HomeKatusa Investment InsightsA Dead Cat and Market “Misery”

A Dead Cat and Market “Misery”

A Dead Cat and Market “Misery” KII

The end of October dead-cat bounce was in full swing. In a rise for the ages, returns for stocks in the S&P 500 cracked the top 20 all-time best months. Below is a table of the Top 20 best-performing months in the S&P 500 since 1985 and the subsequent returns for 3/6/12 months in the future.

Over a shorter time period, returns are more volatile and less consistent. But if you look 6+ months out, the gains are large and frequent.So, if history rhymes, we’re likely looking at 3 to 6 months of volatility before there is any light at the end of the tunnel.

Is This Market Misery Finished?

The Misery Index is an indicator that has been used by investors for decades to gauge when the economy is in trouble.It was created by economist Arthur Okun, who served as a special assistant to President Lyndon Johnson in the 1960s.

  • The “Misery Index” is an index created using the monthly inflation rate plus the unemployment rate.

“Highs” are a sign of increased misery caused by high inflation and/or high unemployment… in other words when the indicator is high, that signals trouble.And the indicator is approaching levels last seen at the peak of the pandemic and the depths of the Global Financial Crisis…

But thus far, we haven’t even seen widespread capitulation.This misery index that you’re looking at could very well exceed the global financial crisis panic.And you MUST prepare for it.The Fed at that time had the tools to be able to flood the market with money, QE. And then look at COVID. It had the sharpest Misery Index and it was a real anomaly.But this one is very different. It’s going to be a long-haul recession.What worked in COVID in the markets will not work in this market.So how do you position yourself?Sure, we look at these indicators. And we’re in a recession, even though no media’s talking about it. But what do you do?

Recession Survival Key: Cost of Capital

The absolute key to succeeding in a recessionary market is one phrase, cost of capital.If the company you are invested in needs to go raise money in a very recessionary market, that cost of capital is going to be very high.So, unless the returns are significantly worth that dilution, you move forward. But most of the time it’s not – avoid these companies.

  • The companies I want to own are the biggest in the world with the best balance sheets in their sectors.

And here’s the best part…If you really pay attention to the financial details of the contracts, you can see that for many of these companies, their contracts are linked to the inflationary markets.So, whether it’s a recession or an inflation or a stagflation, these companies will continue to make cash for us.When we’re at work, they’re making us money. When we go to bed, they’re making us money.That’s what it’s about.

Deflation Station

One thing investors and the general public are missing is that there is massive deflation going on in commodities right now.

  • Gold is down 16% from its 2022 highs…
  • Copper is down 29%.
  • Oil -32%…
  • And even the once famous and viral meme commodity – lumber – is down a significant 66%.

The plunge in commodities is going to have a ripple effect on the economy in the months ahead.And it’s already wreaking additional havoc on many small-cap mining stocks that are driving on auto-pilot, head-first, into brick walls and off cliffs.It’s total carnage in the small-cap mining world.Where market caps of former investor darlings were at market caps in the hundreds of millions – and now 97% lower. Trading for pennies (and not on the dollar).This is where cost of capital comes in.

  • Unless the terms are HUGE in my favor – I don’t care. The cost of my capital is high.

So before you fall for the next “sexy” stock in a foreign land, you want to know EXACTLY what you’re getting into.You’re getting in bed with that local and national government.And you better know what their intentions are…

The World’s Currency Connection

The US dollar is still the primary currency in the world, and it’s going to stay that way.But if you’re in an emerging market like Chile, Peru, and Latin America… or you’re in the emerging markets in Africa… as the US dollar gets stronger, your economy becomes starved more and more.

  • Because you’re devaluating currency, everything becomes more expensive for you.

So, of course, the governments are going to prevent these foreign companies, (specifically American ones) from coming in and extracting the value of their nation.

  • They’re going to increase taxes.
  • They’re going to increase the royalties.
  • They’re going to deny permits.
  • They’re going to full-out confiscate assets.

If your favorite mining stock has significant production in what I call -SWAP nationsit could be at serious risk.Below is a list of countries where U.S. Federal Reserve SWAP Lines exist (think of them as lifelines by the U.S. Federal Reserve).

I call these Positive SWAP Line Nations (+SWAP):


Is it just coincidence these are good-standing allies of the U.S.? No.These are the “safer” countries. Anything else doesn’t have an American Government lifeline – i.e. US Dollars on Demand.It’s the most important currency for a reason. And investors need to forget the dollar demise articles.You want to be positioned to companies that are going to pay you to own them in US dollars, not a devaluating currency.These are the companies I own, with more on my radar that I want to own.I’m preparing my portfolio for panic and recession.And you can see exactly how I’m positioning my money in the resource markets through my premium research service – Katusa’s Resource Opportunities.Things will get interesting!Regards,Marin Katusa


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