● Rational Expectations: Asset Allocation for Investing Adults
By William J. Bernstein
Summary via author’s website, EfficientFrontier.com
It’s been almost two decades since the first electronic edition of The Intelligent Asset Allocator appeared online, so I decided to start with a clean sheet of paper in the wonky world of quantitatively based asset allocation aimed at small investors. Continuing the theme of the Investing for Adults series, this full-length finance title is not for beginners, but rather assumes a fair degree of quantitative ability and finance knowledge. If you think you can time the market or pick stocks and mutual fund managers, or even if you think that you can formulate an optimally efficient mean-variance asset allocation with a black box, then you’d best peruse the reading list first, and come back in a few years.
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I’ll be traveling and attending to the final arrangements for my mom over the next few days and so blogging will be light to nonexistent, returning with the usual fare on Monday, June 2.

Today’s revised GDP report for this year’s first quarter looks dismal. Growth was considerably weaker than expected, with economic activity slumping 1.0% in the first three months of the year on a seasonally adjusted annualized basis. That’s quite a bit lower than the 0.1% gain in the initial estimate. But the GDP report, which isn’t all that valuable for real-time business cycle analysis, is misleading if you read it in a vacuum. Indeed, more recently updated economic reports paint a considerably brighter picture, including today’s news on jobless claims, which dipped to the lowest level since August 2007.
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Tomorrow’s update on US personal consumption spending for April is expected to report a gain of 0.3% vs. the previous month, based on The Capital Spectator’s median econometric forecast. That’s substantially below March’s 0.9% increase.
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Bubble talk is on the march these days, and for an obvious reason: trailing return is high. But as I’ve discussed before (see here, for instance), I prefer to describe the ebb and flow of market prices as a reflection of fluctuating expected return. On the surface it’s a cosmetic distinction. But managing portfolio risk in a productive way requires looking at markets as offering a constantly changing menu of risk premiums. It’s more exciting to think in terms of bubbles, but such a focus can be distracting when it comes to our primary objective of earning a satisfactory return across a multi-year span. The reality is that we’re usually making decisions amid shades of gray vs. stark, clear extremes. Accordingly, our investment process should reflect this reality.
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There’s a bullish tailwind blowing across the major asset classes at the unofficial start of summer. But there’s a new feature to the current rally. Compared with the previous update in April, the range of returns at the moment is less extreme compared with recent history. There’s also less red ink weighing on our standard list of ETF proxies via 250-trading-day windows (the rough equivalent of 1-year returns). Take note too that of the declines that remain, the losses are relatively slight these days.
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To all of you who sent your condolences and support, through emails, flowers, cards, thoughts and prayers… thank you so much for helping me move through a rough week after losing my mom. Painful as this is, the burden’s a bit lighter because all of you reached out. Thank you.
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Family responsibilities came a-calling last night. My beloved mother, Eva Picerno, passed away. Her 94 years finally caught up with her. But she went peacefully, in bed, watching her favorite show—Dancing With The Stars. Her passing isn’t terribly surprising—the finale came after a long, slow decline. But her New England spirit kept her optimistic and cheerful to the end. Her graceful exit comes nearly three years after my dad, Joseph, slipped over to the other side. I miss them terribly. As the only child of loving, devoted parents, I was given a great gift. But now duty calls one more time for my mom and it seems appropriate to take a breather from macro and markets. At some point, soon after the Memorial Day holiday, these pages will again be buzzing with the usual commentary and number-crunching. Meantime, in honor of my mom, The Capital Spectator will go dark in the days ahead as your editor transitions from sober-minded analyst to grieving son struggling to say good-bye one last time.

Economic momentum remained broadly positive in April. It may not feel like growth, but the macro trend remains firmly skewed toward expansion, based on the latest profile of last month’s numbers. Indeed, the April update of a diversified set of 14 economic and financial data sets betray minimal signs of stress in the search for business cycle risk.
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● Think Like a Freak: The Authors of Freakonomics Offer to Retrain Your Brain
By Steven D. Levitt and Stephen J. Dubner
Summary via publisher, HarperCollins
Levitt and Dubner offer a blueprint for an entirely new way to solve problems, whether your interest lies in minor lifehacks or major global reforms. As always, no topic is off-limits. They range from business to philanthropy to sports to politics, all with the goal of retraining your brain. Along the way, you’ll learn the secrets of a Japanese hot-dog-eating champion, the reason an Australian doctor swallowed a batch of dangerous bacteria, and why Nigerian e-mail scammers make a point of saying they’re from Nigeria.
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