After $150 Billion Buying Binge, "Tokyo Whale" Seen Paring Back ETF Purchases In 2018

A few months ago, we noted that the Bank of Japan had decided to throw every textbook out of the window and crank their plunge-protection to "11"after reports surfaced that they owned a staggering 75% of Japan"s ETFs.

The BOJ first started their buying spree in December 2010 - when they held no ETFs at all - and have since accumulated some $150 billion in aggregate holdings.  The buying was all as part of unprecedented "economic stimulus" which has undoubtedly contributed to the Nikkei 225 Stock Average surging roughly 125% since December 2010.

Here"s a quick graphical recap of the program courtesy of Bloomberg...

...and another look which shows the central bank owns three quarters of ETFs by market value...

 

...all of which has resulted in the following bubble stock market appreciation...

Not surprisingly, since the program started, everyone from the head of the country’s stock exchange to the chairman of the Japanese Bankers Association has questioned the ETF program’s size and whether it artificially depresses volatility.

Now, with the Nikkei surging to 25 year highs, analysts are increasingly saying it"s time for the BOJ to put this specific component of their many controversial bubble-blowing policies to rest.  Per Bloomberg:

Sometime next year, the BOJ will cut its annual buying target for domestic exchange-traded funds by as much as a third from the current 6 trillion yen ($53 billion), says Toru Ibayashi, head of Japanese equities at UBS Wealth Management in Tokyo. Soichiro Monji of Daiwa SB Investments Ltd. expects a similar reduction, but by the end of March.

 

“Four trillion yen,” UBS’s Ibayashi predicted. “And everybody will understand.”

 

"Fear of deflation was behind the 6 trillion yen target,” Daiwa SB’s Monji said in an interview. “We’re no longer in that kind of environment. Risks are now skewed toward the upside, rather than the downside. It’s hard for the central bank to justify its buying spree.”

 

“Given the circumstances at this point in time, it is difficult for the BOJ to keep buying ETFs at six trillion yen per year,” Ibayashi said.

Jonathan Garner, chief Asia and emerging markets equity strategist at Morgan Stanley in Hong Kong, described the ETF purchases as “perhaps the most controversial part” of the bank’s stimulus program which includes everything from negative interest rates and yield-curve control to buying tens of trillions of yen of bonds each year, on top of its stock purchases. 

Of course, not everyone agrees as Naoki Kamiyama, chief strategist for Nikko Asset Management Co. in Tokyo, and Hisao Matsuura, a strategist at Nomura Holdings Inc., both saying the BOJ won’t cut its ETF target anytime soon as "it would hurt investor confidence and make a pickup in inflation much less likely..."

You know, because every central bank"s primary objective is to boost "investor confidence" by creating massive asset bubbles that make the masses feel richer...at least until the marginal stimulus fails and the whole ponzi comes crashing down...

China Deleveraging Hits Corporate Bonds As Cascade Effect Begins

Following the market lockdown during October’s Party Congress, many commentators were disturbed by the continued rise in Chinese government bond yields as we returned to “business as usual”, with the 10-year rising to 4%. At the beginning of this month, we discussed the sell-off (see “China: Shadow Bank Inflows Are Critical To Sustain The Ponzi…But They’re Falling”) and noted a useful insight from the Wall Street Journal.

An important anomaly to note about the bond rout: as government bonds sold off, yields on less-liquid, unsecured Chinese corporate bonds barely moved.

 

That is atypical in an environment of rising rates - usually, bond investors shed their less-liquid holdings and hold on to assets that are more easily tradable, like government debt.

The question was…why had corporate bond yields barely moved? The answer, according to the WSJ, was that China’s deleveraging policy led to redemptions in the shadow banking sector, e.g. in the notorious $4 trillion Wealth Management Products (WMP) sector. Faced with redemptions, shadow banks had to sell something…quickly…and highly liquid government bonds were the “easiest option”. Furthermore…and this is potentially significant…the WSJ noted.

Meanwhile, the nonbanks have held on to their higher-yielding corporate bonds, which at least have the benefit of helping them to maintain high returns.

Not any more (see below).

We agreed with the WSJ’s explanation at the time, but noted that the government bond sell-off was actually a sign of the unravelling of the WMP Ponzi scheme. The Chinese authorities are wise to the Ponzi which is why they announced the overhaul of shadow banking and WMPs last Friday (see “A ‘New Era’ In Chinese Regulation Means Turmoil For $15 Trillion In China"s ‘Shadows"). However, the new regulations don’t kick in until mid-2019, a sign to us that when they looked “under the bonnet”, they didn’t like what they saw.  

