Dow drops 4%, gold up $20: Obama verdict

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Wall Street voted with its feet on the day of President Obama’s inauguration and the Dow dropped four per cent, while gold rallied $20 on rumors of a big investment in the yellow metal, possibly again in Saudi Arabia where a stock market rout is scaring investors.

Or perhaps it was the sight of two million people on the streets of Washington all welcoming more public expenditure, not really the sort of entrepreneurial capitalism needed to put the national economy back on its feet. But more likely Wall Street is just attending to business as usual, and nothing much has changed in the past 24 hours.

Market bottom

The outlook for profits continues to deteriorate, and q-theory points to a further 50 per cent fall in the Dow until shares hit the bottom; q-theory compares net asset value to share prices and is still a long way from previous market bottoms – in what most agree is the worse economy since the 1930s.

If you look at the very rapid decline in share prices over recent months then this rate of velocity also implies a very strong downward momentum, and when compared to previous declines a further fall of 50 per cent looks eminently possible.

The stock market fall yesterday certainly sounds as if Wall Street is worried rather than impressed by President Obama. He speaks brilliantly but has surrounded himself with committees of the great and good, and created a huge talking shop.

Talking shops

In business this is not usually a good way to handle a crisis. You need decisive action, not talking shops, and you have to recognize that painful actions are often necessary – you can not please all the people all of the time and save the economy.

What will happen in the meantime is that the inexorable shifts in markets will continue with the bond market looking like the next bubble to go. That will lead to an exodus from one perceived safe haven into another, and the only viable candidate from where I am sitting is precious metals.

Without the bond markets spending to get out of a recession will be impossible, and old fashioned ideas like higher taxation will be back on the agenda. Everything has to be paid for in the end.