Welcome to Portfolio Rescue. This is our show where you, the viewer, determine our topics. We've got a special episode today. I am sitting in the same room as Duncan right now. It looks like we're on different screens, but we're here together. I flew all the way into New York just to see Duncan.

We've got some special guests today, so this is going to be fun. Remember, if you have a question, email us at AskTheCompoundShow@gmail.com. Duncan, how's it going? I think Duncan was a little nervous today because there's a lot of moving parts. It's easier to do it over Zoom than it is in person, right, Duncan?

Yeah, it's a little complicated being in the same room. If you hear some echo, that's what's going on. All right, all good. All right, let's do question number one. Okay, so first up, we have a question from Mike. Mike writes, "I believe I'm in a somewhat unique retirement position.

As a career firefighter in South Carolina, after 25 years of service, my pension should end up being about 60% of my salary at retirement. I tend to ignore the fact that I'll have a pension and just try to invest for retirement the same as everyone else, a Roth IRA, wife's 403B, a bit of crypto sprinkled in for fun, etc.

Should a future lifetime pension influence my investment strategy or risk tolerance? Would your strategies and tactics change if you had a lifetime pension waiting for you once you hit 50?" The good news here is that this guy has a pension. I did some research for my last book, Everything You Need to Know About Saving for Retirement, and I found in the early '80s, it was basically 60% of all workers had a pension in the United States.

The number I found for today, it's closer to 17% and probably heading lower as people go into 401(k), so this is pretty good. I tried to put some value on it, so I reached out to Nick Magiulli, Nicky Numbers, our data guy here. "John, let's do a chart on ..." I tried to figure out the value of what this pension could be like.

I did some values here, and you see this is the annual pension payout, so 25 to 100 grand I put per year, and I put it at different discount rates and tried to take the present value of those cash flows to today. You could see that could be worth hundreds of thousands of dollars, even millions of dollars for someone.

This is a good problem to have. Let's talk about it. The way I look at this is this is not so much a investing question as it is a financial planning question, so I decided to bring in one of our financial advisors here who actually is based in New York, Alex Palumbo, one of our rockstar financial advisors who works this stuff on clients all the time.

Let's bring him in, John. Alex, how's it going? Hello. So, you get a client that comes to you and they have some sort of income source. It could be a pension like this, which is, I think, a good problem to have. It's out there into the future. I'm sure people sometimes worry, "Is it going to be there for me?" But how do you think through something like this where someone's getting this steady income, and then how does that flow into how they plan their portfolio out?

Right. I mean, theoretically, of course, you do not need to take on as much risk as an individual who's going to retire at 50 as someone with no pension. That's pretty obvious, right? To use an example, let's say that this is going to be worth $150,000 a year every year you're alive.

Actuarial speaking, if you make it to 50, you should live till about age 85 or age 93 is the expectancy, which means that that pension is going to pay you out between $5 million to $6.5 million total, right? Assuming you'll cost a living adjustment too, which there could be.

So, of course, you'll be able to achieve your family's financial goals more than that person who retires with a $2, or $3, or $4, or $5 million 401(k) balance, right? So, theoretically, you can, of course, take on less risk. A lot of people ask, "Should I view this pension as a bond and does that allow me to take more equity risk?" How do you think about that question?

Right. So, the big elephant in the room, the Michael Batnick, however, is the fact that is a sequence of returns risk, which you wrote a blog post about this pretty recently. So, the counter argument is the fact that you will not need to live off as much of a percentage of your assets if you do have that pension coming in as someone who needs to only live off their 401(k), right?

So, to assign numbers to it, let's say that you have a $2 million portfolio and you need to live off $100,000 from that. That's about a 5% burn. But let's say the market is down 50%. Now, you have $1 million and you need to live off $100,000. That's a 10% burn rate, which is way too high.

Versus if the market is up 10%, now you have $2.2 million, then you're living off about a 4% rate. If you have this pension supplementing $80,000 per year, then you only have to live off of $20,000 per year. So, then your burn rate ranges from 0.9% to 2%, and both of those are extremely sustainable.

So, the counterpoint to that is you need to live off less of your investable assets. So, theoretically, maybe you can take on more equity risk. Right. So, you might be able to take more equity risk. You might not have to, though, which is a good place to be. Yeah, that's the whole point, right.