We doubt that China can achieve an orderly restructuring of its shadow banking sector, never mind its much larger credit bubble. A sign that we have taken another step towards China’s “Minsky moment” is that the bond sell-off has spread to the corporate bond market. The chart shows how spreads versus sovereign bonds have blown out during the last few weeks.

Bloomberg noted how the 10-year yield on China Development Bank notes, a quasi-sovereign issue, closed above 5% for the first time since 2014 today while, in another report, it put the corporate bond sell-off in a wider context.

China’s deleveraging campaign is finally starting to bite in the nation’s corporate-bond market, a shift that will make 2018 a clearer test of policy makers’ appetites to let struggling companies fail. Yields on five-year top-rated local corporate notes have jumped about 33 basis points since the month began, to a three-year high of 5.3 percent, according to data compiled by clearing house ChinaBond. Government bonds, which have far greater liquidity, had already moved last month as the central bank warned further deleveraging was needed.

With more than $1 trillion of local bonds maturing in 2018-19, it will become increasingly expensive for Chinese companies to roll over financing -- and all the tougher for those in industries like coal that the nation’s leadership wants to shrink. Two companies based in Inner Mongolia, a northern province that’s suffered from a debt-and-construction binge, missed bond payments on Tuesday, in a demonstration of the kind of pain that may come.

Bloomberg tries to put a positive spin on the corporate bond sell-off, defaults are healthy in terms of differentiating good and credits.

In the long haul, that all may be good for China. Allowing more defaults could see its bond market become more like its overseas counterparts, with a greater differentiation in price. And that could mean it channels funds more productively. “The deleveraging campaign and the new rules on the asset management industry will further differentiate good and bad quality credits, and make the onshore credit market more efficient,” said Raymond Gui, senior portfolio manager at Income Partners Asset Management (HK) Ltd. “Weaker companies will find it harder to roll over their debts because funding costs will stay high.” Gui predicts yields will keep climbing. The average for top-rated corporate bonds is already 2.2 percentage points above what investors demanded to hold them in October last year.

The rise comes as authorities show greater determination to shift the economy onto a more sustainable footing, with less debt. The latest move was a plan to discipline the asset-management industry, including banning guaranteed rates of return. People’s Bank of China Governor Zhou Xiaochuan graphically depicted the risk of excess leverage, by evoking a "Minsky moment," or sudden collapse of asset values. Key to that endeavor will be scaling back some of the implicit credit guarantees that have backed a broad swathe of Chinese borrowers. The country only started allowing corporate defaults in 2014. Last year there was a record, coming in at at least 29. It’s unclear yet whether that total will be met in 2017.

Bloomberg spoke to an analyst who also believes the recent sell-off in Chinese bonds is more to do with separating the “wheat from the chaff”, rather than anything more profound.

"We expect the divergence of performance between different bond categories (Chinese government bonds, policy bank bonds and credits) to become more prominent into 2018," Albert Leung and Prashant Pande, rates strategists at Nomura Holdings Inc., wrote in a note Wednesday.

We disagree. From our perspective, it looks like early signs of cascading sell-offs within Chinese financial markets, which have long been abused by excessive leverage and Ponzi characteristics. Talking of which, the Shanghai Composite Index suffered its biggest one-day drop since June 2016.

What caused the sell-off? According to some commentators it was fear that the local bond rout was getting out of control...hence "cascade". We noted last week that traders had been stunned by the official warning from Beijing that some stocks - in this case Kweichow Moutai - had risen "too far, too fast". Zhengyang Shen, a Shanghai-based analyst at Northeast Securites commented.

"The decline in Moutai has triggered selloffs in some of this year"s best performing stocks."

Which sounds an awful lot like another example of cascading selling...

Modi Throws $32bn At Indian State Banks – Share Prices Surge

Share prices of Indian state banks surged as the government announced it would hand over $32bn to recapitalize the sector. According to Reuters, the motivation was a bid by Prime Minister Narendra Modi to tackle a major drag on the economy that has frustrated his attempts to boost growth.

Once the world’s fastest-growing major economy, India has seen its growth rate plummet to the lowest in three years, far below levels needed to create enough jobs to absorb the million Indians joining the work force every month. Modi’s government has tried to respond by stepping up public spending, but the slowdown has stressed its finances, making it imperative that private investment picks up the slack. Officials privately admit they have struggled to revive private investment because state-owned banks, which provide much of the credit in the economy, are saddled with a mountain of bad debt…

 

Twenty-one state-run banks account for more than two-thirds of India’s banking assets. But they also account for a bulk of the record 9.5 trillion rupees ($145 billion) of soured loans. In addition to repairing their balance sheets, the banks need billions of dollars in new capital to meet global Basel III banking rules, due to fully kick in by March 2019. Fitch Ratings estimates Indian banks will need $65 billion of additional capital by March 2019 to meet Basel III global banking rules. Moody’s expects the top 11 state lenders alone will need nearly $15 billion.

