You’re right. T doesn’t square well with the previous post. I had scheduled this re-post bfore I wrote the previous post so they don’t mesh well.

I would say this: The gift to the financial services industry is so great that I expect these stocks t do better than expected over the near term. However, much of the problem has been papered over and when real economy stress re-asserts itself the poor underling fundamentals will come to the fore again. I think this is a solvency crisis masquerading as a liquidity crisis. However, this post serves as a reminder that a solvency crisis is usually never apparent because it usually manifests itself in the form of liquidity. So, it is easy to claim liquidity is the issue when solvency is the issue. In the process, liquidity issues develop system-wide creating a dead-weight loss.

For example, say firms 1 and 2 are insolvent but many think they lack liquidity. Firms 3 and 4 are in the same line of business but not insolvent. Pumping more liquidity into them makes them temporarily liquid but the insolvency remains. Meanwhile, the overcapacity from firms 1 and 2 makes firms 3 and 4 less profitable. When the economy slows again, this insolvency manifests itself again and firms 1 and2 suffer. But, so too do firms 3 and 4. Is firm 3 really solvent? How about firm 4? Suddenly all of these companies come under suspicion due to the continued existence of firms 1 and 2. Perhaps firm 3 fails as a result. That would be a dad-weight loss.

That is what is happening right now in banking. Propping up zombie banks makes all banks less profitable, weakens their earnings potential. When crisis hits again, discriminating between insolvency and illiquidity, therefore, infects all banks. Some might fail that should not have done.

So, despite the god near term outlook, this is a ‘fake recovery’ and the underlying problems remain. That doesn’t mean there won’t be good trading opportunities.