Edward Harrison — When market contagion occurs, this is how it will happen

I have been pretty sanguine about the markets and the US economy. Yes, the commodities complex is worsening, but that doesn’t mean this feeds through enough into other sectors to force the market down. And the real economy isn’t at stall speed yet either.We just aren’t there yet. Nevertheless, I have a general read on how this ends regarding credit cycle weakness, increased defaults, asset class contagion, falling markets, economic weakness, and recession. So let me sketch out for you the framework I’m using as a lot of the telltale signs of credit cycle weakness are already happening.

Now, to be clear, I am not calling a recession yet – far from it. After all, the Federal Reserve is raising interest rates, something that it does when the economy is doing relatively well. And while I don’t think the Fed necessarily gets it right, I don’t think they are that far off the mark. Yet, at the same time, the evidence is mounting that the credit cycle is pretty far along and that means asset class contagion and real economy weakness is not far behind.

Junk bonds and credit associated with the shale industry are now under pressure.

So how does this infect other markets? Whenever there is a system-wide panic, a large part of this is driven by people selling what they can, not what they must. So, what we need to – and eventually will see – is redemptions – mutual fund and hedge fund redemptions. And when people start to pull their money out of funds, that’s when previously uncorrelated assets become highly correlated.…

But inevitably you and some of your competitors will be forced to sell good assets too, not because you necessarily want to but because you must. And that’s where the contagion begins.…

Credit Writedowns
When market contagion occurs, this is how it will happen

Edward Harrison

winterspeak — The vector for financial contagion is hedge funds

This article sums up exactly my experiences at DE Shaw during the ruble default/LTCM melt down in 1998….

Running for the door, any door, cutting a door, jumping out the windows.….

winterspeak.com

The vector for financial contagion is hedge funds

Andrés Cala — Greek ‘No’ Vote Spurs Wider Resistance

Greek voters rebelled against Germany and the dominant powers of Europe by rejecting demands for more austerity, but the Greek resistance also is resonating across the Continent, emboldening other hard-pressed countries tired of Depression-like conditions, says Andres Cala

Consortium News
Greek ‘No’ Vote Spurs Wider Resistance
Andrés Cala

Times of India — Greece orders banks closed for a week, worried citizens empty ATMs; Indian markets spooked

In the first market reaction to the growing risk of a Greek euro exit, the single currency tumbled in Asia on Monday morning.

Stock markets also fell sharply, with Tokyo, Sydney, Shanghai and Hong Kong each sinking more than 2 percent by Monday afternoon.

In India, the benchmark BSE sensex tanked over 535 points and the NSE nifty slid below the 8,300 mark in opening trade today on across-the-board selling by participants, PTI reported. Brokers said widespread selling by investors as well as funds, in line with a global sell-off on fears that Greece may default on a debt repayment and crash out of the euro zone, soured the mood.

The Times of India
Greece orders banks closed for a week, worried citizens empty ATMs; Indian markets spooked

AFP

Yves Smith — Emerging Markets Contagion Starting to Hit Eurozone

Now some analysts, like Gavyn Davies, remain relatively sanguine, pointing out the the emerging markets crisis of the later 1990s produced only short-term disruption in advanced economies. That considerably underplays the dodged bullet of the LTCM bailout. But more important, as reader Scott has stressed, emerging markets were just over 30% of global GDP then versus roughly 50% now. It’s hard to imagine that if half of the world’s economies are in mild to severe distress that the rest of the world will get off scot free.

Naked Capitalism

Emerging Markets Contagion Starting to Hit Eurozone
Yves Smith

Mosler mention in the LA Times

As markets were relatively buoyed around the world by hope that Greece's debt woes could be managed, analysts warned that the contentious debt exchange exercise could create a new problem in the dangerous debt crisis plaguing Europe. 

"The idea of Greek default transformed from being a Greek punishment to a gift with the pending question: 'If Greece doesn't have to pay, why do I?' — threatening a far more disruptive outcome that is yet to be fully discounted," Warren Mosler, a distinguished trader based in the Virgin Islands, wrote on his website Mosler Economics.

"That is, should Greek bonds be formally discounted, the consequences of merely the political discussion of that question will be all it takes to trigger a financial crisis rivaling anything yet seen."

Read it at The Lost Angeles Times

Greece bond exchange the largest debt restructuring in history
by Anthee Carassava, Los Angeles Times, Athens
(h/t Roger Erickson at mmt-discuss Google group)

Short article, big plug for Warren!

John Carney — Haircut Contagion Watch: Dallara's Comments

John Carney quotes Warren Mosler again, that's twice today. Thumbs up.

Read it at CNBC NetNet

Haircut Contagion Watch: Dallara's Comments

by John Carney | Senior Editor

John Carney — Will Greece Resolution Spark a Bigger Crisis?

John Carney quotes Warren Mosler in presenting his analysis.

Read it at CNBC NetNet
Will Greece Resolution Spark a Bigger Crisis?

by John Carney | Senior Editor

Mike Whitney — "The nightmare scenario is beginning to unfold"

“We are caught, it seems, in one of those self-reinforcing loops that almost always presage a collapse.”– Michael Pettis, China Financial Markets

Germany’s “failed” bund auction on Wednesday was a real gamechanger. It means that Europe’s biggest and most powerful economy will not escape the contagion that’s swept across the south. Germany’s borrowing costs will rise and it’s finances will be put under a microscope. But that’s just the half of it. What’s roiling the markets is that investors are now pricing in the probability of a eurozone breakup. That’s what all the commotion is about; the nightmare scenario is beginning to unfold....

Read the rest at CounterPunch

Germany’s “Failed” Bond Auction

by Mike Whitney

Note: Whitney. who is usually in paradigm with MMT, cites James K Galbraith