Filed under: China, Private equity, Commodities, Oil, Headline news, Blackstone Group L.P (BX), Housing, Federal Reserve
This post is part of AOL Money & Finance’s Best & Worst of 2007. Be sure to cast your vote for the money story of the year.
As we approach the end of 2007, we now have a really tough question to answer. What is the Money Story of 2007? What are the candidates?
The Boom and Bust in Private Equity Buyouts
As we entered 2007, no one could envision the activity with private equity firms around the world. Private equity firms were supposed to be the new Masters of the Universe, ushering in a new Gilded Age not seen since 1920s. We saw this with the initial public offering of the Blackstone Group, the premiere private equity group. This was followed by a series of public and semi-public offerings by other organizations, such as Apollo Group.
However, the new Roaring ’20s was relatively short-lived with the credit crunch. This caused most merger activity, including corporate buyouts, to come to grinding halt. Blackstone Group (NYSE: BX) now trades substantially below its high price. Who could guess that private equity would experience a boom and bust all in the same year? However, before you dismiss private equity as an element of the past, remember that most of these firms still have substantial cash available ready to invest when conditions are ripe.
The Housing Crisis and the Mortgage Meltdown
As the end of 2006 approached, many in the real estate industry were predicting that the housing slowdown had reached bottom and the situation was destined to improve in the coming year. However, things did not quite develop according to plan.
The housing slowdown of 2006 developed into the housing crisis of 2007. Home prices continued to deteriorate as new supplies of homes reached the market. The only problem is there were no buyers. Prices also dropped as well.
Then, just as people thought that nothing could get worse, it did. The credit crisis arrived. Initially, it affected only subprime mortgages. Then, the focus was on adjustable-rate jumbo mortgages. However, bankers became extremely reluctant to lend to anyone except the ideal credits. This was the true knock-out punch to the housing industry. Even if you wanted to purchase a home, there was no guarantee that you could get a mortgage.
The New Low of the U.S. Dollar and the New Highs of Oil and Gold
As the housing crisis and the mortgage meltdown hit the U.S. economy, the Federal Reserve lowered the Federal Funds Rate target by 0.75% to help the situation. However, the European Central Bank, the Bank of England, and the Bank of Japan saw no reason to follow the Fed’s move, keeping their own interest rate targets unchanged. This sent the U.S. dollar to new lows against the euro and other major currencies.
This resulted in gold reaching new highs. That is at least when the metal is denominated in U.S. dollars. Oil has reached new highs as well. Several of the Gulf oil kingdoms have discussed breaking the link between their currencies and the dollar as a result.
Some are predicting that the United Says has seen its ideal days with the dollar eventually losing its status as the world’s reserve currency. Even rappers and supermodels have gotten into the act. The euro is now the currency of choice for gangster rap videos, and Gisele Bundchen has let the world know that the U.S. dollar is not acceptable payment for her services.
Before we begin planning for a return to the stagflation of the 1970s, remember that the United States experienced similar problems in the late 1980s and early 1990s just before the great bull market of the late 1990s.
China and the Recalls of 2007
Whoever handled damage control for China’s public relations in 2007 might want to consider looking for a new job. China experience product recalls in children’s toys and human and pet food.
It will be interesting to see how the lawyers handle this one. Will we see a class-action suit filed in the name of dogs in 2008? Only time will tell.
China responded by bringing up the subject of Mad Cow disease in the United States and restricting American beef imports.
Who knows where this will end? No one knows. However, Chinese goods still continue to sell well here, and the government has formed a committee to analyze the situation.
Now, which one is the Money Story of 2007? Only you know the answer! So vote today.
What about the Money Story of 2008? Do I have any predictions for the future? Just one. It will probably be something that no one is expecting. Remember, none of the candidates above were forecast by anyone.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve’s impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
Share the reasons for your choice for money story of the year in the comments, or let us know about any contenders we overlooked. Also be sure to see the rest of AOL Money & Finance’s Ideal & Worst of 2007.
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