Money Printer 301: Productive, Scarce, or Nothing Else?
Let's start to apply our rules of the road to our portfolio...
Dear Fellow Traveler,
Markets are looking for a string of new datapoints in the days ahead, so we turn our attention to portfolio management.
Before our signal went Red two weeks ago before the gold/silver crash and last Wednesday’s momentum collapse, I asked readers a simple question…
I’m not talking about the ticker symbol.
And I don’t want to hear about the guy at the pool bar who told you he got a hot tip on cryptocurrency stocks.
I am asking about the fundamental reason why you took your money (a representation of your time), and applied it to a long-term investment instead of say… a jet ski?
After digging into the debasement question over the last week, and after studying a decade of how money moves through the financial system, we come to the point about wealth, inflation, and monetary debasement that needs guidance…
Unless you’re a day-trader, speculator, venture capital manager, or glutton for punishment, your bulk of investable assets should fit into one of two categories.
It should be either productive or scarce.
Now, there will be critics of this argument… and I’m okay with that.
But I’m speaking to the retail investor who doesn’t want to spend his hours starring at a line on a screen…
Stick with that…
If it’s neither… dig deeper into why you own it.
Your situation could be unique, but understand that in a world where your currency is losing 7% of its purchasing power every year, dead weight doesn’t just sit there.
It sinks.
What Makes an Asset Productive?
A productive asset exists to finance economic activity.
That’s really it…
In exchange for your money, it promises you future cash flows… dividends from stocks, coupons from bonds, or rent from real estate.
The returns come from the underlying business or activity creating value.
Warren Buffett has been investing in this for 60 years.
He’s told shareholders that productive assets are those in which the investment delivers increasing cash flow.
He said he’d take a good farm or a good business over any non-productive asset, every single time.
And for the most part, he’s right.
Productive assets are the engine of long-term wealth creation. They’re tied to GDP growth and human ingenuity, building things people actually want.
But here’s the problem Buffett doesn’t spend much time on.
Productive assets are concave.
That’s a fancy word borrowed from options pricing, but the concept matters...
When the economy contracts and credit freezes up, productive assets lose more than you’d expect based on their average behavior.
The downside is asymmetric. Stocks don’t drift lower in a crisis… they gap down.
Credit spreads blow out. The losses accelerate in ways that a normal distribution would never predict.
The returns that productive assets generate come from growth.
Growth is the first thing that disappears in a crisis. So every productive asset you own carries a hidden tail-risk exposure. The worse things get, the worse they perform, and the relationship isn’t linear. It accelerates.
This is why owning only productive assets… even great ones… leaves your portfolio structurally exposed to drawdowns.
Want to know what the next big thing around productivity will be?
It’s how AI increases Cash Flow. Companies that become AI-First moving forward… which is going to set the tone for the next few years. I’m going to talk about this a little more tomorrow…
What Makes an Asset Scarce?
A scarce asset exists for a reason entirely different from the others.
It doesn’t finance anything or promise you a coupon. It exists because there isn’t much of it, and in certain environments, everyone wants it at the same time.
Gold is the most obvious example.
There’s a fixed amount of it on the planet (at the current justified production price).
You can’t print more of it.
Jerome Powell has tried everything else, but he hasn’t figured out alchemy yet.
When money creation accelerates and trust in the system erodes, gold benefits precisely because its supply cannot be diluted.
But scarcity goes beyond gold.
Certain government bonds (when they carry safe-haven status), reserve currencies in specific regimes, and fast-moving momentum strategies all behave like scarce assets.
The key isn’t just limited supply. It’s that demand for these assets surges exactly when everything else is falling apart.
And that’s the critical difference.
Scarce assets are convex.
In the exact environments where productive assets are getting crushed… volatility exploding, inflation running hot, the market structure cracking… scarce assets tend to outperform more than you’d expect.
The upside accelerates precisely when you need it most.
This is the missing piece in most portfolios.
I Know What Some of You Are Thinking
I can already see… the emails.
“Garrett, Buffett himself says gold just sits there and looks at you.”