That’s what we call a trend reversal…

Here is Bloomberg’s take...

India’s government has won a resounding reception from investors and credit-ratings firms for its unprecedented pledge of 2.11 trillion rupees ($32 billion) in capital for the country’s beleaguered state banks.

The move, which drove an index of government-run banks up as much as 26 percent, is part of Prime Minister Narendra Modi’s goal to help lenders meet tighter capital-reserve requirements, as slower economic growth and falling demand erode borrowers’ ability to repay loans. Soured debt is now the highest since 2000, hampering credit expansion that’s needed to spur Asia’s third-largest economy.

“The proposed infusion is a sizable jump over what had been pledged before as India is seeking to plug a large part of the core equity gap at the state-run banks,” said Jobin Jacob, a Mumbai-based associate director at Fitch Ratings Ltd. This addresses “weak core capitalization, one of the key drivers for our negative outlook on the South Asian nation’s banking sector.”

Moody’s Investors Service analyst Srikanth Vadlamani said the move is a “significant credit positive” for India’s state-run banks. The amount of capital pledged is enough to address the lenders’ solvency challenges and recapitalize them adequately, Vadlamani, who is vice president of the financial institutions group at the unit of Moody’s Corp., said by phone.

In the end, there was no alternative than for the Indian government to provide additional capital. While investors have shunned the state-owned banks due to poor profitability and asset quality, the situation was further complicated by the requirement for the state to maintain at least 51% ownership. Ratings agencies, Fitch and Moddy’s have been highlighting the weakness in capital ratios.

Delving into some of the details of the capital injection, Bloomberg explains, the government will sell 1.35 trillion rupees of recapitalization bonds, while banks will raise another 760 billion rupees through “budgetary support” and from the markets, according to the plan announced Tuesday. The funds vastly outstrip the 700 billion rupees that India had pledged two years ago to inject by 2019, and is likely a recognition that the government had underestimated the impact ballooning bad loans would have on credit growth…

“These funds will help in efficiently managing risk and credit capital-related requirements of the banks,” State Bank of India Chairman Rajnish Kumar said in an emailed statement.

Bloomberg summarised market reaction in stream of consciousness fashion.

Analysts say the step is “sentimentally positive” and will help lenders meet over 70% of their capital needs but lending won’t grow immediately. Punjab National Bank jumps as much as 40%, most on record; Bank of Baroda surges as much as 29%, State Bank +25%. Recapitalization amount is “huge,” will help banks meet higher provision requirements under new accounting rules starting April 2018 Citi (Manish Shukla, Abhishek Sahoo) Timely recapitalization of government banks will boost capital adequacy, even after they make provisions for soured loans However, private sector demand -- muted over past few years -- has to revive for loan-growth to recover CLSA (Aashish Agarwal, Prakhar Sharma, Aditya Jain) Plan should help satisfy more than 70% of lenders’ needs required for lending to increase, absorb “haircuts” on stressed loans Punjab National Bank, Union Bank raised to buy from sell JEFFERIES (Nilanjan Karfa) India plan is “sentimentally positive” and makes all state banks “a basket trade” Bank lending won’t improve immediately, but it “partially solves” supply of capital flow; stoking demand needs to be worked at separately MORGAN STANLEY (Anil Agarwal, Sumeet Kariwala, Subramanian Iyer) State lenders can now “take the required hits” arising from soured loans, make proper provisions, and move ahead Insolvency rule was helping bad-loan resolution, recapitalization will accelerate it NOMURA (Adarsh Parasrampuria, Amit Nanavati, Riddhi Jain) “Big state banks recap” is a game-changer; expect re-rating in state-owned banks Infusion “highly dilutive” but very positive for FY19 adjusted books

As ever, you can’t please everybody as Reuters noted...

Mohan Guruswamy, an economist in New Delhi, said the government should have taken action three years ago to revive the banking sector. "Now it"s more expensive, and we will not see results soon," Guruswamy said.

 

Mo' Momo, Mo' Worries - Quants Fear Hedge Funds' "Outsized Exposure" To Market Momentum

Better lucky that smart? Managers of active funds are now extremely concentrated in the strongest parts of the US equity market with "momentum" massively outperforming the market in August (and ramping higher off the North Korea missile launch lows).

Bloomberg"s Dani Burger notes that with more than half of their bets on high flyers like technology and online retailers, hedge funds have near-record exposure to momentum trades, a strategy that’s up 2.6 percent in August even as the S&P 500 heads for its worst month since the election. The resiliency of the bet was on display Tuesday, when Alphabet and Amazon opened nearly 1% lower before rebounding along with Apple to deliver the S&P 500’s biggest intraday reversal in 10 months.