Do we say thank you to your service to firefighters? Is that okay? Yeah. I'm in New York, so let's do it. All right. Duncan, next question. Okay. So, up next we have the following. What are your thoughts on using an S-block security-based line of credit against a fairly large brokerage account, $250,000 to $300,000, to either borrow for a primary residence up to $150,000 or, say, $50,000 for a rental property down payment?

This doesn't seem to be discussed very often anywhere except related to the extremely wealthy borrowing against their equity holdings. So, I wanted to get your feedback. There's definitely been some more of this lately. The Wall Street Journal had a piece on this this past summer, and they said that borrowing against your securities in your portfolio has grown from $30 billion in 2016 to nearly $70 billion as of this summer.

So, people are definitely doing it. Obviously, the low rates has a lot to do with it. But, Alex, I'm sure this is a question you get from clients, and I'm trying to think through, what are the advantages of borrowing against your portfolio instead of taking out a loan from a bank?

Yeah. You said the study was from this summer, where people are borrowing more? Yeah. Shocking, right? Now that the market's ripping higher. So, I agree that S-blocks are not discussed enough. I'm a huge fan of the convenient and rather simple process of placing a security back line of credit on your portfolio.

They're free to set up. There's no cost in place unless it's actually tapped, and there's no underwriting necessary because they're collateralized by the securities in your portfolio. They're perfect for a client who wants to sell their primary residence to move into another home, but don't have the liquidity to afford a down payment.

But even if they do, there's no point of using their cash supply or sell their securities when we can simply leverage the assets within their investment portfolio, borrow against it, use the borrow funds to pay for their new home. Then, once their old home is sold, they pay off their S-block balance, and you've now bought a new home without recognizing any capital gains or selling any funds from your portfolio and missing any time in the market, which, of course, tends to go up.

And also the qualitative factors of you don't have to rush or feel bootstrapped that you won't have enough money for a new home or that you're missing time in the market. The point here would be, this is crazy. You're borrowing against your portfolio. Markets are at all-time highs. Interest rates are low right now.

What happens if your portfolio gets crushed? Aren't you an idiot for borrowing against it? What's the downside here? Yeah, there's some pretty, I think, apparent downside that might not be, you know, considered by certain people given what the market's been doing this past year. But this specific person asked, what if I borrow 150 grand against a 250k portfolio?

That's a 60% borrow rate. Depending on the portfolio, you can really only borrow like 70%. I mean, assuming it's invested in equity. Right. What do you think is like too high of a percentage that would make you feel uneasy? It really depends on the situation, but 60% definitely seems like I'd feel very uneasy, right?

So what happens is a downturn in the market, the underlying collateralized securities value is heavily impacted, and then a maintenance goal could be issued. And now you're forced to sell securities at either an all-time low or an extremely low point. And that really defeats the whole purpose of the S-block, right, in keeping your portfolio intact.

Well, those rates are really low right now, but they're not fixed. They're variable on the S-block. The interest is not tax deductible. So moral of the story is, I would make sure that you have an actual payment plan in mind and in place before you take the S-block. This person seems like they just want to have this S-block going in perpetuity with no repayment plan to just YOLO 60% of the portfolio.

And that just doesn't really seem like it's prudent advice. And it makes sense why people want to do these. Wealthy people hate paying taxes, right? So this is a way to skirt taxes and borrow against it. And you feel like you're borrowing against yourself. It makes a lot of sense.

And there's a lot of good reasons to do this, of course. But just think about, you know, 2000, 2009. If you were borrowing from tech stocks in your portfolio, the S&P, you're down 10% after 10 years, while you were paying that interest rate for 10 years. And now, so you're paying that interest, and now your portfolio is down in value.

That's the risk. Perfect. Thank you, Alex. Thank you. Duncan, next question. Okay. So next up, this is a nice short and sweet one. In your opinion, do government yields still give any real signal in terms of future growth and inflation, or has it all been obscured by the bond buying by the Fed?

Everyone's favorite topic, the Fed. Yes. All right, John, let's do a chart on here. This is one of my favorite charts of the year. So I've plotted out here the 10-year treasury rate versus the US inflation rate over the past five years. You can see most years, these things plot along pretty nicely.

And they look like they're following each other pretty closely. Like, oh, that makes sense. Bond yields and inflation have a relationship. Now you have this huge alligator teeth, right? Inflation has spiked to over 6%. Bond yields are still at 1.4. They spiked a little bit. Now they're falling again.

