Bubbles. By their very nature, they get big, and then, Splat! They burst. Dom-com stocks were bubbles. The housing market was a bubble. The Dow Jones of the last few years was a bubble. What did they have in common, and what does a bubble have to do with wine?

What they had in common was values so high, they were unsustainable. The Dow peaked at just below 14,000 in October, 2007, by far its highest ever. Now it’s scraping 9,000. Here in the San Francisco Bay Area, the newspapers reported two days ago that home prices, after rising to ridiculous levels, plunged in December to 31% lower than they were a year go, with the end nowhere in sight.

Now consider expensive California wine. These wines, led by Cabernet, are like the real estate market: Just as the number of million-dollar homes soared between 2001 and 2008, so too has the number of expensive wines. Robert Reich, the former Labor Secretary under Bill Clinton, recently analyzed the housing market in this gloomy article he wrote for the online periodical, RGE Monitor. Briefly, the economic downturn will force Baby Boomers to sell their homes over the next few years, downsizing to smaller homes and condos, or even renting. That will dump even more homes on the market than there already are, what with all the foreclosures, and that in turn will force housing prices even lower. Sounds like a death spiral. There were simply too many big, expensive homes built in the first place, and then easy credit led to a dash to buy. It was an unsustainable bubble, and now it’s burst.

Sounds to me like the expensive wine market. Just as there were too many pricey houses and not enough people who could afford them, so too there are too many pricey bottles, and not enough people able to buy them. I went over Wine Enthusiast’s database and counted 336 wines I’ve reviewed since 2004 that retailed for at least $80. Broken down by the year I tasted them, they were:

2004 and earlier: 1
2005: 67
2006: 98
2007: 71
2008: 99

So the number of expensive wines (judging by my unscientific count) appears to be growing, with the over-$80 segment up 47 percent in 4 years. That tells me it’s over-heated, just like home prices were.

When supply exceeds demand, there’s no getting around the economic consequence: prices must fall. That popping sound you hear is the cult wine bubble bursting. Who survives the shakeout? We’ll just have to wait and see. Not everybody will.

The Sydney (Australia) Morning Herald reported on New Year’s Day on the “unpalatable truths” confronting the Australian wine industry, in this article entitled Wine industry grapples for new hook that has important implications for California’s own wine industry.

The “boom time party” is now over, the Australian Wine and Brandy Commission (AWBC) declares, and wineries must solve an “ever growing plethora of challenges…if they are to survive.”

Wow. We’re not just talking profits and losses, we’re talking survival.

The challenges, according to the AWBC, include:

- production without profit
- diminishing bargaining power in the face of attritional retail dynamics caused by the global financial crisis

A large part of Australia’s problem is over-production. A drop in exports coupled with lower domestic sales have led to a surplus of wine that can only be addressed by moving “towards a quality vision that celebrates sustainable value above unprofitable volume growth,” the AWBC says. That may mandate “the removal of several vineyards…if the industry is to remain on a sustainable footing.” Wine consumers are going to be “unforgivingly Darwinian” in 2009 and beyond, “showing little or no interest in any attribute other than volume at low cost.”

Sounds like the Australian wine industry’s neck is on the chopping block, but what does it imply for California?

Well, the party’s over here, too. You have to believe that, of the 4,000 wine brands in the state (my guesstimate), many are holding on for dear lives, watching their costs rise, their savings fall, and their profit margins (if any) shrivel. They, too, will face “diminishing bargaining power” with everyone they do business with. Distributors won’t take them on except at terms favorable to the middleman and not the producer. Consumers in America are just as unfailingly Darwinian as they are in Australia; $10 is the new $20. There’s already an over-supply of overly-expensive wines that simply aren’t worth the price being asked, and there’s absolutely no reason to think that people will continue to buy them, if in fact anyone was buying them in the first place. And all this is happening before the inevitable rises in alcohol taxes being considered in California, New York and most likely in other states.

At the AWBC’s webpage, looking forward to (or, more properly, dreading) 2009, they say “forecasts are difficult, even potentially misleading, and the emphasis of this year’s assessment is on the issues rather than providing definitive forecasts.” Meaning they don’t have a clue as to what’s happening, except that whatever it is, it’s not good.