“It’s like these things are like gold -- it’s almost like a safe haven,” said Mark Connors, the global head of risk advisory at Credit Suisse Group AG.

“This resilient price action in equities is commensurate with the constructive positioning we see across hedge fund strategies and speaks to the persistent positive sentiment in 2017.”

The much-followed FANG Stocks soared over 2.1% off the opening lows...

The 50 most popular hedge fund longs...

Bloomberg"s Burger asks, how long can it last?

That"s a question that’s becoming more urgent for hedge funds that have finally caught up to a market where gains are delivered by an ever-narrowing cohort of stocks. Volatility has been rising amid renewed geopolitical tensions, signs of uneven economic growth in the U.S. and the threat of further interest-rate hikes by the Federal Reserve.

What’s more, the very nature of following momentum poses its own pitfalls. The strategy is one of the more volatile factors, and when rotations occur, pain seeps through as leaders quickly move to the back of the pack.

All that points to a hedge fund love affair that’s headed for heartbreak, according to Joseph Mezrich, head of U.S. quantitative analysis at Nomura Instinet LLC.

“We are concerned about this outsized exposure,” Mezrich, wrote in a note to clients. “The last time momentum exposure was this high was in 2013-2014, which led to a sharp decline in fund performance when momentum collapsed. Fund managers may be setting themselves up for a repeat.”

So what happens next? We leave to CS" Mark Connors...

"You can’t manage your book for a big deleveraging... Momentum is an escalator up and an elevator shaft on the way down. But managing that is what active managers do for a living.”

Barclays Seeks $455,000 For 'Gold' Equity Research Package; Includes 'Field Trips' And 'Occasional' 1x1's

Literally no one knows the true "value" of equity research, not even the investment banks that are selling it.  Up until now, equity research has been treated as a "freebie" given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.

Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true "value", as defined by institutional clients" maximum willingness to pay for reports, may be much less.  Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."

Be that as it may, with deadlines right around the corner, 2018 offer prices for equity research in Europe are starting to roll in and we suspect there may be a little sticker shock among institutional clients who are used to having unlimited access to all research in return for placing a few trades each year.  Just a few weeks ago we noted that Credit Agricole offered their "Premium Research Package" for the bargain basement price of 400,000 Euros.  Nomura, on the other hand, played the volume game by giving away their "BTFD" reports for just $134,000 a year.

Now, we can add Barclays to the list. Coming in at $455,000 per year for their "Gold" package, it"s hard to imagine how hedgies won"t be knocking down their doors to gain access.  Per Bloomberg:

The firm is proposing three levels of service -- bronze, silver and gold -- with the premium package comprising unlimited reports, field trips and “occasional” one-on-one meetings with analysts and corporate executives, according to a pricing document seen by Bloomberg News. At the bottom end of the scale, read-only access to European research will start at 30,000 pounds.

At Barclays, even if clients stump up 350,000 pounds for the gold “trans-Atlantic” package, they could still end up spending more. “Bespoke” analyst work and corporate access is priced separately, according to the document. Field trips, industry events and company management meetings are also at the bank’s discretion, and analyst one-on-ones are “capped,” it shows.

Prices in the document may not apply to all clients, have been in flux and could still be subject to change, a person familiar with the process said, asking not to be identified discussing the matter. A Barclays spokesman declined to comment.

Banks are scrambling as they enter the last six months before the decades-old practice of sending out free analyst reports as a courtesy and marketing strategy comes to an end. The European Union’s MiFID II regulations, enforced from Jan. 3, require money managers to separate the trading commissions they pay from investment-research fees. This means banks in turn have to be more transparent, providing specific charges for their analysts’ time and work in order to comply.

Of course, the logical takeaway from these exorbitant offering prices, if they hold, is that institutional clients will ultimately be forced to consolidate their vendors...translation, so long to the small independent research shops.  Meanwhile, investment banks will be forced to control costs by trying to focus on writing reports that people actually read (vs. the 1% hit rate they have today).  All of which means that those shrinking analysts pools are about to completely collapse.

In fact, as McKinsey recently noted, up to 30% of research analysts could be at risk of losing their cushy banking jobs as result of Europe"s new regulations.

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.

The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.

“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

Of course, as we"ve said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."

Japan GDP Rises 2.2%; Longest Growth Stretch In 11 Years

In the same quarter in which the US teetered on the verge of contraction (supposedly due to inclement weather despite not one but two seasonal adjustments meant to eliminate "residual seasonality"), Japan grew at the fastest pace in a year and nearly triple that of the US.

