Agora Financial’s Rude Awakening

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Laguna Beach, California

• A tangible protection against inflation-inducing politicians,
• Slurping straws nearing the bottom of Lake Mead (crazy picture below),
• What on earth is a 4-minute showerglass? And plenty more…

Eric Fry, back in Laguna Beach, reports…

In yesterday’s 5-Minute Forecast, Chris Mayer, editor of Mayer’s Special
Situations, cited the frighteningly low water levels in Lake Mead as the
latest evidence that global water supplies are reaching a state of crisis.

Then, in yesterday’s Daily Reckoning, Christopher Hancock, editor of the Free
Market Investor, examined the world’s stressed water supplies from an
investment perspective. Taken together, these two timely observations
highlight both the gravity of the water crisis and the enormity of the
resulting investment opportunity.

When your editor, along with Chris Mayer and Dan Denning, cobbled together a
special report about water stocks one and a half years ago, few investors
bothered to investigate the issue. The prospect of a water crisis must have
seemed like the delusional fear of a hyperactive imagination. But today, we
see that a genuine water crisis has become a clear and present danger.

“The water level of Lake Mead has fallen so low that it threatens to dip
below the water intake pipes,” Chris Mayer explained in “The 5″ yesterday.

“These pipes, like giant straws, suck water out of the lake. So authorities
there have fast-tracked a project to extend the length of the intake pipes
closer to the bottom of the basin. Literally, we are getting close to the
bottom of Lake Mead.
 
“There aren’t any places to draw new water,” Mayer continued. “New pipeline
projects take time and money. Meanwhile, population growth in Nevada is among
the highest in the country. Something has got to give. One is that the price
of water rights will rise significantly. The other is that people can expect
many more water use restrictions out there.”

 
That ain’t paint… Lake Mead at critically low levels

“We were stunned at the magnitude of the problem and how fast it is coming at
us,” said Tim Barnett, a water researcher from the University of California
at San Diego. “Make no mistake, this water problem is not a scientific
abstraction, but rather one that will impact each and every one of us that
live in the Southwest.”

That’s grim news for those of us who live in bone-dry locations like Laguna
Beach. Already, Laguna’s local newspaper is bemoaning the possibility of
water-rationing by July. But investors need not fret.

“As an investor,” Mayer winds up, “you can own a company that owns water
rights out West. You can also own the company that supplies pipes for new
pipelines. I’ve been recommending investments in all facets of the global
water industry.”

Follow along with Chris in Capital & Crisis, including his “Blue Gold” water
portfolio, here.

Meanwhile, Mayer’s colleague, Christopher Hancock, has been monitoring the
water crisis on other parts of the globe…

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Waltzing on Water
By Christopher Hancock

Inflation erodes wealth, tangible assets preserve wealth. But which tangible
assets preserve wealth best? Ahhh, there’s the answer we all seek. I don’t
have the answer, but I’m happy to take a guess.

“[Inflation] discourages all prudence and thrift,” wrote Henry Hazlitt, the
late libertarian philosopher, economist and journalist for The Wall Street
Journal, The New York Times and Newsweek. “It encourages squandering,
gambling, reckless waste of all kinds. It often makes it more profitable to
speculate than to produce. It tears apart the whole fabric of stable economic
relationships. Its inexcusable injustices drive men toward desperate
remedies. It plants seeds of fascism and communism. It leads men to demand
totalitarian controls. It ends invariably in bitter disillusion and
collapse.”

The thief, the politician and the banker are seemingly playing the same game.
They’re playing the law of large numbers. Whether they steal by the sword or
by the pen, their craft effectively erodes the tangible wealth of a
productive society.

Inflation robs citizens of their productive efforts. It erodes their tangible
wealth. It leads, in effect, men toward desperate remedies. Consequently, the
average citizen isn’t left with many options. He can always study to become a
legislator or a central banker. If that doesn’t work, may we suggest dark
hoods and dark pants?

So I ask: How will you preserve the purchasing power of your savings, even
while politicians are busily eroding it away?

We believe businesses with tangible assets trading at depressed prices are a
great place to look. A recent article entitled “Lake Mead Could Dry up by
2021″ by Andrea Thompson, a staff writer for LiveScience, got us thinking
about water as a different sort of tangible asset, that’s still trading at a
depressed price.

