Yuan

• Berezovsky Died of Hanging Without Struggle, Police Say (BBG)
• BRICS Nations Plan New Bank to Bypass World Bank, IMF (BBG)
• China pledges more investments to Africa (FT)
• BOJ's Kuroda signals targeting longer-dated JGBs (Reuters)
• North Korea orders artillery to be combat ready, targeting U.S. bases (Reuters)
• Supreme Court to take up gay marriage for the first time (Reuters)
• U.S. Cracks Down on 'Forced' Insurance (WSJ)
• Japanese courts press Abe on electoral reform (FT)
• Vietnam accuses China of attack on fishermen in South China Sea (Reuters)
• Italy's High Court Overturns Knox Acquittal (WSJ)
• Facebook’s Zuckerberg Said to Explore Forming Political Group (BBG)

• Cyprus Salvaged After EU Deal Shuts Bank to Get $13B (BBG)
• Last-minute Cyprus deal to close bank, force losses (Reuters)
• Anxious, angry Cypriots face uncertain future (Reuters)
• Spain Brings the Pain to Bank Investors (WSJ)
• First Switzerland now... U.S. Seeks Answers in Liechtenstein on Tax Cheats (BBG)
• Rebel Free Syrian Army founder loses leg in Syria blast (Reuters)
• European Stocks Rise on Cyprus Deal as Italian Bonds, Crude Gain (BBG)
• Michael Dell Likely to Sweeten Buyout Bid to Save Legacy (BBG)
• Bankers’ pay premium is narrowing (FT)
• Surgery Restoring Penis After Prostate Cancer Increasing (BBG)
• Silent or supportive, conservatives give gay marriage momentum (Reuters)

China’s Government knows it's on thin ice and so is doing three things to try to mollify the Chinese population:

1. Launching a very public campaign to crack down on corruption (to mollify the populace).
2. Taking steps to tame inflation (slowing financial speculation and importing massive quantities of commodities to attempt to control prices).
3. Curbing its stimulus efforts.
4.  

This is precisely the formula that resulted in the Arab Spring in the Middle East: increased costs of living and a corrupt Government. Could China be heading for a similar development? It sure looks like it.

• Cyprus works on Plan B to stave off bankruptcy (AP)
• Cyprus seeks Russian bailout aid, EU threatens cutoff (Reuters)
• Freddie Mac Sues Multiple Banks Over Libor Manipulation (BBG)
• Bernanke Seen Keeping Up Pace of QE Until Fourth Quarter (Bloomberg)
• Italian president seeks way out of political stalemate (Reuters)
• Chinese factories struggle to keep staff (FT)
• South Korean banks, media report network crash (CBC)
• BlackBerry Inventor Starts Fund to Make Star Trek Device Reality (Bloomberg)
• Osborne Should Be Fired, Voters Say in Pre-Budget Poll (Bloomberg)
• Obama Begins First Visit to Israel as President (WSJ)
• Anadarko finds ‘potentially giant’ oilfield (FT)
• Britain's Osborne boxed in by austerity on budget day (Reuters)
• MF Global reaches agreement with JPMorgan (FT)

Years ago we wrote of a not so far off future in which martial law, economic collapse, and the destruction of civil liberties stood imminent.  We related our views on the propaganda rhetoric of the SPLC, and how they were using false association to tie liberty groups to any deviant organization they could think of, including racists and domestic terrorists, in order to condition the American public to react to our message with immediate contempt. It became clear to us then that the SPLC, which had become the propaganda wing of the widely reviled Department Of Homeland Security, was helping set the stage for a paradigm shift in the U.S.  This shift would obviously include economic and social disruption, as well as political turmoil beyond anything our nation has seen for over 150 years.  But most importantly, it would pave the way for certain elements of the American populace, namely those who are awake, aware, and outspoken, to be labeled “enemy combatants” dangerous to the state. The SPLC, of course, has so far utterly failed in their efforts to stop the rise of Constitutional activists.  By their own admission, “patriot groups” have expanded exponentially since 2008, and continue to develop freely even in the face of wildly absurd character attacks taken from the amoral (immoral) guidebook of Saul Alinsky himself.  The truth, once realized, is difficult if not impossible to stop. Unfortunately, the establishment understands this as well...

Until this weekend's Cyprus black swan, the biggest red flag facing the market was the threat of persistent Chinese inflation, manifesting itself in very sticky and upward rising home (and many other) prices. In fact, quite recently the new Chinese leadership encouraged "bold" and aggressive steps to tame real estate inflation and instituting fresh curbs on house appreciation "speculation", which is a natural byproduct in a nation that has an underdeveloped and untrusted capital market - unlike in the US where the S&P absorbs all the Fed's reserves (with no money multiplier impact) keeping inflation elsewhere largely tame. It is this inflation that has kept the PBOC not only on the global "reflation" sidelines, but forced it to withdraw liquidity with several record repos in the days following the Chinese new year. It is also the downstream effects of this inflation that has pushed the Chinese stock market red for the year. So just how much of an issue is the soaring Chinese real estate market as global liquidity makes its way to triplexes in Shanghai? The chart below explains it all.