On Thursday morning, Japan"s Cabinet Office reported that Japan"s Q1 GDP rose at a 2.2% annualized pace, beating estimates of 1.7% growth, and up from the 1.2% SAAR growth in Q4 of 2016. It was also Japan"s 5th consecutive quarter of positive GDP, the longest stretch of growth going back 11 years. 

On a sequential basis, Japan"s economy grew by 0.5% in Q1, up from 0.3% in Q4, and in line with expectations (which begs a question, how did economists who predicted 0.5% sequential growth get 1.7% annualized, while the actual number was indeed 0.5%, yet when annualized resulted in 2.2%. The answer is probably in non-GAAP rounding).

Broken down by components, domestic demand rose 0.4% in Q4 compared to the previous quarter, when consumption posted a modest decline. Residential investment was the biggest growth component of private demand, rising by 0.7%, while public demand was a more modest 0.1%. Private inventories added 0.1%, while net exports rose 2.1% in the quarter, down modestly from 3.4%, due to the 5% increase in the Yen over the time period. Imports were a 0.2% offset to annualized GDP growth, after growing by 1.4% sequentially.

The number easily beat Goldman"s expectations. This is what the bank said ahead of the report: "We forecast +1.7% qoq annualized real GDP growth in Q1, accelerating from +1.2% in 2016Q4. Steady export growth, recovering consumer spending and inventory accumulation are the main contributors to Q1 growth, while we expect small correction to private capex, which advanced +8.4% qoq annualized in the prior quarter. Positive GDP growth in Q1 would mark a fifth quarter of sequential growth, for the first time in 11 years, confirming the solid state of Japanese economy."

Some other economist reactions via Bloomberg:

• "Exports have taken the lead in the recovery, and domestic demand wasn’t bad, showing resilience with household spending turning positive," said Masaki Kuwahara, senior economist at Nomura Securities Co., which correctly forecast the 2.2 percent expansion.


• "Looking ahead, the growth rate will slow a bit, if not turn negative, toward the second half of this year as China’s economic indicators are weakening a bit. I’m expecting exports to slow down, weighing on the overall growth rate,” said Kuwahara.


• "It’s a pretty impressive number but I don’t think this can continue for a while," said Takashi Shiono, an economist at Credit Suisse Group AG.


• "Uncertainties are increasing rapidly with the chaos at the White House and a pickup cycle in global production could end soon," said Shiono. "The risk-off sentiment in the market will put pressure on the yen to strengthen and that will weigh on Japan’s economy."

The strong GDP growth may come as disappointment for Japan bulls, however. Already the BOJ has quietly tapered its bond purchases from JPY80 trillion/year to JPY60 trillion, and Kuroda, with less than a year left on his tenure, will be looking for excuses to not only officially taper purchases - here he has no choice as the BOJ has about 1 year left of eligible bonds to monetize - but to potentially give the old rate hike experiment another try, even if the BOJ"s latest minute reluctantly admitted that despite labor shortages the economy has failed to generate the much needed inflation. Today"s strong GDP print just gave Kuroda the excuse he needs to hint at even more monetary tightening, assuming of course the the threat of US presidential impeachment has been postponed indefinitely.

A Russian Went Inside A Chinese Click-Farm: This Is What He Found

On the day when Snapchat erased billions of market cap from investors (and founders) accounts - as the MAUs-means-money model seems to break - we thought it worthwhile taking another glimpse into the hush-hush world of "click-farms" and the fakeness of the latest social network fads.

In 2014, we first exposed the world to the "click-farm" where nothing is what it seems, and where social networking participants spend millions of dollars to appear more important, followed, prestigious, cool, or generally "liked" than they really are. As we detailed at the time, social networking has been the "it" thing for a while: for the networks it makes perfect sense because they are merely the aggregators and distributors of terrabytes of free, third party created content affording them multi-billion dollar valuations without generating a cent in profits (just think of the upside potential in having 10 times the world"s population on any given publicly-traded network), while for users it provides the opportunity to be seen, to be evaluated or "liked" on one"s objective, impartial merits and to maybe go "viral", potentially making money in the process. Of course, the biggest draws of social networks also quickly became their biggest weaknesses, and it didn"t take long to game the weakest link: that apparent popularity based on the size of one"s following or the number of likes, which usually translates into power and/or money, is artificial and can be purchased for a price.

But it is not only sport stars with chips on their shoulder, or fading move and music gods who are willing to dish out in order to get the fake adoration and fake fans: as the AP reports, In 2013, the State Department, which has more than 400,000 likes and was recently most popular in Cairo, said it would stop buying Facebook fans after its inspector general criticized the agency for spending $630,000 to boost the numbers. In one case, its fan tally rose to more than 2.5 million from about 10,000.

