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From: O'Neill, Jim [MD]

Sent: Friday, November 11, 2011 3:18 PM
Subject: What Was The Most mportant Thing This Week?

What Was the Most Important Thing This Week?

So once again, what a week. To most people, there has only been one thing that has mattered, taly. have been
conducting a small poll throughout the week as went about my usual crazy schedule. Since Wednesday, at all the
events spoke at, asked, "There have been two really important things that happened this week, what were they? taly
came up immediately as the most popular first choice. n many cases, angles on the taly issue came up as 2
, 3
too. For the second issue, there were a host of options, with one person amusingly suggesting the debate about
whether England's football team should be allowed to wear poppies on their shirts in the probable embarrassment
against Spain this weekend. Seriously though, as only one participant answered correctly, the second important event
was Chinese CP inflation.

China: The Latest Data and the BRICs.

This week, we saw the usual monthly release of most of the important data in China, which again showed signs of
slowing momentum in the economy. The data also showed slowing inflation and signs of a continued narrowing in the
trade balance. Also important was the monetary data. While M2 showed further softening, the data also contains hints
of stabilization and more high frequency signs that suggest monetary signals are shifting. While many debate whether
China's "soft landing will allow monetary easing, at the margin, it looks as though they are already tinkering.

China's trade surplus widened over the previous month, but by a much lesser degree than expected. Moreover, with 10
months reported, the annualized trade surplus is not much over 2 pct of GDP. Exports are weaker than expected and
imports are stronger. n my view, this continues what appears to be a relatively clear trend. t continues to baffle me why
so many Western commentators and policymakers seem to ignore pretty strong evidence that this "global imbalance
has turned significantly for the better.

The latest inflation data confirms what most forecasters have believed. Some of the pickup in Chinese inflation earlier
this year was highly likely to reverse as base effects from late 2010 diminished. Together with a turnaround in some
domestic food prices and the consequences of a slowing economy, Chinese inflation is heading back below 5 pct,
possibly even close to 4 pct by year end, and back below in early 2012. As have written about repeatedly since the
Summer madness in markets, this development is extremely important for both China and the rest of the world. f
inflation continues to ease, then the likelihood of a soft landing rises, and China will be able to achieve a shift more
towards domestic consumption-led growth. As am fond of saying to people, in 2011, the change in China's nominal
GDP in US$ will be the equivalent of creating three new Greek economies. n the context of the above question and
what is important this week, realized that, along with the other three BRC nations, the probable change in the US$
value of their combined GDP in 2012 is likely to be close to $2 trillion. They will effectively create the equivalent of
another taly.

This is what the BRC countries can do to help the world, and especially troubled Europe, way more than any specific
steps to invest in European beleaguered bonds.

On Friday morning, our money market team hosted a client breakfast about China and was joined by the head of our
Chinese asset management business, Wang Yi, to lead the discussion, which turned out to be very interesting and quite
broad. We discussed all the usual issues and many more. And, as said in concluding, Yi and his team have a very
exciting future ahead of them and for us.

The US Appears to be Doing Just Fine Too.

Another reason why have been more sanguine than many about the European mess is my views on the US. Although
the US economy has turned out to be much softer than some optimists, myself included, believed at the start of 2011, it
is actually stronger than most concluded by the time the mayhem broke out in August. Amongst many useful coincident
and leading indicators, this latest week's drop in job claims to 390,000 is as good as many pieces of evidence could
cite. t seems to me that, while there is considerable focus on the budget issues, it wouldn't take much in terms of
successful policies to turn the housing market around. And, if it did, then it wouldn't take much for people to start
thinking more optimistically about the US economy.

An "ok US, together with a Chinese "soft landing, is the key to world equity markets in my view, and it will take a lot of
persistent bad news from elsewhere to avert this. Unfortunately, the Euro Area keeps trying hard to provide it.

ItaIy and a HighIy TroubIing Week for EMU.

For a couple of days this week, it actually felt as though Europe's post-war project was nearing the end of the road and,
as a result, emotions have been running high. For those that never believed it was a good idea, some have been
expressing a mood of jubilance. For many involved in its creation, this has not been a good week. got more caught up
in the middle of this than usual as a result of a newspaper interview, where the headline distorted what had actually
said, claiming that we were predicting a break up. While this was not a fair reflection, did say that some major issues
were now on the table and needed to be recognized. The EMU, as created, has not really worked and needs to change.
t is quite clear that many countries should not have been allowed to join. t is also clear that the Growth and Stability
Pact has not worked. Policymakers need to be more open in at least acknowledging this, and then doing something
about it. f all of this wasn't enough of a challenge, taly's issues have become front and centre. taly is no Greece.
ndeed, although the BRCs can create another taly in 2012, taly is close to 4 times the combined size of Greece,
reland and Portugal. ts total debt is close to 25 pct of the Euro Area GDP. Quite simply, taly cannot be allowed to stay
in the position it found itself this week.

On top of this, taly is an important historical player in creation of not just the EMU, but also the EU. taly was the first
country that was allowed to analyze professionally some 30 years back and have retained a lot of affection for it as a
result. ('ve not enjoyed some evenings in Milan and Turin watching United getting a good occasional lesson over those
years though.) When it came to EMU in 1998, it was quite clear to me that, despite many objections, the EMU couldn't
start without taly, primarily due to its size and the key fact that large swathes of Northern taly are just as competitive as
parts of Germany and France. This remains the case today, and it is tough to see the persistence of the EMU without
taly involved. So, while can see the case for an EMU without some others, and despite all of taly's complications,
can't see an EMU without taly. At the same time, can't see taly sustaining life with 6-7 pct 10-year bond yields. So
something has to give. Let's see what taly brings over the weekend, and how Frankfurt, Berlin, Brussels and the rest of
us all react.

A Moment on Mexico.

had a pleasant diversion from all the European madness with a visit from a Mexican delegation. While they didn't quite
go as far as some Mexican policymakers and recommended that BRC become BRMC, they were highly intrigued about
our "Growth Market concept and, of course, the fact that we included Mexico. Listening to their views on a couple of
critical issues, it added to my suspicion that the decade we have started could be a better one for Mexico than the past
one. At the core of this suspicion is the issue of the RMB and Chinese competitiveness. This conversation adds to my
belief that Mexico is getting back something that was lost to China in the past. And of course, a certain Chicharito is from
that country, which helps.

Anyway, let's see what the next twist and turn brings. Good luck!

Jim O'Neill
Chairman, Goldman Sachs Asset Management

Viewpoints are also available on our public website: Monthly nsights and Strategy Series are
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