This is the sudden increase in savings that has Wall Street tied in knots. When no one knows if they are the next guy or gal to get a pink slip, they stop spending and start squirreling away cash as their own personal hedge against disaster. And when folks hunker down like this, spending falls off a cliff. 2008 Q4 was the worst consumer figure in 26 years, while December and January durable goods orders fell 4.6% and 5.2% respectively, the tail end of a six-month slump (a 17-year record) that has dropped us to levels unseen since December 2002.

Now consider what this implies for the commercial real estate market.

Personally, I have my own theory of how this thing ends. Simple really. We retrace the entire bull market back to 1982 where it all began. Shocking, I know, but noodle it out. All bull markets are driven by some form of innovation that lowers the costs of production, hence the cost of living, thus allowing more income to be spent on discretionary items, thus broadening the entire economic base. Simplistic yes, but it captures the major trend.

OK, the driver for this latest cycle was the computer chip in all its manifestations, generating improvements in everything from process control, inventory management, budgeting, finance, and so forth. Later on you had the desktop, network and finally the wireless revolution which contributed to the overall effect.

The result was an economy awash in surplus investment capital. Now, lets say half the returns generated in this period represent actual gains, while the other half was largely fictional, generated by credit expansion. OK, over the period of the expansion, more and more credit was created, and an ever increasing portion of it went into rank foolishness, like running the price of housing past anything affordable, or expanding production capacity way beyond anything the market could absorb.

So, I say the real part of that gain, acheived mostly in the first half of the expansion, up to about 1997 or so, was largely real, but that it was almost entirely wasted in the subsequent decade of mad credit expansion and overleverage that brought us to our present sorry state of affairs.

So, it's gone. Poof. Completely and utterly wasted. A round trip to nowhere, which means the bottom of this market is somewhere around DOW 1000. (776 actually, but I'm rounding up because I'm such an optimist).

The actual long-term trendline cuts just above 2000 at the present time, so if you project out 5 years you get something like DOW 4000. I suppose that would account for any real gains we make between now and then, assuming we're somehow able to dig ourselves out of the hole we're presently in. Maybe that's a more realistic target than 1000? Hey, it could be worse, right?

ebear