Our home in Palm Beach Gardens, Florida, was just a few miles from the eye of hurricane Frances. Fortunately, the only damage we sustained was a busted screen porch and a shattered garage door window.
The Weiss School, our elementary and middle school two miles from our home, was hit harder. The winds ripped up a part of the roof and flooded about a fourth of the building.
But it could have been a lot worse.
By the time Frances reached Florida, it was a relatively tame category 2, and no one got hurt. Ivan, in contrast, now slamming Western Cuba and aiming for the Florida panhandle, is wavering between a category 4 and 5. It’s the sixth most powerful storm in recorded history, far stronger than Andrew which leveled parts of South Florida in 1992. It’s already claimed scores of lives. And it’s far from over.
That’s why Elisabeth had pleaded with me not to take down our storm shutters yet, and why, rather than meet in the dingy darkness, I decided to drive to the nearby Marriott Hotel yesterday for a meeting with Larry Edelson. Larry was formerly the co-editor of my Safe Money Report. Now he’s editor of his own publication, Real Wealth.
Years ago, Larry and our staff began a research project that was massive in scope: To map out the myriad changes in our natural environment and determine their impact on the economy, the financial markets, and specific investments. Our code name for the project: Nature’s Revenge.
So, yesterday, in the clear sunny weather between Frances and Ivan, I asked Larry to give me a summary of the results.
Blue Gold
“This is much more than a story about hurricanes,” he said. “It’s about a whole series of changes in man’s surroundings that could transform investing as we know it today. In some parts of the planet, you’re seeing floods and mudslides. In other areas, you’re seeing more scorching temperatures, sweltering nights, blazing days. The 1990s was one of the hottest decades in recent history. The 2000s are shaping up to be even hotter.
Larry paused and then began to cite some examples.
“Look at Montana’s Glacier National Park: A symbol of raw, Rocky Mountain beauty. But it’s quickly losing its namesake ice. Look at Alaska. The permafrost is thawing, causing up to 33 feet of ground to subside.”
For a few minutes, Larry and I talked about the cause of rising global temperatures.
“Environmentalists blame it, of course, on green house gases. Others blame el Niño or la Niña. Still others say it’s just part of a natural 1,000-year temperature cycle. But it doesn’t really matter what’s driving the mercury higher – the impact is the same: A massive, worldwide shortage of fresh water.
“Each and every minute of every day,” Larry continued, “over one billion people around the globe don’t have access to clean, fresh, potable drinking water. More than a third of the world’s population – about two billion people – live in countries with moderate to high water stress, where consumption exceeds available supplies of drinking water. Across the globe, 20 countries already face water scarcity. In many regions, water is so scarce, it’s like blue gold.”
“For example?”
Larry glanced down at his notes but didn’t have to. He had most of the facts in his head. “In China, for example, available water supplies adequately support only about half of China’s 1.3 billion population. Among China’s 617 cities, 300 of them – also nearly half – face serious water shortages.
“In Thailand and Malaysia, rivers now carry 30 to 100 times more pathogens, heavy metals, and industrial poisons than the government supposedly allows. Water-related diseases are rampant.
“India gets 90% of its annual rainfall during the summer monsoons, from June to September. The rest of the year it is basically bone-dry, with hardly a drop of rain. It’s estimated that India and other countries with similar climates can actually use no more than 20% of their annual freshwater resources.
“In Karachi, Pakistan, poorly-maintained sewage treatment plants with clogged pipes can barely manage to operate at 15% of their design capacity. Most of the sewage leaks out into the soil and contaminates the city’s drinking water wells, causing sickness and death.
“Jordan, Israel, and Saudi Arabia all suffer chronic water shortages. They’re forced to import as much as 91% of their fresh water needs from other countries.
“In parts of Iran, the fresh water table or aquifer has plunged an astonishing eight meters. It has created a swelling flow of ‘water refugees.’ They’ve abandoned entire villages because the wells have run dry.
“Dams in Turkey and irrigation in Syria have reduced Iraq’s water supply from the Tigris and Euphrates rivers by one third. That was even before the war. Now it’s much worse.
