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.

Investing in emerging markets has become de rigeur for equity investors in recent years. If you like stocks, goes the argument, how could you not like stocks in countries where growth is fastest? It’s probably fair to say that investing today with the objective of avoiding emerging markets is a more controversial approach than including them.

No doubt GDP growth and other measures of economic output are favorable in the BRIC (Brazil, Russia, India and China) countries than in the developed world. Frontier markets (for those who find mere Emerging Markets boring) are more loosely defined but include Argentina, Bangladesh and Croatia. Of course not every country gets promoted. The implicit promise is that an Emerging country will eventually emerge into the warm sunshine of the developed world. Sadly for Greece, they were recently relegated from developed and back to emerging by MSCI.

The faster growth enjoyed by these more dynamic economies doesn’t necessarily translate into superior returns for investors. China’s growth has moderated in recent quarters, but the central planners are still targeting 7% annual increases in GDP, around three times the sustainable rate in the U.S. However, investors in the iShares FTSE China 25 Index Fund (FXI) have since the end of 2007 endured an annualized return of -6.4% whereas over the same period the S&P 500 has returned +4.2%. The mechanism that translates increased GDP into investor profits isn’t that reliable in China. And why should this be surprising? Public policy objectives regard both real and intellectual property rights as subservient to government policy. Fair treatment of investors is a fairly low priority. John Paulson lost an estimated $500 million in his hedge funds through an investment in Sino Forest, a Chinese lumber company that on closer inspection appeared to be harvesting trees on property it did not own. Running a Ponzi scheme such as this one doesn’t draw the same ire of securities regulators that we see in the U.S.

Several years ago on a trip to India I found myself in a conversation with a senior member of the Securities and Exchange Board of India (SEBI), India’s securities regulator. “Approximately how many insider trading cases are prosecuting annually in India?” I enquired of a man closely involved in maintaining the integrity of India’s capital markets. “Oh none – there is no insider trading in India.” was his breezy response.

Intrepid buyers of securities in countries where  substantial segments of the population struggle with basic issues of human survival should leave their pre-conceived ideas of fair markets behind.

That doesn’t mean you shouldn’t invest in emerging markets – that is, after all, where the growth is. But it’s far more sensible to do so through large multi-national corporations who are infinitely more able to assess each opportunity, control their risk and wind up with a fair return. P&G (PG) is heavily focused on growing its already substantial sales in developing markets (currently $33-34 billion). Mondelez (MDLZ) reports that 40% of its sales are in emerging markets. IBM (IBM) is targeting 30% of its sales in Growth markets by 2015. We are invested in these companies and others like them, because their brands of products and services continue to have globally attractive growth prospects.

Investors can obtain exposure to the faster growth of the developing world through companies whose brands are sought throughout the world. In addition, they’ll be protected by U.S. standards of governance and accounting. It turns out that you don’t need to go abroad to invest there. Although we don’t invest directly in emerging markets, we profit from their growth through the expertise of global companies like these and others that do business there. Why do it any other way?

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.

Financial markets are not totally devoid of entertainment value. Sometimes a spectacle unfolds that can rivet one’s attention, rather like a movie in which the reckless driver who’s been handling his car aggressively takes one risk too many, causing his shiny sports vehicle to careen off the road and into the valley below.

This must have been the expectation of the shorts who sold 44% of the outstanding shares in Tesla (TSLA); that the company was over-hyped, relied on unproven technology and was doomed to fail taking its Hollywood investors with it. So imagine the wide-eyed horror of the unwitting passengers on TSLA’s current moon shot as they assess a company now worth over $10BN, trading at roughly 11 X trailing sales and 350 times trailing Gross Profit (there are no earnings). TSLA may be many things, but out of favor is not one of them.

As if a tripling of its price in six months isn’t bad enough, the shorts also have to deal with a CEO with a sense of humor. For Elon Musk, evidently not one you’d want to join at a poker table, has shown his exquisite understanding of markets by committing to invest $100MM of his own cash in the upcoming secondary offering of shares just as the shorts are enduring their own particular tail event. How often do you see that?

So TSLA’s price has moved beyond what must have been plausible for most short sellers, who like all shorts are further dealing with the consequences of a steadily growing position as it loses money. We have no position in TSLA and have no intention of taking one. But watching its stock price in recent days has been entertaining to say the least.

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.

Canada’s Business News Network picked up on my recent blog on Agrium (AGU) and the company’s plan to pay Canadian financial advisers who vote their clients’ shares in favor of management’s slate of Board nominees. Here’s a brief spot I did earlier 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.

I’m sure many found this riveting today. I worked with Ina Drew for many years and I’m sure like everybody who knows her was amazed at the losses last year. I grew to have enormous respect for Ina’s ability and can only imagine how difficult the past 15 months has been for her.

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.

Barron‘s has a decent overview of MLPs today. They could have been more critical of the various funds, exchange traded notes and ETFs that offer MLP exposure. None of these pass through the tax benefits to clients as effectively as a portfolio of direct holdings – although the managers being interviewed run such funds themselves. We also shy away from the E&P names where distributions are more volatile. Low volatility, “low beta” MLPs are better in our opinion.