Since then there have been crackdowns (self-regulated) and also numerous "advertising metric errors," but still, as recently as March of this year, scientists at USC and Indiana University discovered up to 15% of Twitter accounts could be fake. Since Twitter currently has 319 million monthly active users, that translates to nearly 48 million bot accounts, using USC"s high-end estimate. The report goes on to say that complex bots could have shown up as humans in their model, "making even the 15% figure a conservative estimate." At 15 percent, the evaluation is far greater than Twitter"s own estimates.

In a filing with the SEC last month, Twitter said that up to 8.5 percent of all active accounts contacted Twitter"s servers "…without any discernable additional user-initiated action."

Since that equates to roughly 20 million more bot accounts than Twitter"s own assessment, that could be an issue in light of analyst concerns about user growth. In a recent research report, Nomura Instinet analysts wrote that "Twitter"s revenue growth has slowed to the mid-single digits, as the platform has struggled to attract new users over the past year…"

The research could be troubling news for Twitter, which has struggled to grow its user base in the face of growing competition from Facebook, Instagram, Snapchat and others.

So, if they"re not human, where do all those "likes," "retweets," and "followers" lighting up your social media accounts from?

Thanks to this Russian gentleman - who visited a Chinese click farm, where they make fake ratings for mobile apps and other things like this -  we now know...

Russian man visited Chinese click farm.They make fake ratings for mobile apps and things like this.He said they have 10,000 more phones pic.twitter.com/qE96vgCCsi

— English Russia (@EnglishRussia1) May 11, 2017

      He said they have 10,000 more phones just like these.

As we concluded previously, the bottom line is simple: "The illusion of a massive following is often just that," said Tony Harris, who does social media marketing for major Hollywood movie firms, said he would love to be able to give his clients massive numbers of Twitter followers and Facebook fans, but buying them from random strangers is not very effective or ethical. And once the prevailing users of social networks grasp that one of the main driving features of the current social networking fad du jour is nothing but a big cash scam operating out of a basement in the far east, expect both Facebook and shortly thereafter, Twitter, to go the way of 6 Degrees, Friendster and MySpace, only this time the bagholders will be the public. Because "it is never different this time." The only certain thing: someone will promptly step in to replace any social network that quietly fades into the sunset.

Bank Of Japan "Bought The Dip" Over Half The Time In The Last 4 Years

A year ago, we noted that The Bank of Japan (BoJ) was a Top 10 holder in 90% of Japanese stocks. In December, we showed that BoJ was the biggest buyer of Japanese stocks in 2016. And now, as The FT reports, the real "whale" of the Japanese markets is stepping up its buying (up over 70% YoY) entering the market on down days more than half the time in the last four years.

Since the end of 2010, The FT notes that the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥6tn. Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥1.2bn of ETFs every single trading day (tailored to support stocks that further “Abenomics” policies), and lumbers in with buying bursts of ¥72bn roughly once every three sessions.
 

Some traders say the bank’s supposedly targeted buying has cushioned the whole market. Last year, foreign investors were net sellers of ¥3tn of Japanese shares - a retreat that might have decimated benchmarks had the BoJ not swum in with ¥4.3tn of support via ETFs.

In the afternoon sessions on days the BoJ comes in big, the average return on the index is about 14 basis points higher.

Since the annual quota was increased to ¥6tn, Nomura says, the BoJ has provided a cumulative boost to the Nikkei of about 1,400 points.

But, as we"ve noted in the past, it appears to be the flow, not the stock, that is the big driver...

As in a casino, The FT"s Joe Lewis concludes, the whale definition may hinge less on the cash on the table and more on the psychological impact on other gamblers. The BoJ has been at the game long enough for the market to know it reliably buys on weakness.

Of the 1,038 business days between April 2013 and March 2017 there were 449 sessions where the market was down: the BoJ bought on more than half of them. Whale or not, investors are now primed to think they are swimming with one.

So given that we know SNB is extremely active in stock markets, and The BoJ is the Japanese stock market, does anyone realistically doubt The Fed is/has been active?

China Just Flooded Its Economy With A Record Amount Of New Debt

China vowed that this time it was serious about finally deleveraging its economy. Once again, it lied.

First, a quick tangent: as a reminder, when it comes to the global economy, increasingly more analysts are realizing that just one number truly matters: that of the global credit impulse, which as we cautioned for the first time two months ago, had recently turned negative, mostly as a result of the recent deceleration in China"s credit creation.

Then earlier this week, in a follow up report from UBS, the Swiss bank found two material developments: the reflation trade of the past year was entirely the function of Chinese credit dynamics...

... and making matters worse, China"s credit impulse had now turned decidedly negative, suggesting a similar fate for the global credit impulse. 

As a result we were particularly interested in the latest set of Chinese monetary aggregates released overnight. They confirmed that China is clearly not yet ready to surrender its position as the world"s primary drive of credit growth.

