Happy New Year and, as always very much enjoy your nightly newsletter. That said, very sorry to hear in Governance about your experience (I assume it was yours-maybe a contributor?) w BLM door knocking and your wife's apprehension. I am also in LA, for 35 years now and, in years past, my friends from across the pond only moved back when they couldn't take earthquakes or fires. We are also thinking of a move, after hearing friends talk about arming themselves at home because of police defunding, the state's inability to stop spending and taxing, etc. A sad state of a once great state. Be well

Eoin Treacy's view

Thank you for this email and I am one of the people who has recently armed himself. For me it’s the trend. Fires and earthquakes are a nuisance but don’t phase us. People are a different matter.

When we arrived in 2013 the city was quite different, at least to my eyes. Vagrancy and public indecency among the homeless have been a long running problem. However, in 2017 the City was barred from seizing and destroying the belongings of homeless people that are found on the street. 

After that, the number of homeless exploded on the West side. Google’s campus in Venice is surrounded by a large homeless encampment. They are building another one less than half a mile from my home which is due to open in the next 18 months. There is no one size fits all symptom for homelessness but the majority of people on the streets are not from California. The state has been a magnet for people trying to make it big for generations and the weather makes it so living on the street is possible.

In 2014 theft of anything less than $950 was made a misdemeanour. It has been a bonanza for thieves. Criminality has become big business and the lockdown riots were like all their Christmases came at once. On my block four cars have had their wheels stolen in the last eighteen months. There is very little the police can do. Videos are popping up everywhere of shoplifting from all kinds of stores. Here are two recent ones. (Cheviot Hills and Rodeo Drive)  The shoplifting ordinance was upheld by popular vote in the recent election so there is no end in sight to this trend.

We had the opportunity to take a lease on a prime retail location in September on the corner of Hollywood and Highland. It’s ground zero for Los Angeles’ tourist area and the pandemic meant the lease was attractive. We decided to forego it because who wants the hassle? The reality is casual crime and the risk of being sued are major impediments to many people starting brick and mortar businesses. Quasi-political social unrest adds another dimension to that. Ecommerce is not free from a version of shoplifting but it’s an easier business model overall.

I remain of the view that while the pandemic has been enormously challenging for the brick-and-mortar sector, the survivors will have more market share and can therefore prosper. Despite the headwinds they face from rising crime rates, the retail Armageddon is probably over. Macy’s real estate alone is worth more than the market cap of the company, for example.

Here is a section from a report from the California budget center from 2015: 

These characteristics of California’s tax system mean that wealthy Californians pay a large share of the state’s personal income tax. In 2012, the wealthiest 10 percent of households paid 80.4 percent of California’s personal income tax.

To be in the top 10% you need to earn $137,000 a year. To pay any taxes at all one needs to make more than $46000. The conclusion is simple. Politicians aim their policies at anything which benefits non-tax payers and the trend is only going one way.   


The big question is what happens when generous unemployment benefits run out? They have been extended for another three months and may be extended again after that. There is expectation that the Biden administration will have unfettered ability to increase government spending. The steepening yield curve and breakout in Treasury yields suggest otherwise. The willingness of the Treasury and the Fed to form a Faustian pact to adopt MMT is going to be the central question of 2021. Without it, the prospect of significant additional volatility has to be the base case.

Support for strong policing and zero tolerance of crime tend to move in cycles. It generally has to get bad and affect the lives of most people before they are willing to vote for “hard-on-crime” policies. Until then, the rights of the underprivileged are given priority at everyone else’s expense.

Terry Pratchett made the observation in the Discworld series that there is no crime without police. It’s a play on Berkeley’s thought experiment “if a tree falls in the forest does it make a noise if no one hears it? If we change the law and defund the police crime statistics improve, but the reality of life is altered. Governance is a trend and unfortunately in the USA it has been pointing lower for a while now.   

Nevertheless, it is still a wonderful place to live overall. The thing I like most about the USA is the willingness to openly discuss problems. Even if the polarization between the parties is growing wider, there is still a conversation. Democracy is a constant experiment. It’s fluid and a constant vying for equilibrium is what drives progress. Right now, we see plenty of volatility and this period is not over, but a new equilibrium will eventually be found.

This latest memo from Howard Marks also highlights the increasing polarisation in the performance of various sectors. His purpose is to highlight the false dichotomy between growth and value but it could just as easily be applied as a version of the master-slave dialectic unfolding in the political sphere.

Here is a section:

To summarize, businesses are both more vulnerable and more dominant in today’s world, with much greater opportunities for dramatic changes in fortune, both positive and negative. On the positive side, successful businesses have much more potential for long runways of high growth, superior economies, and significant durability, creating a huge pot of gold at the end of the rainbow and seemingly justifying valuations for the potentially deserving that off-puttingly high by historical standards. On the negative side, it also creates immense temptation for investors to overvalue undeserving companies. And companies with-and-now cash flows and seeming stability, can see those evaporate as soon as bunch of Stanford computer science students get funding and traction for their new idea.

The appendix “Dealing with Winners in Practice” in the above memo is eerily similar to the discussion of the third psychological perception stage of a bull market from The Chart Seminar. Buy and hold and increasing positions on dips is the number one strategy in a bull market. Having faith in one’s conviction, sitting out corrections and believing in the promise of the future is the only way to hold on during a bull market. It also makes selling after years of refusing to, extraordinarily difficult.

One of the primary characteristics of a mania is the belief that we need new young people who understand the new world and the new way of doing things to take the risks older, more conservative, people are unwilling to engage in. It seems Howard Marks has reached that Rubicon.

Bull markets don’t end because demand evaporates. They end because supply increases and liquidity tightens. The number of IPOs is rising, fewer companies are buying back shares, valuations are high. All can still go higher. The missing ingredient is monetary tightening. That’s why what happens with MMT and Treasury yields is so important.