Just as Australia needs a new wine hook — and France, and Italy, and everyplace else — so too California’s wine industry is going to have to reinvent itself. Here’s what I would tell wineries:

- Lower your prices to the minimum you can, unless you really, really think you can get away with not doing so. But make sure you’re not fooling yourself through hubris.
- Save your cash.
- Boost quality. A lot of wineries have been selling a lot of bad wine for a long time, but the handwriting’s on the wall. You won’t be able to get away with it much longer.
- Figure out alternatives to the three-tiered system and how to market and sell direct, and not just through the old tasting room, but through the Internet. You may not understand cyberspace, but your kids or grandkids do.
- Be bold. Do something different. The future doesn’t need more Cabernet Sauvignon.

It’s early morning on New Year’s Eve, and a thick ground fog covers the Bay Area. Visibility on my street is about one block, and it’s eerily quiet out there. Not even the starlings and gulls are around and about. They’re hunkered down in their resting places, just as most of us humans are.

This gloomy day seems symbolically fitted to end 2008, a year that will be remembered for many things, but particularly, I suspect, for the dramatic collapse of our country’s economy following the September bankruptcy of Lehman Brothers. The San Francisco Chronicle reports this morning that home prices in the city dropped 31 percent this year, the sharpest on record, and a reminder that not even The City by the Bay, with its fabulous wealth and glamor, is immune from the economic meltdown. A radio report this morning, from the local NPR affiliate, said the restaurant business in San Francisco is in a state of collapse, with restaurateurs bracing for the worst in 2009. People just aren’t eating out any more, and if they are, they’re scaling down from entrées to appetizers, from 2 glasses of wine to one, or from wine to water. That has the waiters grumbling, but what can they do.

The fog is an apt metaphor, also, for the internal mood many Americans feel these days. One tries to peer into the future to glimpse what lies ahead, but that future is blanketed in an impenetrable darkness that masks everything. Best not to think too far ahead in times like these, people tell me. Focus on one day at a time, which means one moment at a time — the Now. It’s easier said than done.

But it’s important to remember that everything passes. The fog will go away, and by this afternoon the Bay Area will once again bask under blue skies and bright sunlight. The birds will be out in a little while, filling my street with sweet birdsong. Perhaps the little hummingbirds will visit the begonias outside my window, which are in full crimson bloom.

I know this, too: 2009 will be a better year. So tonight, when my family and I cheer in the New Year with a glass of champagne, I’ll say a special toast for President-elect Obama and for our country. We’ll see our way out of this. The fog will lift.

Item: “Retail Sales Plummet. High End Walloped,” with luxury goods down a catastrophic 35%, the biggest decrease of any consumer item in the country, including furniture and electronics. That’s from last Friday’s Wall Street Journal. And like it or not, wine is a luxury item.

Item: Eighty-eight percent of the participants in Wine Market Council’s new Wine & the Economy study feel the economy is getting “much worse” or “a little worse,” with Boomers and seniors even more discouraged than Millennials and Gen Xers. And “[wine] consumption rates…are trending downward for all wine drinkers,” the report found. The reasons? Nearly half of all consumers are “not spending as much money on wine” as they used to, while more than one-third are “not dining out as often as they used to,” even those who self-describe themselves as “better off financially.” The report concludes: “The financial situations of males, Generation X wine drinkers, and those 63 and older significantly worsened over the past six months.” (The report is not yet available online.)

Item: The governors of the nation’s two largest states both want to raise alcohol taxes, including on wine. In New York, Gov. David Patterson has proposed more than doubling the excise tax on wine, from 18.9 cents per gallon to 51 cents. In California, Gov. Arnold Schwarzenegger’s “nickel a drink” tax hike is supposed to help staunch the state’s exploding deficit, which Schwarzenegger recently described as “financial Armageddon.”

What happens to consumption when alcohol prices go up? “…increases in the monetary prices of alcoholic beverages, which can be achieved by raising Federal, State and local alcohol taxes, significantly reduce alcohol consumption”, according to this study from the National Institute on Alcohol Abuse and Alcoholism.

