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This morning’s horrendous 8.1% US unemployment rate is going to wind up being a big positive for the stock market. The only way for this stock market to stop going down is to over-deliver on the misguided apocalyptic expectations that the Great Depression cometh…

Finally, the economic data is terrible enough for the revisionist economic historians (or “economists”) from Washington to Wall Street to absolutely freak-out. As they freak-out, they’ll freak out everyone else… and hopefully break the confidence that global investors have in the US Dollar while doing so…

If the US$ stops going up, you’re going to observe some very itchy trigger fingers in both the short books of wanna be short sellers, and levered long only managers who are sitting on piles of cash. You saw that on today’s market open, and you saw it again when we rallied from down to up again on the day…

Cash? Yes, that stuff that we allocated 96% of our Asset Allocation Model to 6 months ago (September 2008 - before unemployment ripped from 6.2% to 8.1%). Back then, some of Wall Street’s finest savants accused me of “hiding in cash”. Now (after the crash of course) I walk around meeting both existing and prospective clients in NYC and Portfolio Managers are boasting to me how large of a position in cash they have…

You know what this all means - I better start taking down my Cash position from the 70% I was holding prior to this morning’s market opening. I’m doing that more aggressively than I have in a long time, today…

Why? Well, primarily because I am now understanding that what we have here is The Great Recession. While some people on Wall Street are rightly expressing their personal depression, they are wrongly straight-lining that statistically insignificant personal position across a globally interconnected economy. Fortunately, as Dr. Copper, Wal-Mart, and China reminded me this week, Wall Street is no longer going to own the debate as to where this economy is headed next – the clients will. Some of them have blue collars… some of them are Chinese… I know, I know – very weird stuff I am talking about here…

Why I’m Not Depressed: It’s all about the delta. The revisionists are straight-lining the record setting acceleration in unemployment into becoming a repeatable rate of growth – mathematically speaking at least, that’s silly. Whether you want to look at this relative to the mid 1970’s when year-over-year trough to peak unemployment last ramped this quickly (up 300-400 basis points year over year), or in terms of percentage accelerations across different durations, my conclusions are the same – the rate of growth in the US unemployment rate is setting up to SLOW… right as the manic media worries people about it most.

This Is How a Depressionista Can Get To His/Her Numbers: the February 2008 to February 2009 acceleration in the unemployment rate was 330 basis points (from 4.8% to 8.1%, see charts below) – that’s a 69% acceleration of the nominal level of unemployment in this country. If we were to straight line that steep curve (chart) and project the same rate of growth in unemployment to February 2010, you’re looking at a 13.7% US unemployment rate. That would err on the side of a Great Depression type number. Using a shorter duration model, maintaining the current pace of growth in monthly unemployment gets you a 8.6% unemployment rate by the end of March – that too would be depressing, but I don’t think we see that number – if we don’t, the growth rate of unemployment will have SLOWED sequentially.

How Do You Slow The Pace of Growth? Socialize The Country, and Break The Buck: Since The Great Recession began, the USA has lost 4.4M jobs. Obama’s plan is to add back 4M jobs – how convenient is that linear conclusion? In the face of finally adding jobs to the baseline number, can the US unemployment rate continue on this accelerating Trend line? That would be tough math for me to see adding up – and if we get that kind of a Great Depression, I too will join the lines of those who are depressed.
KM

Keith R. McCullough
CEO & Chief Investment Officer