“In Africa, 20 million people in six countries depend on drinking water from Lake Chad, an aquifer that has shrunk 95 percent in the past 38 years. According to the African Development Bank, nearly two-thirds of Africans who live in rural areas lack an adequate water supply.
“In Mexico, 90% of the land is high and dry. The per capita water supplies are 3,470 cubic meters, less than half of the world average. Mexico City is sinking at the rate of nine centimeters per year – mainly because so much water is being sucked out from under it.
“In Lima, Peru, three million people are having their water supplies cut off for twelve hours every night from 5 p.m. to 5 a.m. – due to water rationing. There are high altitude reservoirs in the Andes, where Lima’s water comes from. But the reservoirs have shrunk by 43% below normal.”
Shortages in Europe and the U.S.
I asked Larry if the problem was limited to developing nations. His response: “Heck no! In Europe, over 90% of the rivers have high nitrate concentrations. That’s as much as 200 times more than in unpolluted rivers. Over half of Europe’s lakes have become clogged with life-choking algae from agricultural and municipal drainage. Three-fourths of Poland’s river water is too polluted even for industrial use.”
“What about the U.S.?”
“Groundwater is being used up at a rate 25% faster than it is being replenished. In the western states, we have a decade-long drought. The drought is now threatening drinking water supplies for major cities and irrigation for food production. U.S. Geological Survey scientists say that – right now – the West could be experiencing its worst drought in 500 years. The Colorado River, which provides drinking water for Las Vegas, Phoenix, and Los Angeles, is at its lowest flow on record. Over 173,000 miles of fresh waterways throughout the continental U.S. are polluted.”
“And you attribute this mostly to the warming trend?”
“Of course not. Regardless of climate trends, the demand for drinkable water far outpaces supply. According to the U.S. Census Bureau’s World Population Clock, the human race is 6.4 billion strong at latest count … and the count is rising at the rate of 80 million new thirsty mouths each year.
“In water terms, that’s bad news. Nearly two billion people have been added to the planet just since 1970. Meanwhile, the per-capita supply of fresh water is one-third LOWER today than it was then.
“But almost 70% of the available fresh water gets used for irrigation in agriculture. Irrigation is the biggest water waster of all. Only 35% to 50% of the water used in irrigation actually helps grow crops. The rest leaks, evaporates, or runs off into surface waterways. Then it carries a toxic load of agricultural pollutants.”
The sun beat down as we walked outside the hotel. Immediately to the right, a mammoth tree was on its side, uprooted by a combination of high winds and too much water in the ground. Litter from the storm was everywhere. In wet Florida, dryness and water shortages seemed distant. But we knew that excess rainfall here was the natural corollary of droughts in other regions of the world.
“What do you think will be the consequences for investors?”
“We’ve reached – or will soon reach – a critical stage in history in which the explosive growth of civilization collides with the powerful forces of nature, and the longer we ignore it, the greater nature’s subsequent revenge. This means either we slow down or we bump up into a kind of semi-permeable growth ceiling. No, it won’t stop all economic growth. But it will make economic growth tougher and choppier.”
“So how do investors make money?”
“By seeking out the few companies that will help us out of this mess.”
“Such as?”
“Such as companies that get fat government contracts to provide solutions. Thirsty citizens will demand action from their governments, and governments will scramble to find solutions. New York City is already spending $1 billion to conserve and protect upstate water catchment areas.
“In the U.K, businesses can now claim 100% credit for capital allowances spent on plants and machinery to reduce water use and improve water quality. 100%! I figure that tax credit should act as a powerful stimulus for some companies. I’m talking about companies that supply meters and monitoring equipment, flow controllers, leakage detection, water taps, etc.
“Here’s the big picture: In the U.S. alone, the water industry will grow by 7% per year to $150 billion. The EPA estimates that we need to spend at least $138 billion by 2016 just to meet the requirements of the Safe Drinking Water Act. But private sources say the EPA’s figures are grossly underestimated.
“Meanwhile, more and more U.S. cities are choosing to privatize their water supply systems, leading to contracts for vendor companies good for as much as 20 years. That’s two decades of guaranteed revenue. But I wouldn’t invest in just any water company.”
“So where do you see the biggest opportunity right now?”
