The decline is very disturbing, and discouraging. No doubt about it. This graphic is quite illustrative of various historical declines and so it has great comparative value. I think we’re all unable to look away from the car wreck, and are quite interested in asking “how bad is it?” compared to other historical bads. Human nature.

What this graphic doesn’t have, however, is any predictive value, which is what a word like “trajectory” implies. Where the economy will be 1, 3, 6, or 12 months from now simply does not have any dependence on the rate of decline that the stock market has seen in the past 6 months or so.

Instead, the future of the economy will rely on reaching a new equilibrium based on the post-bubble establishment of sound stable real estate values. We saw several years of 6-10% growth in prices, which was well above historical.

Sorry folks, but real estate price growth really does have to parallel average income growth. When real estate valuations have finished regressing to the historical mean (which fair warning, may mean falling below that mean by as much as 10 or 15 percent and then bumping back up to it before stabilizing), then things will begin to stabilize and allow growth from there.

Let me stress that I’m not trying to minimize anything, just contextualize it. I grew up with stories about speculative bubbles, and they were usually spoken of as something that used to happen in the bygone cowboy days of capitalism. Oops. Everything old is new again. Bummer.

Now, in the last 15 years, we have seen the return of these bubbles, which are destructive far beyond the scope in which they occur. The popping takes down way too many bystanders in relatively unrelated areas. Now we’re in the period where the conventional wisdom of the past reasserts itself with a vengeance, and as painful as that is, it’s very necessary. We all need to look askance at the blithe BS of salesmen plumping risky high-yield schemes.

The hangover period is the only time when those who preach temperance stand any chance of being heeded. Risk is back. In fact it was never gone.We simply chose to look away.

Given where we are today, I think we’re definiately headed below 7000 on the Dow, probably lower.