We are accustomed to reading and listening to water policy from the perspectives of agribusiness, local, state and federal government, and of environmental concerns. It is a great discord of competing and conflicting public and private interests that is typically a win/lose situation for the weakest, least organized constituency -- the public.
Today, we are just peaking at the opening page of another chapter: water from the Wall Street perspective. Granted, Wall Street has always been there in one guise or another and we often don't notice the influence of the evermore powerful force of monopoly finance capitalism.
This is just a taste of some basic terminology, strategies and propaganda.
Still Water Runs Deep
Matthias Paul Kuhlmey
If we follow acclaimed hedge fund manager Michael Burry’s (one of the main characters from the book, The Big Short) investment path, the next big opportunity (or crisis, for that matter) will be related to water. In full agreement, we have been publishing our side of the story: first in our 2014 post,"Glass Half Full," establishing the investment thesis, and then in 2015, with"Dry Spell," offering a proprietary investment framework related to U.S. drought conditions (as per our own definition) and an investment in water vs. global small cap stocks in general.
Analyzing drought conditions in the U.S. over the past 10 years, our findings show that during “drought periods,” the S&P Global Water Index (composed of 97 percent small cap stocks) has outperformed the MSCI World Small Cap Index by 68 percent. To the contrary, during “non-drought periods,” the S&P Global Water Index has underperformed by 24 percent; the difference in relative performance between those two periods is more than 90 percent!
Score Card: Ever since having introduced our work in 2015 via this blog, our model continues to be right 75 percent of the time in correctly identifying the out- or underperformance of water stocks vs. global small cap stocks. An exception, in this respect, remains the current period; as of 11/27/2015, the model triggered an overweight to global small cap stocks as opposed to water stocks, but the latter have relatively outperformed by nearly 3 percent since that time.
Undeniably, there are flaws to every model, but the current trend in favor of water stocks is likely linked to two aspects: 1) persistent drought conditions and water scarcity, especially as observed in California, paired with a forming public awareness, and 2) the water-related investment story (see our original thesis) may finally be coming through, with more mainstream investors considering this particular allocation choice. In my personal view, it still is an early-stage opportunity.
Saudis Follow Michael Burry in Water Investment
The latest hot investment is a water investment, one that is particularly liquid but deals in a scarce commodity.
Water has always been a valuable commodity, but it is one that many experts have said is under appreciated, under priced and laced with government subsidies. Hedge fund legend Michael Burry of The Big Short fame first popularized the idea of investing in water, and now the government of Saudi Arabia investing in U.S. water rights is raising eyebrows.
Water is a cheap commodity
The days of “cheap water” are behind us, Ben Grumbles, President of the U.S. Water Alliance, previously toldValueWalk. He says water and its infrastructure has been “taken for granted” and is “a leaking time bomb.”
The commodity that is perhaps most under appreciated in the U.S. was the focus of Michael Burry’s next “big short” for a reason.
“We often spout off the fact that 70% of the Earth’s surface is covered in water,” Burry was quoted as saying. “While this is true, freshwater – the kind we care about – actually only represents 2.5% of that amount. On top of that, only 1% of our freshwater is easily accessible, with most of the other 99% trapped in glaciers and snowfields. In the end, only 0.007% of the planet’s water is actually available to fuel and feed the world’s 7 billion people.”
The United Nations has noted water use has grown at over twice the rate of the world’s population, with today people using nearly 30% of the world’s total accessible renewal supply of water. Projections are that in less than 10 years, that percentage could reach 70% and by 2025, an estimated 1.8 billion people will live in areas plagued by water scarcity, with 2/3rds of the world’s population living in water-stressed regions.
Drinkable water is a scarcity issue, something that they are well aware of in Saudi Arabia.
Saudis pile in on water investment
Almarai Co., Saudi Arabia’s largest dairy company, recently purchased land and water rights in California’s Palo Verde Valley, an area that has preferential access to water from the Colorado River. The Saudi company was reported to have acquired a large tract near Vicksburg, Arizona, a region known for fewer well-pumping restrictions than other parts of the state. The purchase of nearly 14,000 acres enable the Saudis to take advantage of weakened water rules and the move is not sitting well.
