This is another post I originally ran on Naked Capitalism last month. As you know, I have turned more positive about the potential for a cyclical economic recovery. However, I am unchanged regarding much of the sentiment expressed in this post - that any upturn must be considered with suspicion because the underlying fundamentals of the U.S. and global economies remain poor (See my post on macro disequilibria to see why).

My personal view at this time is that we will get a rebound of uneven quality, the prospect of which will be supportive of financial markets. However, it is far from clear how robust this upturn could be or how long it could last. I see an L- or W-shaped outcome as likely (i.e. prolonged weakness or a double dip recession).

I am not convinced we are in a new bull market either. More likely, we have seen a strong bear market rally (but, like the ones experienced in Japan and the U.S. post-2002, it can go on for much longer than anyone could predict). Remeber, bull markets arise from a confluence of P/E ratios going from low to high, high secular earmings growth potential, and high seclar GDP growth potential. We have not reached a low that is comparable to previous lowsin 1942 or 1982 in this regard.

Now, here is the original post with some edits.

As I see it, the Geithner Plan is inadequate because it assumes illiquidity where insolvency is the problem. The long and short of it, from my perspective, is that this plan will not get at the heart of the issue, leverage, debt and unsustainable levels of credit growth. (Dan Roberts of the Guardian has an interesting take on this, suggesting the US is following the UK lead here).

Nevertheless, I want to suggest that the liquidity thrown at the U.S. economy by this and other stimulus plans is so great that it may induce a cyclical upturn. Heresy? Hardly, as I mentioned in my previous post, this is what essentially transpired in Japan in the 1990s. So, let’s look at Japan for a second.

Last July, I wrote a post, “Japan circa 1996 - forgotten already?” to remind readers of what took place in Japan in the 1990s. The Yamaichi Securities episode of 1996, as told by the International Herald Tribune, was the event I highlighted:

In a reminder of the scale of the bad debts still weighing on Japan’s financial system, Yamaichi Securities Co. on Wednesday became the second of the “Big Four” Japanese brokerage houses this week to unveil a billion-dollar bailout for a subsidiary struggling with irrecoverable real-estate loans.

Ryuji Shirai, vice president of Yamaichi, said the brokerage would spend 150 billion yen ($1.31 billion) to help its nonbank subsidiary, Yamaichi Finance. The bailout forced Yamaichi to revise its earnings forecast for the year to March 1997 to a consolidated net loss of 108 billion yen from a previously predicted net profit of 18 billion yen.

Yamaichi’s move followed an announcement by rival Nikko Securities Co. on Tuesday that it would spend 147.5 billion yen to help three affiliated units write off their bad debts. Nikko also cut its earnings forecast for the year, from a net profit of 24 billion yen to a net loss of 95 billion yen.

Yamaichi and Nikko’s bailouts and forecasts for big losses followed similar moves earlier this year by Japan’s two other major brokerages and came as little surprise.

But they again illustrated the difficulties that even Japan’s biggest financial institutions are having dealing with an estimated $400 billion in mainly unrecoverable real estate loans and underlined that it would take years for Japan’s financial system to recover from its real-estate lending binge in the late 1980s.

Over the past couple of months, Nomura Securities Co. has announced a 371 billion-yen bailout for a troubled financial unit while Daiwa Securities Co. has spent 120 billion yen.