F. Fed’s Yellen says recovery still at risk of shocks Bloomberg: U.S. Initial Jobless Claims Fell to 545,000 Last Week Wall Street Journal: Housing Starts Post Moderate Rise CNBC: Fed Chairman Sees Possibility Of ‘Jobless’ Recovery Money Morning Special Report: Is the U.S. Economy Headed for a “Jobless Recovery?”

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