“It flies in the face of economic reason,” said John Szczepanski, director of the U.S. Forage Export Council. “You’ve taken on all of the risk a farmer has. The only way you can justify that is that they’re really not trying to make a profit. They’re trying to secure the food supply.”
Indeed, not only does Saudi have a water problem, but it could be getting worse due to recent Government cuts (although at least for now the Government has no plans to stop water investments). A recent report from Jadwa Investment notes:
Another project to commence operations is the $2 billion oil-fired power and desalination plant in Yanbu, with a capacity of 2,500 mw of power and 550 thousand cubic meter a day (cm/d) of desalinated water.
The rapid growth in demand for power and water will continue to be met with continuous project expansion.
Watch water investment, it could be the next big thing.
New York Magazine
Michael Burry, Real-Life Market Genius FromThe Big Short, Thinks Another Financial Crisis Is Looming
By Jessica Pressler
If The Big Short, Adam McKay’s adaptation of Michael Lewis’s book about the 2008 financial crisis and the subject of last month’s Vulture cover story, got you all worked up over the holidays, you’re probably wondering what Michael Burry, the economic soothsayer portrayed by Christian Bale who’s always just a few steps ahead of everyone else, is up to these days. In an email, which readers of the book will recognize as his preferred method of communication, the real-life head of Scion Asset Management answered some of our panicked questions about the state of the financial system, his ominous-sounding water trade, and what, if anything, we can feel hopeful about.
The movie portrays all of you as kind of swashbuckling heroes in some ways, but McKay suggested to me that you were very troubled by what happened. Is that the case?
I felt I was watching a plane crash. I actually had that dream again and again. I knew what was happening, but there was nothing I, or anyone else, could do to stop it. The last day of 2007, I couldn’t come home. I was in the office till late at night, I couldn’t calm down. I wrote my wife an email and just said, "I can’t come home; it’s just too upsetting what’s happening, and I didn’t want to come home to my kids like this." As for punishment of those responsible, borrowers were punished for their overindulgences — they lost homes and lives. Let’s not forget that. But the executives at the lenders simply got rich.
Were you surprised no one went to jail?
I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either — all those VCs and dot-com executives still live in their mansions lining the 280 corridor on the San Francisco peninsula. The little guy will pay for it — the small investor, the borrower. Which is why the little guy needs to be warned to be more diligent and to be more suspicious of society’s sanctioned suits offering free money. It will always be seductive, but that’s the devil that wants your soul.
When I spoke to some of the other real-life characters from The Big Short, I was surprised to hear that they thought that financial reform was pretty effective and that the system was much safer. Michael Lewis disagreed. In your opinion, did the crash result in any positive changes?
Unfortunately, not many that I can see. The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.
How do you think all of this affected people's perception of the System, in general?
The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial. I see it a little differently. If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. This crisis was such a bona fide 100-year flood that the entire world is still trying to dig out of the mud seven years later. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it’s the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.
Where do we stand now, economically?
Well, we are right back at it: trying to stimulate growth through easy money. It hasn’t worked, but it’s the only tool the Fed’s got. Meanwhile, the Fed’s policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.
What makes you most nervous about the future?
Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.
The last line of the movie, printed on a placard, is “Michael Burry is focusing all of his trading on one commodity: Water.” It sounds very ominous. Can you describe this position to me?
Fundamentally, I started looking at investments in water about 15 years ago. Fresh, clean water cannot be taken for granted. And it is not — water is political, and litigious. Transporting water is impractical for both political and physical reasons, so buying up water rights did not make a lot of sense to me, unless I was pursuing a greater fool theory of investment — which was not my intention. What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. A bottle of wine takes over 400 bottles of water to produce — the water embedded in food is what I found interesting.
What, if anything, makes you hopeful about the future?
Innovation, especially in America, is continuing at a breakneck pace, even in areas facing substantial political or regulatory headwinds. The advances in health care in particular are breathtaking — so many selfless souls are working to advance science, and this is heartening. Long-term, this is good for humans in general. Americans have so much natural entrepreneurial drive. The caveat is that it is technology that should be a tool making lives better in the real world, and in line with the American spirit of getting better and better at something, whether it’s curing cancer or creating a better taxi service. I am less impressed with the market values assigned to technology that enhances distraction. We don’t want Orwell’s world, but we don’t want Huxley’s world either.
