A couple of years ago Goldman Sachs’ CEO Lloyd Blankfein was on TV almost every day promoting the good his company does for the economy. One of his less fortunate phrases in his otherwise highly articulate defense of his firm was that Goldman was “…doing God’s work.” I imagine he meant Goldman was engaged in doing things of which they could be proud rather than running a charitable enterprise, but it was an expression that stuck, such is life in today’s soundbite world.

Banks are fundamentally about aiding capital formation. This includes directing savers to sound investments that will preserve the purchasing power of their capital, and helping companies fund themselves with appropriate amounts of debt and equity capital. All of the trading, wheeling and dealing, M&A activity and fee generation ultimately comes down to the business of moving capital efficiently from those who possess it to those who can use it more profitably.

Given this calling, it is no doubt with some discomfort that on Saturday Mr. Blankfein and his colleagues confronted a New York Times article that described how their ownership of aluminum warehouses in Michigan was adding to the cost of anything that uses aluminum (which includes everything from soda to airplanes). When highly sophisticated managers of capital take on the business of holding inventory of raw materials, their natural inclination towards exploiting any arbitrage results in huge aluminum ingots being shuffled around the warehouse with no apparent purpose beyond increasing their cost to the buyer. For reasons not entirely clear, holding aluminum in a series of warehouses can be more profitable than delivering it, since longer storage time adds to the price paid by the buyer and therefore, ultimately, the consumer.

There’s still too many bankers, and maybe banks, who just don’t get it. The long, steady growth in financial services that began in the early 1980s and culminated with the Crash of 2008 brought with it a great deal of unnecessary trading and arbitrage that didn’t support the basic business of capital formation (see paragraph #2, above). The reasons for the financial crisis are varied and substantial blame lies with regulatory failures (poor oversight of mortgage lending) and poor public policy (over-investment in housing). But banks weren’t totally blameless, and the type of story highlighted above is just why Main Street thinks so little of Wall Street.

Where’s the judgment at that company, for someone to wonder whether managing an aluminum ingot warehouse so as to extract additional profit from just about everybody else was what banks are for?

In my upcoming book, Bonds Are Not Forever: The Crisis Facing Fixed Income Investors, I link the growth in financial services with the growth in debt and pose the question, is more banking really good for the rest of the economy? Goldman Sachs is certainly not all bad, but in this one vignette they have tossed a little more ammunition to those who believe that when it comes to Wall Street less is certainly more.

France’s culture minister has criticized Amazon for undercutting rivals and being a “destroyer of bookshops”.  Curiously, Aurelie Filippetti went on to claim that “Everyone has had enough of Amazon” although if French subjects weren’t such active customers Mme Filippetti would have to concern herself with less weighty matters.

No doubt online sales have greatly challenged traditional, brick and mortar sellers of books and music. This debate is at least a decade old. Obviously consumers prefer the far wider choice that a virtual inventory can offer compared with a physical one. Many more titles are available, and quite obscure niche writers and musicians can find an outlet for their work given the better business model offered by internet-based selling. I personally buy more books and music because of online availability. Books are the ultimate impulse purchase on a Sunday morning after reading the New York Times book review (online, naturally). Who would now buy a CD without first listening to the music, whereas 15 years ago countless musicians used to sell many mediocre songs bundled with a couple of hits?

Meanwhile, France is looking a bit like DisneyWorld, another American cultural icon that it officially disdains even while the French spend their money there. For Socialist France, like DisneyWorld, is increasingly a wonderful place to visit but definitely not somewhere you’d want to live.

We certainly make our share of mistakes, so don’t misread the absence of any gold mining exposure in our client portfolios as bragging. Regular readers of this blog will be aware of the occasional wrong turn. One of the most insightful lessons of Behavioral Finance is the overconfidence many people have in their forecasts of all kinds of things, from jellybeans in a jar to quarterly earnings. A recognition of how little short term certainty there is creates some humility around position sizing, and hopefully makes the inevitable mistakes small.