Item: Meininger’s Business International is reporting the following situations in the wine industries of these European countries:

Hungary: “…until recently the wine industry had seemed relatively immune to the economic crisis…But since late October, the industry has experienced a brutal reality check.”

Denmark: “…if Danes make spending cuts, it won’t be to wine.” Way to go, Danes!

Austria: The global crisis “has not, so far, had great repercussions for Austria´s wine industry.” But this conclusion is based only on statistics for January-June, 2008, meaning that third quarter and especially fourth quarter numbers could be grim.

Italy: “…we’ve seen a significant shift from on –premise to off-premise sales as consumers forgo restaurants and wine bars, preferring to dine and entertain at home,” Meininger’s quotes a marketing manager as saying. The article concludes, “…according to many industry experts, times are increasingly difficult for Italian wine.”

France: Exports down. Prices expected to drop in 2009. Champagne, Cognac and Bordeaux most at risk. Allan Sichel, the president of Bordeaux’s Negociants’ Union:  “We are anticipating difficult times, yes,” especially for smaller vignerons who “can’t get the backing from banks.”

Everything looked so great last January, with the wine industry healthy and happy and the economy rolling along. Then, in the spring and summer, came dark hints of a problem in the home mortgage industry, which nobody quite understood. Suddenly, wham. September arrives, and the stuff hit the fan. Now here we are slouching towards 2009, wondering what the hell happened and how much worse things will get before they start to get better.

Still, in my job, there was a lot of great wine in 2008. Here are my top-scoring ones. My employer, Wine Enthusiast, already has released our Top 100 list, so I don’t mean to compete with that. That’s worldwide; these are all from California. (All wines have been published in our Buying Guide, or will be over the new few months.)

1. Shafer Hillside Select 2004 Cabernet Sauvignon
2. Arista 2005 Ferrington Vineyard Pinot Noir
3. Signorello 2005 Padrone Bordeaux blend
4. Colgin 2005 IX Estate
5. Stonestreet 2004 Christopher’s Cabernet Sauvignon
6. Iron Horse NV Joy! Sparkling Wine
7. Williams Selyem 2006 Rochioli Riverblock Pinot Noir
8. Nickel & Nickel 2005 John C. Sullenger Cabernet Sauvignon
9. Far Niente 2005 Cabernet Sauvignon
10. Hanzell 2005 Ambassador’s 1953 Vineyard Chardonnay

The list is heavy on Cabernet and Napa Valley, with a few cool-climate Pinots, a drop-dead gorgeous Chard, and one of the smoothest California bubblies ever. All are ageworthy, and all are expensive.

TOP TEN BEST BUYS

At Wine Enthusiast we have a specific bottle price/rating formula for the special designation of Best Buy. This is always an important category, but especially in these hard times.

1. Honker Blanc 2007 Sauvignon Blanc (Napa Valley); $12. (From Tudal)
2. Vina Robles 2007 Sauvignon Blanc (Paso Robles); $14.
3. Chelsea Goldschmidt 2006 Merlot (Dry Creek Valley); $14.
4. Hayman & Hill 2005 Reserve Selection Merlot (Napa Valley); $15.
5. Mandolin 2005 Syrah (Central Coast): $10.
6. Lee Family Farm 2007 Silvaspoons Vineyard Verdelho (Alta Mesa/Lodi); $15.
7. TAZ 2007 Pinot Gris (Santa Barbara County); $15.
8. Fortress 2007 Sauvignon Blanc (Red Hills Lake County); $15.
9. Mirassou 2007 Pinot Grigio (California); $12.
10. Lake Sonoma 2007 Sauvignon Blanc (Dry Creek Valley); $15.

An interesting list, dominated by white wines. Hmm. Not sure what to make of that.  Maybe it’s easier to make a good, inexpensive white wine than an equivalent red wine. Or maybe I just found these crisp, (mainly) unoaked white wines a refreshment after so many clumsily oaked ones.

Anyhow, here’s wishing you and yours a happy, healthy 2009, and may your year be filled with peace, prosperity  — and fine wine!

Cheers!