On the surface, the Chinese data was bifurcated, as Chinese new bank loan issuance was lower than expected totaling just over 1 trillion yuan, lower than the CNY1.17 trillion in February and below the consensus estimate of CNY1.2 trillion, as the government has tried to contain the risks from an explosive build-up in debt and an overheating housing market, at least when it comes to the traditional banking system. Even with the "slowdown", banks still extended the third highest loans on record for a single quarter, totaling 4.22 trillion yuan in January-March.

Loans to households surged to 797.7 billion yuan in March, according to Reuters calculations using PBOC data, accounting for 78% of all new loans in the month. That was much higher than either January or February and even the 50% of new loans in 2016. The rise likely was due to individuals increasingly turning to alternative types of loans as banks tighten rules on traditional mortgages, said Wendy Chen, an economist at Nomura in Shanghai.

"We think (the increase in short-term loans) is possibly due to attempts to circumvent strict regulations on mortgages," said Chen. "The high loans to households reflect that property sales are still very hot, and likely shifting from top tier cities to more third or fourth tier cities."

As Reuters observes, a surge in household lending in March also added to worries about whether authorities will be able to get the frenzied property market under control, even as cities roll out increasingly stringent curbs on home buying. While the central bank has cautiously raised interest rates on money market instruments and special short- and mid-term loans several times in recent months, most recently just hours after the Fed hiked in mid-March to avoid another spike in capital outflows and to contain debt risks and discourage speculation, it is treading cautiously to avoid hurting economic growth.

Indeed, as China"s housing market continues to overheat, more cities have implemented strict home purchase rules, with some even restricting homeowners from "flipping" or re-selling properties they have held for only a brief time.

Yet while conventional loan issuance showed a modest moderation, it was more than offset by another dramatic surge in aggregate, or Total Social Financial, which includes both bank loans as well as off-balance sheet aka "shadow" lending, which not only rocketed in March to 2.12 trillion yuan from 1.15 trillion yuan in February and a record injection in January...

... but for the first quarter, TSF reached a new record high 6.93 trillion yuan - equivalent to the size of Mexico"s economy - and well above last year"s first quarter total. At today"s Yuan exchange rate, China"s credit creation in Q1 amounted to just over 1 trillion US dollars.

Entrusted loans, trust loans and undiscounted banker"s acceptances - together a good indicator of shadow banking activity - increased sharply in March. Entrusted loans rose CNY203.9 billion, trust loans were up CNY311.2 billion and undiscounted bankers" acceptances gained CNY238.7 billion, according to MNI. These gains were several times larger than the increases of CNY166 billion, CNY73.2 billion and CNY17.3 billion, respectively, during the same period last year, and boosted Total Social Financing in March to CNY2.12 trillion, nearly double the February figure of CNY1.15 billion and the second highest level since March 2016.

"The increase of entrusted loans, trust loans and undiscounted banker"s acceptances was probably caused by the restrictions on lending to companies in the real-estate sector and overcapacity industries, and many could only turn to shadow banking (for financing) even though it carries a higher interest rate," said Li Qilin, chief macro analyst at Lianxun Securities in Shenzhen.

In addition to Qilin, for most analysts, the spike in TSF financing confirms the ongoing surge in off-balance sheet lending, primarily in the largely unregulated shadow banking system, despite repeated attempts by authorities to target riskier lending in past years. Furthermore, this shadow lending surge has raised substantial doubts about the effectiveness of official efforts so far to clamp down on risks in the financial system - especially those emanating from various shadow banking intermediaries and SPVs, profiled recently in a Deutsche Bank report which cautioned that China"s entire financial system is on the edge of an "uncontrollable liquidity event", and has prompted the central bank to inject record amounts of liquidity to keep the system stable.

But wait, there"s more. 

Loans to companies totaled 368.6 billion yuan in March, less than half the amount of household lending, PBOC data showed. That is yet another ominous signal for the economy, unless firms are finding other sources of funding (which they very likely are in the shadow banking space, suggesting the money creation process is increasingly slipping away from traditional PBOC oversight.

Nomura"s Chen said that the spike in non-bank credit growth in March may have been due to corporate borrowers turning to alternative funding channels as high demand for household loans crowded them out from traditional bank loans. She was also optimistic that the recent record surge in shadow lending will moderate:

"We don"t think the strength in shadow banking activity will continue," Chen said, adding that regulators are expected to continue slowly clamping down on the sector.