Yi Gang, Vice Governor of the People's Bank of China (PBOC), recently made the headlines with his comments on Chinese gold reserves. On Wednesday, Mr. Yi stated that China's gold reserves remain static at 1,054 tonnes, and suggested that a sizeable increase in those reserves would be unlikely in the future. "We need to take into account both the stability of the market and gold prices," Mr. Yi stated, adding that as the world's largest gold producer and importer, China produces about 400 tonnes of gold annually, and imports an additional 500 to 600 tonnes of gold every year. "Compared with China's 3.3-trillion-U.S.-dollar foreign exchange reserves, the size of the gold market is too small," Yi said, rejecting speculation that China would further diversify its foreign reserve investments into the precious metal. "If the Chinese government were to buy too much gold, gold prices would surge, a scenario that will hurt Chinese consumers ... We can only invest about 1-2 percent of the foreign exchange reserves into gold because the market is too small," Yi stated.

• Dimon’s ‘Harpooned’ Whale Resurfaces With Senate Findings (BBG)
• Greece and lenders fall out over firings (FT) - as predicted 48 hours ago
• Dallas Fed Cap Seen Shrinking U.S. Banking Units by Half (BBG) - which is why it will never happen
• Xi elected Chinese president (Xinhua)
• Russia Bond Auction Bombs as ING Awaits Central Bank Clarity (BBG)
• U.S. and U.K. in Tussle Over Libor-manipulating Trader (WSJ)
• Chinese firm puts millions into U.S. natural gas stations (Reuters)
• In Rare Move, Apple Goes on the Defensive Against Samsung (WSJ)
• Berlin Airport Fiasco Shows Chinks in German Engineering Armor (BBG)
• Ex-PIMCO executive sues firm, says was fired for reporting misdeeds (Reuters)
• Bank of Italy Tells Banks in the Red Not to Pay Bonuses, Dividends (Reuters)

Given China’s rapid rise in all aspects of national power, as well as its reluctance to release specific details about many important aspects of its military spending, its annual budget announcement rightly attracts worldwide attention. Last week, China revealed its projected 2013 official defense budget: 720.2 billion yuan (roughly $US114 billion), a figure that continues a trend of nominal double-digit spending since 1989 (the lone exception: 2010). Although China’s limited transparency about specific defense budget line items matters, it shouldn’t distract observers from seeing the bigger picture concerning China’s military development: The People’s Liberation Army (PLA) increasingly has the resources, capabilities, and confidence to attempt to assert China’s interests on its contested periphery, particularly in the Near Seas (Yellow, East, and South China Seas). This development has the potential to seriously challenge the interests of the U.S., its allies, and other partners in the region, as well as access to and security of a vital portion of the global commons—waters and airspace that all nations rely on for prosperity, yet which none own. That’s why the PLA’s development matters so much to a Washington located halfway around the world.

While FX Reserves may not exactly be freely spendable ready cash, they are often used a proxy for a nation that is 'wealthy'. It seems, however, from the following chart that in fact the FX reserves of the world shows a different picture than Americans might like to consider. The highest level of reserves are split between currency manipulators and resource-rich nations. China and Japan top the table, according to Bloomberg, and Saudi Arabia and Russia are rising fast up the league tables of FX horders. Just as notable is that China's FX reserves have swelled to $3.31 trillion at the end of 2012 from $286.4 billion a decade ago, representing a pace of $829 million per day. The problem is that recently China has hardly had the same appetite for the USD it exhibited in prior years. With the world apparently devaluing against a more stoic inflation-anxious China, it would seem Japan's 'horde' will dwindle fast if they ever do anything but jawbone.

Average daily trading combined volumes on the three main gold contracts on the Shanghai Gold Exchange in the first two months of the year jumped 24% on the year, according to Reuter’s calculations.  "The strong physical demand in China is the main reason behind gold's resilience," a Beijing-based trader told Reuters. Physical demand prospects out of China remain positive in the weeks ahead, UBS AG said  according to Bloomberg. China is very vulnerable to a property crash and its own economic crisis. The Chinese stock market has performed very poorly in recent years and Chinese people realise the importance of gold as a store of value.

• Cardinals head to conclave to elect pope for troubled Church (Reuters)
• Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
• Ryan Plan Revives '12 Election Issues (WSJ)
• Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
• Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
• CIA Ramps Up Role in Iraq (WSJ)
• Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
• SEC testing customized punishments (Reuters)
• Judge Cans Soda Ban  (WSJ)
• Hungary Lawmakers Rebuff EU, U.S. (WSJ)
• Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
• Funding for Lending ‘put on steroids’ (FT)
• Investigators Narrow Focus in Dreamliner Probe (WSJ)
• With new group, Obama team seeks answer to Karl Rove (Reuters)

A few observations about growth and policy backdrop that is shaping the investment climate. It is a large overview that may be helpful to start the week.

Chinese Foreign Minister Yang Jiechi said Saturday that "Japan needs to face up to reality, and take real steps to correct its mistakes... so as to prevent a further escalation," with regard the demand that Japan reverse its nationalization of the small islet chain of the Senkakus. In some of the strongest rhetoric yet, The Japan Times reports that the Chinese minister said Japan's 'single-handed' actions so far have "caused great damage to China-Japan relations and undermined stability in the region," and urged Tokyo to "make concrete efforts" to prevent fraught bilateral ties from spiraling out of control. As the reigns of control in China continue to be handed over (with Yang expected to become state Councillor for foreign affairs), we suspect the situation is far from resolved - especially with Shinzo Abe fighting a war on another front (that China is likely not pleased with either).