Wall Street Journal
California’s Water Injustice
Despite El Niño rains, the feds keep favoring fish over farmers.
Editorial Page Writer Allysia Finley on why federal regulators are depriving Central Valley farmers of much-needed water. Photo credit: Getty Images.
El Niño has doused northern California, but farmers in the state’s Central Valley won’t see much benefit. The Obama Administration is again indulging its progressive friends at the expense of low-income communities.
The Bureau of Reclamation recently announced that Central Valley Project agricultural water contractors south of the Sacramento-San Joaquin River Delta would receive a mere 5% of their contractual allocation this year despite brimming reservoirs in the North. Lake Shasta is at 90% capacity, and billions of gallons of water were released from Lake Folsom this winter to avert flooding.
Meantime, wildlife refuges and farmers north of the Delta—those in Democratic Reps. Jerry McNerney and John Garamendi’s districts—will get 100% of the water they’re owed. The liberal gentry in the Bay Area, which pipes its pristine water directly from Hetch Hetchy reservoir, also won’t be affected by this government water rationing. Federal biological opinions limit Delta water pumps to a third of capacity to protect endangered smelt and salmon, which can get sucked into the machines. Despite these restrictions, fish populations continue to decline.
The Fish and Wildlife Service acknowledged last year that “existing regulatory mechanisms have not proven adequate” to halt the smelt’s decline and that “we are unable to determine with certainty which threats or combinations of threats are directly responsible.” The bigger culprits appear to be invasive species, Delta farm fertilizer, Sacramento effluence, the drought and, perhaps, natural selection.
The Obama Administration is nonetheless doubling down on a failed policy. Amid this winter’s storms, Delta water regulators reducedwater pumping to protect putatively vulnerable larval and juvenile smelt. Three adult smelt—and no juveniles or larvae—have been killed by the pumps this year.
This environmental injustice has piqued Senator Dianne Feinstein,who on March 11 demanded that federal agencies base “pumping decisions on better science.” “In some instances these decisions were made even though available data suggested no smelt or salmon were anywhere near the pumps” while “in other cases, adult smelt were spotted as far as 17 miles from pumps, which led to reduced pumping levels,” she noted. “There are real-world consequences to the decisions” such as a melon farmer and his father who lost their farms, which employed 450 workers.
Ms. Feinstein’s pleas were ignored. On March 24—two days after the White House hosted a “water summit” to discuss challenges “in predominantly poor, minority, or rural communities, where water inequality can go hand-in-hand with socioeconomic inequality”—the Democrat appealed to President Obama.
“It seems to me that the agencies operate the system in a manner that may be contrary to the available data,” Senator Feinstein wrote. “Between January 1 and March 6 last year, 1.5 million acre feet of water flowed through the Delta and 745,000 acre feet were pumped out. During the same period this year, 5.5 million acre feet of water flowed through the Delta, but only 852,000 acre feet were pumped out.”
The San Luis and Delta-Mendota Water Authority says 700,000 acre-feet of water—enough to irrigate about 200,000 acres of land and sustain 700,000 families for a year—were lost between Dec. 1 and March 22 due to pumping restrictions. On March 25 regulators announced they would reduce pumping even more to protect smelt larvae. Forget you, Feinstein.
As she noted, restoring depleted groundwater reserves during wet years is essential to prevent aquifers, land and infrastructure from collapsing. It’s also needed to sustain farms. During the drought, farmers have had to drill deeper wells or buy water at a premium from those with senior water rights. The alternative is to leave land fallow—some 500,000 acres last year.
This government-made water shortage has had a trickle-down effect on the Central Valley, where unemployment is in the double digits and nearly a quarter of residents live in poverty. According to the Bureau of Economic Analysis, the Madera and Merced economies shrunk by 1% in 2014 while San Jose’s GDP grew 6.7% and San Francisco’s 5.2%.
House Republicans and Senator Feinstein have backed legislation to give federal agencies discretion to increase pumping during heavy storm flows. Ms. Feinstein last month told the Sacramento Bee that Mr. Obama hasn’t engaged. The unavoidable conclusion is that the President and his green patrons care more about protecting fish larvae than the poor.