Thompson writes: “Lake Mead, a key source of water for millions of people in
the Southwestern United States, could go dry by 2021, a new study finds.”

The study concludes that natural forces such as evaporation, changes wrought
by global warming and an increasing demand from the booming Southwest
population are creating a deficit from this part of the Colorado River
system.

Along with Lake Powell, which is on the border between Arizona and Utah, Lake
Meade supplies roughly 8 million people in the cities of Las Vegas, Los
Angeles and San Diego, among others, with critical water supplies.

The system is currently at only half capacity thanks to a recent string of
dry years, researchers say.

Land and water: What could hold better value?

The world’s immediate need for fresh water remains paramount. In China, for
example, two out of every three major cities have less water than they need.
Cities in northeast China have roughly five-seven years left before they run
completely dry.

Each year, the Gobi Desert devours 2,460 square miles of Chinese soil, an
area roughly the size of Delaware.

Why is Asia’s largest desert growing so quickly?

Through a process scientists call “desertification.” Basically, China’s rapid
economic growth comes at a great price. Air pollution inhibits precipitation.
Researchers from Israel’s Hebrew University of Jerusalem and the Chinese
Academy of Meteorological Sciences found that on hazy days, precipitation
from the top of Mount Hua in China’s northwestern Shaanxi province is cut by
up to 50%.

Consequently, one-quarter of China currently finds itself buried beneath
sand. But those lucky enough to fill their pipes with water have another
problem: 90% of China’s city aquifers are deemed polluted. Seven hundred
million Chinese drink water contaminated with either animal or human waste.
In most cases, their murky glasses contain both.

Westerners, however, take water for granted. We simply turn on the tap and it
flows. But that’s certainly not the case the world over. And from they way
things are looking, that may not be the case here much longer. Lakes around
the U.S. are running dry. In the West, we see this happening at Lake Mead. In
the East, it’s Lake Lanier.

Arid landscapes, low rainfall and quickly depleting underground water tables
make fresh water one of the most pressing issues facing countries.

You see, water, in essence, is a commodity. When scarce, it’s the one
commodity even more valuable than either oil or gold.

Solutions vary. Some have proposed towing icebergs. Despite being highly
inefficient, we’re not assured the icebergs will even be there to tow.
Others argue for heavy investment in desalinization. We see two potential
problems here. First, desalinization requires massive amounts of energy, as
well as specialized, expensive infrastructure. Saltwater conversion also
produces a byproduct of concentrated seawater that some scientists claim
contributes to marine pollution.

We also like to point out that desalinization takes place at sea level. For
flat regions like the Middle East, where desalinization plants account for a
majority of total world capacity, that isn’t too much of a problem.

But what about countries with steep terrain? Pumping water to higher
altitudes (Nevada) presents a significant challenge both economically and
physically.

And finally, for the most part, countries use desalinated water for washing,
filling swimming pools and watering golf courses…they rarely use it for
drinking.

We tend to believe that water rights in this century will be valued much like
oil rights were in the last. Best of all, central bankers can’t inflate away
the value of a clean glass of water.

[Joel's Note: When Chris Mayer (along with Dan Denning and Eric) recommended
a handful of water stocks a couple of years back, there was moderate interest
at best. Even so, the companies Chris selected skyrocketed shortly
thereafter. (Chris unloaded one for a 100% gain a few months back.) As the
problem of water scarcity becomes more and more prevalent, well positioned
companies will enjoy exponentially more upside than before.

If you’d like to take a peek at the revised report, read on here.

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————————————————-

[Rude Endnote: The water dilemma is somewhat closer to home, quite literally,
for your managing editor. Australia has suffered through the worst drought on
record in recent years. As a consequence, major crops – particularly wheat –
have been decimated Down Under, contributing to record high prices on the
world markets.

Last year, Australia’s Liberal Party announced a $9.2 billion federal
investment program to address the dire situation. Our friends and families
have been on strict water-restrictions, only allowed to use garden hoses and
such on certain days and facing stiff penalties fort exceeding rations.

In Queensland, the state government even tried handing out “shower glasses” –
4-minute hourglasses you take into the shower with you to time your bathe.

Are you going thirsty in your neck of the woods? Drop us a line and let us
know the situation.

We’ll be flying back to the Middle East over the weekend, so we’ll see you
again on Monday.

Until next time…

Cheers,

Joel Bowman
Rude Awakening