We're going to bring on one of my favorite macro people, who happened to be in New York. I'm using my time here to sort of use people. So Cullen Roche is here from Pragmatic Capitalism. Also has his own ETF. He has his own advisory shop. Cullen, what do you think?

Do you think that all of this monetary policy is obscuring the signals that we can get from simple things like interest rates that people would use in the past to say, hey, if growth is rising, rates should be rising too. And if inflation is rising, rates should rise. Like, that makes sense on a textbook perspective.

We're not getting that anymore. Why not? Yeah. This is hilarious, by the way, because people who fast forward this are going to see me and they're going to think, like, how did Alex get 20 years older and uglier? But so this is something that a question I get a lot because people think that the 30 year treasury or the treasury market in general is some sort of like totally free market.

And really, the way that I like to explain, especially the Federal Reserve market, is that the Federal Reserve is essentially a manipulation of what would have otherwise been free banking. So, you know, the whole manipulation or not manipulation story is just kind of nonsense because the system is what it is.

And the Federal Reserve, by being involved as the central bank around all of the public banks, is by definition a manipulation and they have to set an interest rate. And so the analogy that I like to use to think of all of this stuff is that think of the Fed as basically walking a dog and the long bond is basically the dog.

The Fed is holding the leash and the leash where they hold it being the overnight rate is super tight. They have absolute control of that rate and how much it can move. They let the dog on the farther out end of the leash kind of wander at times, but the Fed still has pretty tight control over that dog for the most part to the extent that they want it to.

They could theoretically rein that thing all the way in if they wanted to and have absolute control if they decided to. I mean, if they went out and they did QE on the 30 year and they said the 30 year bond, we're going to be a buyer of the 30 year bond at zero percent, the 30 year interest rate would collapse.

So, you know, thinking of all of this in terms of the way the market exists now, the Fed kind of lets the bond market wander. But for the most part in today's environment, I think that what's happening is that the Fed's been really clear that the dog has kind of started to wander a little bit.

You know, interest rates popped a little bit from the beginning of really when COVID happened, interest rates collapsed and then they kind of popped back up and they've kind of started to come back down. And a lot of that is the signaling from the Fed that they're pulling that leash and they're making it very clear, look, we're not going to let this dog get too far away from us.

And so a lot of that is sort of based on the market signals that I think are becoming increasingly apparent that the Fed basically thinks inflation is not going to get out of control for a sustained period of time. So do you think that this is, I mean, obviously people say, well, the Fed's buying all these bonds that has to do with it.

I also think there's a lot of people are still starved for yield and retirees want to de-risk their portfolios. And so money is still flowing into fixed income. It's actually thinking of it in terms of like the relative safe asset shortage in the global monetary system. The U.S. Treasury bond is still the safe asset.

And so if there's a shortage of safe assets in the whole world, especially in a world where inflation is in some places much, much higher, the Treasury bond is still the super safe asset that a lot of people go to. Do you put any credence to the signal of, okay, inflation is way up here and bond rates are down here.

Do you say, well, the bond market is obviously smarter than everyone else and the bond market is signaling that this inflation is not going to last? Like how much, how much do you put into that signal? Yeah, I don't love the, the whole bond market is smarter than everybody narrative.

I tend to think it really is sort of a function. The Fed's trying to guess what future economic growth is going to look like. And so the Fed being at 0% basically is signaling that the Fed thinks future economic growth is unlikely to be that great in the long run.

And so they're still trying to stimulate things to some degree. And so the fit, the bond market kind of just follows that in the, the low yields of the last like 20, 30 years to me is more a signal that economic growth has just been kind of low and stagnant.

Not that, you know, it doesn't mean that the stock market can't go up in those environments. A lot of the times, in fact, when, when interest rates are really stable, the stock market does really well. So could that also mean that we're thinking this is a signal that we think this current burst of economic growth is probably not going to last, right?

Like that it's going to go back to where it was at two to 3% or whatever, and it's not going to remain high. The most interesting outcome here is that as we kind of like navigate into 2022, you know, what are the likely scenarios here? And does the, does the bond market actually start to look pretty smart in the current environment?

Because the big things that we're seeing as we head into 2022 are, you're going to start having a big peel off of fiscal policy and statistically, you're going to start seeing the data is going to be basically the opposite of what we had from COVID, which was this big base effect.

You now have a top effect where the data spiked a ton, and now you're doing year over year comps on a higher comp, which means that the inflation data is likely to start moderating around the summertime purely based on statistics. And then you've got things like if the supply shortages and like, you know, the LA port starts to ease up, which is pretty likely and looking like it's already starting to happen, then you could get into 2022.

