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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

Table of Contents:
The stock market has soared 58% since its March 2008
low – and the media is proclaiming that the recovery has • Are American Workers
begun. Facing a Jobless
Not so fast.
• The Housing Market
There are three major factors threatening to stall the Continues to Struggle
recovery before it even gets started. And the “jobless
• Rising Inflation Looms on
recovery” you’ve been hearing about is just one of them.
the Horizon
That’s why now it’s more important than ever to protect
• How to Protect Your
your money. 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

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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

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

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

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

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.

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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

“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

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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