Two Water Companies in China
“In China! China’s water resources are the fifth largest in the world, and its winding rivers have nurtured civilizations for more than five thousand years. But with the country’s 1.3 billion people modernizing at rates never before seen in history, China’s rivers – including the legendary Yangtze – are drying up. China now has one of the worst water shortages on the planet.
“Arable land is bone dry. In the major east coast cities like Beijing and Shanghai, the resulting dust storms that blow in from surrounding areas like the Gobi desert are causing epidemic surges in asthma, emphysema, and bronchitis.
“China’s water shortage is now so severe that the annual per-capita water supply is one-fourth the global average, according to the World Bank. In other words, on a per-capita basis, Chinese citizens have only one-fourth the amount of water available to them compared to the rest of the world.
“That’s just the supply side. On the demand side, the future of available water in China is bordering on the apocalyptic. According to the World Bank, water demand in China is exploding exponentially and will create a water shortage that “will soon become unmanageable, with catastrophic consequences for future generations.”
“Right now, the Chinese government wants to entice solid foreign companies to help solve its water crisis. The best way to do that: Offer them fat profit margins!
“But most investors and analysts aren’t paying attention to the water crisis in China. They don’t know how to profit from the opportunity. They don’t know where to turn. They don’t know the companies with the inside track on the crisis. So, the companies that are uniquely positioned to benefit from China’s water crisis are overlooked and, in my opinion, dirt cheap compared to their profit potential.”
The Best Way To Play China’s Water Crisis
I told Larry I had heard that some people are focusing on major water bottling companies Рlike Nestl̩, the owner of Perrier, or Group Danone, the owner of Evian.
But Larry shook his head. “I don’t recommend that,” he said. “Sure, companies like Nestlé and Group Danone are moving into China’s water market … but how many of China’s 1.3 billion people – earning an average of $1,000 per year – can afford bottled water?
“A far better way,” he continued, “is to invest in select companies that are working on the infrastructure of water – building plants to clean waste water … desalinate ocean water … building and modernizing the water distribution system throughout China, especially in major cities.
“These are typically companies with the inside track on China’s water crisis, and either have been – or are close to – bagging important contracts with the Chinese government.
“There are two companies in particular that get my attention. The first company is a major player in helping bring fresh water to China’s billion-plus population. It manufactures industrial water pumps, and it also designs and operates waste-water treatment plants. The company sells everything from shallow well pumps for individual homes to sewage systems for large cities.
“It’s involved in one of the largest construction projects ever undertaken by mankind – the Three Gorges Dam along the Yangtze River. This $25 billion project (although some estimates are as high as $75 billion) is expected to be completed in 2009, and is the world’s largest water conservation effort.
“This company is also the leading firm providing waste-water treatment facilities in Shanghai, with its population of 13 million people. Shanghai faces one of the worst water shortages in China. The city’s per-capita water availability is just ONE-TENTH of the world’s average!
“Moreover, this company is set to develop and operate the first ever waste-water treatment plant in Zhengzhou, a city of nearly 6 million people.”
“And the second company?”
“The second company is smaller, but it’s also positioned to become a major player in China’s water market. But its market cap of nearly one billion is respectable and it has been in the water industry since 1874!
“Now, with the connections this company has amassed in China, I think it is very likely to vault in value from a small-cap natural resource company to a multi-billion-dollar conglomerate.
“The company operates two wholly owned subsidiaries and one joint venture in China. Its commercial products (such as control valves and water pressure regulators) are higher growth, higher margin businesses – precisely the kind of products needed in China’s booming economy as high-rises, factories, and hotels are built at break-neck speed.
“This company is also involved in the lucrative Three Gorges project and has signed contracts with Chinese municipalities as well.”
“Larry, you’ve given us everything but their names.”
“The first company is ITT Industries, symbol ITT. The second is Watts Water Technologies, symbol WTS. My subscribers should already own them. So it’s OK by me if your readers buy them, too.”
I reminded Larry of the risks – and the importance of limiting your investments in stocks like these to small amounts. He agreed.
For more details, I recommend his Real Wealth Report. Or, if you want to hear from Larry weekly at no cost, you should get his free weekly e-mail, Real Wealth Dispatch.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
martinonmonday@weissinc.com
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