Rational Expectation Theory

Great article on Rational Expectation Theory and why there will be no V-shaped recovery.

Also, here are a couple of very interesting points in the article:

It’s a widely accepted notion that long term stock investors make money. Actually, this is not true. Most companies don’t last for more than 20 years. How can long term investment make money for you? The bankruptcy of General Motors should remind people that this notion is ridiculous. General Motors was a symbol of the U.S. economy, a century-old company that succumbed to bankruptcy. In the long run, all companies go bankrupt.

Property on the surface is better than the stock market. It is something physical that investors can touch. However, it doesn’t hold much value in the long run either. Look at Japan: Its property prices are lower than they were three decades ago. U.S. property prices will likely bottom below levels of 20 years ago, after adjusting for inflation.

China’s property market holds even less value in the long run. Chinese properties are sitting on land leased for 70 years for residential properties and 50 years for commercial properties. Their residual values are zero at the end. The hope for perpetual appreciation is a joke. If you accept zero value at the end of 70 years, the property value should only be the use value during those 70 years. The use value is fully reflected in rental yield. The current rental yield is half the mortgage interest rate. How could properties not be overvalued? The bulls want buyers to ignore rental yield and focus on appreciation. But appreciation in the long run isn’t possible. Depreciation is, as the end value is zero.

http://english.caijing.com.cn/2009-06-09/110180019.html