He’s right. In isolation, gold doesn’t produce anything.
It doesn’t compound and offers zero innovation. If you held only gold for 50 years, you’d have dramatically underperformed equities.
But you don’t own gold because it produces.
You own it because it goes up when everything productive is falling apart.
It’s insurance, not an engine.
And by the way… Buffett’s $300 billion cash pile doesn’t produce much either.
He understands the value of holding something that doesn’t break when the world does. He just won’t call it what it is.
“This is just a barbell strategy. Nassim Taleb already wrote about this.”
Nassim Taleb has written extensively about combining safe assets with asymmetric upside, and he deserves credit for it. And if you tell him that you went back to graduate school because his book The Black Swan drew you back into academic finance, he will nod, say “That’s nice,” and walk away… (True story…)
Never meet your heroes.
The productive/scarce framework isn’t claiming to be a new invention.
It’s telling you why the barbell works, specifically in a debasement environment.
When your currency is losing 7% a year, you need to know what goes on each end and why.
The barbell is the structure.
And the debasement rate is the justification for it...
“You can’t eat convexity. Gold doesn’t pay me while I wait.”
You’re not supposed to live off the scarce side of your portfolio.
If you are… you’ll be eating cans of pie filling at some point before looking at the nutrients in gold (there are none).
That’s what the productive side is for… the dividends, the cash flows, the compounding.
The scarce side exists so that when the productive side gets cut in half (and it will, eventually), you have something appreciating that you can rebalance from… and when they print more money… watch as both of these assets move higher in price…
You don’t eat your fire insurance policy either.
But you’re glad you have it when the kitchen catches fire.
Why This Matters Right Now
We covered in the Postcards debasement letter that agricultural commodities like wheat, corn, and cotton have negative real trends after stripping out currency dilution.
Productivity gains have driven their real prices down over time.
We’re really good at growing food. (My agriculture degree has yet to produce a single Lamborghini.)
But gold and palladium show positive real trends, even after adjusting for debasement.
Scarcity wins. Abundance doesn’t.
The same principle applies to equities.
Not every stock is equally productive.
Buffett’s entire career is a masterclass in sorting through the productive category and finding the companies that actually generate real returns above the debasement rate.
The metrics that matter here aren’t complicated.
Return on Invested Capital tells you how efficiently a company turns capital into profit. Anything consistently above 15% is a business that’s outrunning the money printer. Anything below 8% is running on the treadmill and losing.
The Piotroski F-Score gives you a nine-point checklist of financial health indicators: profitability, leverage, and operating efficiency. A score of 7 or above means the business is fundamentally sound. Below 4 and you’re holding something that’s deteriorating.
The Altman Z-Score measures bankruptcy risk. A score above 3.0 means the company is in no danger. Below 1.8 and you’re basically holding a lottery ticket with worse odds. In a world of currency dilution, you cannot afford to own companies with balance sheet risk because the margin for error disappears.
There’s the qualitative test that Buffett has always emphasized.
Does the business have a moat? Is it a monopoly or near-monopoly?
Can it raise prices without losing customers?
Because a company with pricing power is, in its own way, scarce.
There aren’t many businesses that can raise prices by 5% a year and keep every customer.
The ones that can are productive AND scarce.
Those are the ones you want to own forever.
The Filter
Here’s the simplest version of this framework.
Before you buy anything, ask two questions.
Is it productive? Does it generate cash flows, have a high ROIC, a strong balance sheet, and a competitive moat that lets it compound over time?
Is it scarce? Does it benefit from limited supply, and does it tend to rise when everything else is falling?
If the answer to at least one of those is yes, it belongs in the conversation.
If the answer to both is no… congratulations, you own the financial equivalent of a pontoon boat.
It’s expensive, it depreciates, and the only person who enjoys it is the guy who sold it to you.
Own things that produce.
Own things that are scarce.
And for heaven’s sake, stop holding things that you can’t explain...
Stay positive,
Garrett Baldwin
Amazing. An eye opener article!