Inflation starts to moderate. The bond market starts to look pretty smart. And then you have like an outlier situation where we'll, you know, we pumped all this money into the economy and things got really good, but what if you get some give back? And then the economy starts to kind of look.

Which is essentially what happened in like World War II. You had this huge spike in inflation, rates didn't go anywhere, and inflation came back down. And I don't know, to me, for the government, that's almost best case scenario, because they inflate away some of the debt. Right? Isn't that the idea?

Potentially? Yeah. I mean, inflating away the debt, I don't know if that's really their goal. I mean, it's a byproduct of what they're doing. I mean, to me, this was a lot like a war in the sense that the government kind of just threw the kitchen sink at it because we didn't know how bad this was going to get.

I think it's easy to kind of look at it in retrospect and say, oh, we did too much. But at the time, you know, this looked like an atomic bomb hitting the economy. All right, Duncan, we got one more interest rate question for Cullen. Okay, so next up, we have Nicholas from Sweden, which is cool.

So Nicholas wrote, "This market sure doesn't make much sense. I was wondering what your take is on treasury yields. Inflation is running high, money is being printed like never before, and the stock market is only going up. But still, the treasury yields have been falling. So what do you think will happen when the market goes down?" All right, John, let's do a chart on here.

I just plotted out, going back to the 1960s, the 10-year treasury and 30-year mortgage bond. And I put the gray scales in there that shows the recession. Every time there's been a recession since then, interest rates have fallen on the 30-year mortgage, on the 10-year treasury, whatever you want to say.

I don't see why that relationship would have to. I mean, you get this, the Fed lowers interest rates, right? So that happens because they're trying to stimulate the economy. Investors have this flight to safety. I don't see why either of those factors would go away. I guess it's just, do we keep getting a lower floor every time there's a recession?

I mean, what's the alternative? You know, we kind of got a little blip of this in the last couple of weeks where treasury bonds jumped 5% or so in the last couple of weeks when the stock market started to kind of get jittery. And to me, there is no alternative in terms of the truly safe assets.

I mean, Bitcoin's not the thing, and gold's not the thing. So, you know, so we have to get negative rates eventually, right? Like, isn't that... You know, I was talking to Nick Majulie the other night about this, and he asked me, he said, you know, gun to head, where do rates go, 5% or 0%?

I was like, oh, two guns to my head. I'll put two guns to my head and bet you that it goes to 0%. I mean, to me, the fact that rates didn't rise that much in an environment where, you know, we literally printed $7 trillion of new debt, and the Fed was stimulating up the wazoo, and CPI is at 6%, and interest rates are still pretty low.

If that doesn't make long-term interest rates rise, then, you know, it's starting to look like, well, what will? You know, outside of like the Jack Dorsey hyperinflation scenario, it's starting to look like, well, yeah, it seems like the demand for these things is so strong that the likelihood of going to zero is just so much higher than...

I think it's possible in like 30 years from now, people are going to look back and say, how did that ever happen in the '70s and '80s, right? Like that period is going to, I think that's going to be the outlier. More than this period, if we have it between like 1% and 4% or something, or 3%, or whatever the ceiling is now.

It's hard to, because people have always said, like, refinance your mortgage now, because mortgage rates are going nowhere but higher, and every time they go lower, right? I mean, people are so scarred by the '70s, especially like generations older than us. But it was such a unique situation. And it's kind of countered almost all of the big macro trends that are going on now where, you know, the demographics were totally different from the baby boomers in the '70s.

The tech trends didn't really exist in the '70s. And so it's just like completely different in terms of its environment when compared to the '70s. All right. Someone in the comments here says that Cullen has very good hair. I take that as an affront, because I thought I had the best hair.

Oh, Alex thinks he's got good hair too. All right. It looks like Cullen's picture also first, so I don't know what's going on with that. Okay, well, someone wanted to get a good shot of him. All right. Thank you, Cullen. Thank you, Alex. I turned myself off for the sake of these guys.

For coming in. Duncan, how did we do? First time live. It was good. Yeah, it was an experience. All right. We'll do a post-mortem after this and see what happened. Remember, if you have a question for us, it's AskTheCompoundShow@gmail.com. Next week, I'll be back in my office in Michigan.

Duncan will be in New York still. Thanks, everyone, for watching. And thanks to Cullen and Alex for coming on board. See you next week.