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Understanding the Dynamics of Productive and Scarce Assets

Understanding the Dynamics of Productive and Scarce Assets

Trading and Investing

Gregory C. Jones and Max Golts released a thought-provoking research paper exploring the intricate dynamics of investable assets!

Effectively categorizing them into two distinct types: productive and scarce.

Golts & Jones’ analysis is meticulously detailed in their paper “The Concave and Convex Profiles of Productive and Scarce Assets.” The read offers a fresh perspective on asset management and strategy formulation, especially in today’s complex financial landscape.

The Dichotomy of Productive and Scarce Assets

Jones and Golts articulate that most investable assets can become broadly classified into two categories: productive and scarce.

Productive assets become characterized by high equity beta and positive carry. These assets typically exhibit concave supply dynamics, suggesting that they are abundant and their availability increases as their price increases. Examples of productive assets include equities and commodities that are essential for economic growth.

On the other hand, scarce assets are defined by their store-of-value and risk-hedging attributes. Which are critical during economic downturns or periods of uncertainty. These assets display convex supply curves, indicating that their availability is limited and does not necessarily increase with rising prices. Key examples of scarce assets include gold, safe government bonds, and major reserve currencies.

Analytical Approach: Skewness and Coskewness

To systematically categorize these assets along the productive-scarce spectrum, Jones and Golts employed statistical measures such as skewness and coskewness in relation to major risk factors. Their empirical study, spanning from 1973 to 2022 and encompassing over a hundred investable assets, reveals that productive assets generally show negative skewness and coskewness. This means they tend to underperform during market downturns but offer higher returns in growth periods.

In contrast, scarce assets often manifest positive skewness and coskewness, performing well in times of market stress or uncertainty. The paper also examines alternative assets and strategies, such as fast momentum strategies, which exhibit a convex profile due to the scarcity of liquidity.

For instance, in a traditional 60/40 portfolio, stocks represent productive assets due to their growth potential, whereas bond duration exemplifies scarce assets, offering stability and risk mitigation.

Golts & Jones’ study suggests investors consider incorporating a mix of both asset types to achieve a balanced and robust portfolio.

Gregory C. Jones and Max Golts provide a clearer understanding of how different assets behave under varying economic conditions. Furthermore, their work underscores the importance of strategic asset allocation in achieving long-term investment objectives and stability.

We highly recommend reading this paper!

The Concave and Convex Profiles of Productive and Scarce Assets by Maxim Golts, Gregory C. Jones :: SSRN