Anyone who has ever raised children, will never forget these words.  I remember saying “no, but we are getting there.”  It didn’t take long for the question to be raised again and again and….you get the point. 

It seems to me as if all of us are asking the same question about the downturn in the economy…..are we there yet?  Have we finally bottomed?  And if so, is this the time to make those “discount” collectible wine purchases?  Are we going to look back years from now and lament that this was the time to “back up the truck” and scoop up those deals?  I approached this question for the first time last January in my blog (Come on Down).  It’s a good time to revisit the question.

First and foremost, full disclosure here….I am not a soothsayer.  I gave up Crystal Ball consulting a long time ago.  However, some basic economic assumptions and facts are probably worth raising that might shed some light on the answer to this question.  Let’s start with the big picture. 

70% of the GDP derives from consumer spending.  That’s you and me and all of your family and friends and their friends pushing the economy (forward and backward).  That, in turn, influences the supply:demand balance.  Right now, we are subtracting from the economy.  This has produced deflation, resulting in what I call a “discounted society.”  Nearly everything is on sale (including, unfortunately, wages).  Fasten your seatbelt. Here is my summary of the headwinds and tailwinds.

Headwinds:

1)  Discretionary and retirement income has dwindled by an average of one third over the last year.
2)  The loss of discretionary monies is resulting in an elevated savings rate and a compensatory decrease in     purchasing.
3)  Wage deflation is spreading, further crimping retail spending.
4)  Individuals continue to unwind burdensome debt.
5)  Corporate downsizing with commensurate job loss and risk thereof, while decelerating in its pace, continues, again  pressuring spending.
6)  Home foreclosures have placed many in a “survival” mode, where every available penny is cherished.
7)  The construction industry, which provided as much as 40% of the job growth in the early 2000’s, has downsized and shows no signs of growth.  Even when that time comes, it’s likely to be meager.
8)  Lending is still very conservative, restricting growth. 
9)  Local, state and federal taxes may increase in order to address budget concerns.
10)  Governments at all levels are in a world of hurt (look at California….look at the recent layoffs in Oro Valley).
11)   Despite lower GDP, some costs may elevate due to emerging markets pressure (China).
12)  The economic environment REALLY is different this time (from past recessions).  The depth and scope of this 
          recession is beyond that of the 1970’s and early ‘80’s.
13)  The effects of the unheralded federal stimulus are unknown (ok…neither a positive nor negative.  I had to put it 
         somewhere).
14)  The consumer, in light of all of the above, may retrench for many years to come.
15)  This is getting too depressing…time for a few positives.

Tailwinds:

1) I could be wrong on how many of above play out.  Perhaps the federal stimulus package will save the day, resulting in improved psychology, job creation, equity market recovery, housing stabilization and growth fueling increased spending beyond my expectations.
2)  Some of the foreign markets (especially China), are still  flush with cash and are using it to propel growth.  A recent Hong Kong collectible wine auction was highly successful and 2008 first growth futures prices nearly doubled 
overnight recently following Parker’s opinion that the vintage was much better than earlier believed (note: other 
wine experts and even some producers are not quite as positive).
3)  The equity markets have bounced approximately 36% off their lows.
4)  The housing market numbers seem to be indicating that we are in the early stages of stabilization (not     growth…oops…I forgot that this is a positive list).
5)  The rate of job loss seems to be decreasing…less bad is  encouraging.

6) The inventory or production of wines from any given vintage is fixed.  Unlike equities or bonds, you can’t “reissue” new collectible wines.  Thus, there is a defined supply/demand curve to work with.  This is especially important with high quality, low volume producers such as those in Burgundy.  With the supply meager, pricing has held better than with Bordeaux, some of which saw a 40+% decline in auction prices.   These factors have helped to stem the downward pressure on some  wine varietals.  In fact the Liv-ex, which tracks the 100 top Bordeaux prices along with a few Burgundy and Chateauneuf du Pape, “only” dropped about 20% (vs. nearly 50% for the Dow Jones Industrial Average) from its high to it’s low and has recovered modesty since.

OK, so where does all of this place us………….has the economy bottomed, has the collectible wine market bottomed and is it time to make some purchases?   

If the definition of the state of the economic health is equity market pricing, then I do believe that we have seen a bottom for this cycle.  We may retrace some or even a significant portion of the recent bounce off of the bottom, but the severity and length of this recession, points, in my opinion, to the low being set (not accounting for an unseen exogenous catastrophe). 

If, however, the definition of the economic health accounts for housing, jobs, consumer spending, corporate and government financial health, then I would suggest that we are “getting there” as I used to say to my kids, but we not there yet.  In fact, I would argue that the “getting there” interval could be very long and grinding.  While the economic numbers are getting “less bad,” that does not translate, in my opinion, to getting better.  My fear, is that we have done so much damage to our economic life, that it may take a generation to recover (my take as to why I do think that it is different this time).  If this is the case, availability of discretionary monies is going to be restricted in comparison to past recoveries. 

My take is that this should place long term pricing pressure on the collectible wine market.  How long is long?  Can’t say.  We have witnessed downward pressure for a year at this point.  Another couple of years, at the minimum wouldn’t surprise me.  That doesn’t mean that highly sought after wines will not appreciate from here.  I just believe that the overall wine market will be challenged to move too far too fast.

That being the case, my personal strategy is to compile a list of wines that I would love to have or add to my cellar.  When the pricing looks right, I’ll pick up a little and then wait.  If the price falls further, I’ll pick up more.  If the price takes off, then at least I can take solace that I own a little.  And if the wine price does take off without you, consider it to be a missed opportunity and then look for others. 

Somehow, I have to believe that if you are patient, you will get your chance to purchase those special wines.  The hard part, in today’s society, is that we live in such a “now” world with no patience for time, that we have forgotten what it is like to be patient.  Perhaps, that will be different as well this time….

Tags: Bordeaux, Burgundy, collectible wine, liv-ex