What happened was that the banks around the world stopped lending overnight to each other. Why? Well the US government, in their wisdom, decided not to rescue the Lehman Bros Bank. Their reasoning's were that the bank did not have sufficient assets to back it. Considering that the now infamous, Freddie Mac and Fanny Mae rescue was done when their assets to debt ratio was 60 times, I repeat, 60 times, I hate to think what the state of Lehman Bros was. The reason they stopped lending to each other overnight was that now they did not know if the bank they had lent money to overnight, would be able to repay them in the morning or if it also had gone bankrupt. This created a total mistrust across all the major banks around the world for about a week. Then the Republic of Ireland came up with a brilliant idea - stop the jokes now - they decided to offer a government guarantee for all of their bank deposits. Some other governments followed and the same weekend an International Monetary Fund (IMF) meeting was scheduled in New York where the major governments, Finance Ministers and Federal Reserve Banks met, including our esteemed Wayne Swann. Those who had not followed with offering the government guarantee on cash deposits followed suit. The exciting part is that all at this meeting decided to co-operate and vowed to do so until this problem was resolved. So far this has resulted in government guaranteed bank deposits and the lowering of interest rates across many countries. This has resulted in stability returning to the finance sector and it seems to be continuing to improve on a daily basis.

AUSTRALIA'S REACTION AND ISSUES
Australia offered the government guarantee on deposits fairly quickly and they had no choice. If they didn't then any deposits held in our banks would have gone offshore to other banks that had a government guarantee. What our government took a while to figure out was what the consequences of these actions were. Well we now know that mortgage funds have been frozen as the fund managers are trying to stop a run on these funds. This is designed to protect the investors. When sanity properly returns, these funds will be unfrozen. In the meantime they will probably allow small redemption amounts on a regular basis.

WORLD BANK RANKINGS
Wayne Swann said at a recent lunch, that the top 4 Australian banks are ranked in the top 12 in the world. A top ranking official in the US Government, recently undertook a survey of the banking systems around the world, this survey showed that Australia, The Netherlands and a Scandinavian County (can't remember which one) had the best regulatory systems in the world and they have decided that they are going to base their new system on Australia. Another recent survey showed that Australian banks had the best regulatory system in the world, US was ranked 40 and UK was ranked 44.

HOW BAD IS IT?
The drop in the Australian All Ordinaries now is about the same, in percentage terms, as in 1987, however, there are many differences. In 1987 many companies had very high debt, they were not as regulated as they are now, and many went bankrupt. Today, maybe 5 listed companies are in trouble, the balance have been majorly downgraded on the back of fears of a global slowdown. To give an example of how incorrectly they have been downgraded, recently a research paper was undertaken on BHP. It said that if in the very unlikely event that BHP sales halved in the next 12 months, the share price should still be $50.00, not the current price of $25.00. Also any international corporation that sets up in Australia, must have a separate entity which is Australian based and comes under the Australian regulations, so even if their parent corporation is in trouble, the Australian ones are not usually. Yes, the US is in trouble - the definition of a recession is two negative quarters, the definition of a depression is two negative years. So far the US has not been declared in recession, however, all the people I know who have recently been to the US say that they are astonished by the number of people living in cars, and how badly they are upset with the Bush Government. Well they have just voted and record number of voters says it all. The UK has been declared in recession and their housing bubble has burst as well, but the difference is that they do not have a CNN equivalent telling the world how bad things are there. (This is the first time in history that CNN has been in every lounge room in the world, when there has been such a financial crisis and unfortunately the world continues to listen and believe in their sensational headlines. Cable TV is not a luxury in most countries, like it is here - and the US publishes on average 4 pieces of economic data per day for CNN to sensationalise).

 WHERE TO FROM HERE?
We are witnessing a once in a lifetime shift in economic power, world growth has been debt based generated from accessing the increased equity in the property values and spending it. It is now shifting to industrialised growth in Asia which will see China as the number one economy in the world, followed by India, followed by the US, with India becoming number one at a later date. Asia is going through an industrialised revolution, similar to the UK in the early 1800's. The industrialised revolution in the UK allowed the UK to be the number one economy for the whole 19th century. Asia's growth is mostly internal, and therefore is not reliant on the rest of the world for their growth. Their predicted growth rates are still between 6% and 9%, Australia's is 1.6% and the US, UK are predicted to be minus something. The problem is that the world has no previous results of Asia continuing to grow when the rest of the world isn't, and until this starts to happen, CNN will continue to spread the bad news. Australia has been positioning itself to be a major trading partner for Asia over the last fifteen years and all that hard work is now paying off. Not only does Asia require our resources, including minerals, energy and food, but also our expertise in infrastructure etc. It is these alliances that, I believe, will rescue Australia from a major slowdown. The Australian Ambassador to China said recently that currently 60% of China's energy is produced from coal, China's energy requirements are predicted to quadruple over the next 20 years and China's energy will still be obtained from 60% coal. The other thing that he said at the lunch was that China's savings are 7% of Gross Domestic Product (GDP) and that the Chinese Government is campaigning heavily for their people to spend more and not save so much so that their economy can continue to grow. China has in savings, the equivalent of the US national debt. In the early 1800's China produced 30% of the world's manufacturing, currently it is 10%. In India they are still selling 8 million mobile phones per month and they are about to release an AUD$3,000 car. The recent 20/20 cricket series where they spent millions of dollars on just one player also is evidence of how much money they are generating internally. India has a larger middle class than the whole of the US population, and half of these are aged under 25. This generation will be the source of the world's new technology over the next couple of decades.

WHAT DOES ALL THIS MEAN FOR YOU?
Invest your funds in Asia and Australia. The resources sector in Australia will recover much faster than our banks, as banks will continue to be hampered by the lack of funds and tighter lending practices as well as their tarnished reputation generally around the world. The only time the Australian market dropped this far in the last 100 years was in 1974 which was the oil crisis. The market started to drop in February and bottomed in November the same year. By December the following year the market was back to where it started from February 1974. The other four bear markets over the same time frame have not dropped as far but taken a little longer to recover. Please also remember that historical data is universal in showing that economic data is a lagging indicator of market behaviour. Whether the focus is on measures of confidence, employment or activity, the central message is that markets bottom before these measures reach their worst levels.
How to gauge if we are at the bottom:
• Large corporations commence to issue corporate bonds which they ceased to do early this year.
• US house prices stop falling.
• Asian economies show that they are continuing to grow.

SEEK ADVICE
A man contacted me in March this year, saying that he was an ex client and that we had made him good money in the early 1990's. He then went off and did his own thing and then found a fund which invested into US corporate debt and was run by a reputable and one of the largest fund managers in Australia. I had not heard of this particular fund so I undertook some research for him. He put his life savings of $900,000 into this fund in late 2004. At the time of contacting me, his question was do you think I should get out now? I replied yes even though the value had dropped to less than $300,000. In the process of him requesting his funds, the funds were frozen and they have just stated that their units are now worth $0.00. At WIN we have not had any of our clients in any of these types of funds.

WIN Financial Network Pty Ltd is a Corporate Authorised Representative of WealthSure Pty Ltd, Australian Financial Services Licensee, License Number 238030, ABN 93 097 405 108. The information contained within this document is of a general nature only. Whilst every care have been taken to ensure the accuracy of the material contained herein at the time of publication neither the author or Licensee will bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.