Writing about gold when it’s just had its biggest drop in 30 years is only for those who weren’t involved. The all-too-obvious problem with gold is that you can’t figure out its NPV, because it generates no cash. Instead it consumes a lot to dig it up, move it and store it. So we don’t avoid it because we’re bearish, we just can’t figure out its value. From time to time I’ll run in to people who own some gold as their, “when all else is lost at least I’ll have some” investment. The game’s not over, and they may turn out to be smarter than we are. But I always respond that if inflation is your fear, wouldn’t you rather own shares in companies that sell products everybody wants and have pricing power? Like Coke (KO), which reported earnings this morning ahead of analysts’ expectations.

There are some scenarios involving civil strife and a complete breakdown of civilization in which shares in KO or any other financial investment might be useless, and a stash of gold plus an armory a more appropriate position. You can’t be certain of very much, so even that has a probability > 0%. But 5%+ inflation and the discrediting of fiat money is a higher probability (albeit not yet the most likely outcome in our view). A portfolio of investments in companies that look like KO will probably offer a better prospect of holding its value than a lump of yellow metal. Businesses that can sell a little more product annually to the growing consumer base in emerging economies, and can be relied upon to pass through the cost increases that higher inflation might impose, can remind you why you own them each quarter

Gold will not have many days like yesterday, maybe not for at least another 30 years. But if you prefer the Coke Standard to the Gold Standard at least you have some future cashflows to estimate and present value back to today.

The EU has come up with a novel way of trampling over depositors’ rights in Cyprus with their proposed “tax” on depositors of Cypriot banks. So far through the Eurozone crisis depositors have been left whole, but the news on Saturday suggests they’ll be unwilling participants in the latest bailout. One might expect senior and subordinated debtholders to be taking a loss as well before depositors. That would be the more appropriate treatment of their capital structure. However, their €19BN economy supports a banking system with €68BN in customer deposits, and this highly leveraged system has hardly any senior debt outstanding. So finding the €5.8BN needed requires going after the depositors.

Even more amazing is the reporting that the tiered haircut (latest proposal of 3.3% on deposits below €100,000, 9.9% from €100,000-500,000 and 15% above) is designed to grab a significant amount of Russian investors’ money. The Cypriot President Nicos Anastasiades is a brave man.

One would think that a logical consequence of this move would be for Greek depositors to pull their cash from the Greek banking system. It’s probably a stretch to assume a run on Italian and Spanish banks,  but it must be a good bet now that the next Greek bailout will place their depositors at risk. This particular genie is out of the bottle. It’s frankly amazing that anybody ever held more than €100,000 in Cypriot deposits to begin with, but it must be that the days of large, unsecured deposits being held in southern European banks are numbered.

We haven’t changed any positions on the back of this news. The US$ should benefit but we’re not yet short the Euro. We still like being long US$ versus the Yen. America’s respect for property rights rests on a more solid foundation than in some other countries. The biggest positions we own (CXW, BRK, MSFT) are not overly exposed to such turmoil. But this news does potentially complicate the investment outlook.

Master Limited Partnerships (MLPs) are one of the more tax efficient income generating investments around, given that investors can deduct depreciation from their distributions and thereby defer portions of their tax liability until they sell. We’ve been running an MLP strategy for many years, directly invested in a portfolio of partnerships. This is the best way to own MLPs for high net worth clients.

Recently I’ve noticed a couple of articles discussing how much tax revenue the IRS forgoes through this treatment. A recent estimate from the non-partisan Joint Committee on Taxation put the figure at $1.2 billion annually.  It’s not much in the context of a $3.5 trillion budget, but still worth noting in case tax reform renders this a source of new revenue.

Another interesting development has been the strong growth of various funds (closed end funds, ETFs, ETNs) to hold MLPs for those investors unwilling to deal with K-1s. These vehicles give you a 1099, but the price you pay is a complete loss of the tax efficiency MLPs provide. 1099s come at a considerable cost. Nonetheless, these vehicles are growing strongly. Barrons noted their growth and listed funds that held in aggregate $22BN in MLPs, which is about 10% of the float adjusted market cap of the Alerian MLP index.

Although all these vehicles are only appropriate for smaller investors, their growth is performing a great service to people who continue to invest directly in MLPs and receive K-1s. Because the indirect investors are receiving their returns after tax, the tax loss to the U.S. Treasury is less than would otherwise be the case. Let’s hope that all these funds continue to grow, funded by smaller and less tax sensitive investors.