We are not so confident, as the following charts from Deutsche Bank, and associated description suggest: "There has been a sharp rise in net claims to NBFIs from banks (Figure 33). We believe this is due to rising shadow banking transactions and also arbitrage activities with funds self-circulating within the financial sector. Clearly as shown in Figure 34, small banks are key lenders to NBFIs"

Perhaps our skepticism is unwarranted: in March for the first time, the PBOC"s quarterly inspection of banks" books included off-balance sheet wealth management products to give authorities a better sense of potential risks to the financial system. It remains to be seen if the central bank will do anything to intervene and slowdown this unprecedented surge in reliance upon shadow funding sources.

Finally, in an ominous confirmation that this glut of new credit creation is not reaching the broader economy but is getting trapped by various asset bubbles (most notably housing) M2 money supply growth hit a more than 6-month low, growing at only 10.6% y/y in March, lower than the expected 11.1% rise and down from 11.1% in February.  The government has said it expects M2 to growth about about
12% this year.

On one hand, the slowdown reflects the moderately tighter policy stance by the People"s Bank of China (PBOC), but more importantly suggesting that overall economic growth is poised for a further slowdown.

Adding to worries that the PBOC could cause a sharp imbalance in Chinese liquidity as it attempts to trek a fine line between injecting record amounts of loans on one hand, while gently tightening on the other, is that alone with bumping up some interest rates, the PBOC withdrew 705 billion yuan from the financial system through its open market operations in the first 12 weeks of this year, a 1.1 trillion yuan negative swing from a year ago, ING estimates. That said, analysts do not expect a full-blown policy rate increase this year, which could risk a knock to economic growth ahead of a key party meeting in the autumn when a new generation of leaders will be picked.

The central government has made containing financial risks a top priority this year, calling for vigilance against asset bubbles and urging companies to reduce leverage. But it has still targeted economic growth of around 6.5% this year, which will require the copious amounts of new credit that is continues to inject month after month, increasingly so via the unregulated shadow banking system.

The one silver lining: most of China"s "Big Five" banks reported last month that bad loan ratios were stabilizing, likely giving policymakers more confidence that risks from bank lending are under control, although Chinese banks, which are mostly state-owned, are notorious for misrepresenting the true state of their balance sheet. Indeed, many analysts believe Chinese NPLs are far higher than banks admit, and some China watchers warn a debt crisis may be inevitable if loan and money supply growth continues to sharply outpace the rate of economic expansion for the foreseeable future (as shown in the chart below) and that a Minsky Moment may be the inevitable outcome, with the only question being "when?"

Up To 15% Of Twitter Accounts Are Fake, Study Finds

In January, when we exposed that up to 350,000 Twitter accounts could be fake, the social media world started to question its own reality. Now, a study from USC and Indiana University, that Twitter has roughly 48 million active bot accounts. That"s 15% of reported active users that are not human at all...

Earlier this year, a computer scientist in London has stumbled upon massive networks of fake Twitter accounts - with the largest consisting of over 350,000 profiles - which may have been used to "fake" numbers of followers, send spam, and boost interest in trending topics. On Twitter, bots are accounts that are run remotely by someone who automates the messages they send and activities they carry out.

Some people pay to get bots to follow their account or to dilute chatter about controversial subjects.

As The BBC reported, UK researchers accidentally uncovered the lurking networks while probing Twitter to see how people use it.

But now, as CNBC reports, a much bigger big chunk of those "likes," "retweets," and "followers" lighting up your Twitter account may not be coming from human hands.

Researchers at USC used more than one thousand features to identify bot accounts on Twitter, in categories including friends, tweet content and sentiment, and time between tweets. Using that framework, researchers wrote that "our estimates suggest that between 9% and 15% of active Twitter accounts are bots."

Since Twitter currently has 319 million monthly active users, that translates to nearly 48 million bot accounts, using USC"s high-end estimate. The report goes on to say that complex bots could have shown up as humans in their model, "making even the 15% figure a conservative estimate." At 15 percent, the evaluation is far greater than Twitter"s own estimates.

In a filing with the SEC last month, Twitter said that up to 8.5 percent of all active accounts contacted Twitter"s servers "…without any discernable additional user-initiated action."

Since that equates to roughly 20 million more bot accounts than Twitter"s own assessment, that could be an issue in light of analyst concerns about user growth. In a recent research report, Nomura Instinet analysts wrote that "Twitter"s revenue growth has slowed to the mid-single digits, as the platform has struggled to attract new users over the past year…"

The research could be troubling news for Twitter, which has struggled to grow its user base in the face of growing competition from Facebook, Instagram, Snapchat and others. But, of course, Twitter itself tried to spin this as a positive?

A Twitter spokesperson said that while bots often have negative connotations, "many bot accounts are extremely beneficial, like those that automatically alert people of natural disasters…or from customer service points of view."

The real concern, as Axios notes, is whether audience measurement companies should take bots into consideration as part of user traffic numbers, which affect advertising potential, if their behaviors mimic that of real human users.