Saudis Follow Michael Burry in Water Investment ValueWalk, By Mark Melin  

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 told ValueWalk. 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.

And:

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.

The Big Short

El valor del no (o del pensamiento contrarian),  este bien podría ser el título alternativo de la excelente película de Adam McKay La gran apuesta, inteligente y cinematográficamente efectiva adaptación del libro homónimo de Michael Lewis sobre la historia detrás cd algunos de los gestores de hedge funds que sí vieron la gran estafa de las hipotecas subprime que acabó por llevarse por delante el conjunto de la economía global en 2008.

La película se basa de las historias de algunos de los variopintos personajes que sí tuvieron la inteligencia suficiente para analizar la realidad del mercado hipotecario estadounidense en el tumultuoso periodo desde principios de la década de los 2000, viendo la realidad con sus propios ojos, críticos, y no dando por sentados los mantras que se repetían entonces (como el manido “el mercado inmobiliario no puede estar sujeto a burbujas” o “la vivienda nunca baja”); y, al mismo tiempo, el coraje suficiente para decir NO, esta tendencia es insostenible; de no cabalgar con la ola y denunciar que el Rey esta desnudo; y vaya si el Rey iba desnudo.

The_Big_Short_teaser_poster

Se trata de una película -y un libro- altamente recomendables donde se puede leer buena economía (el libro ofrece, en mi opinión, la mejor explicación sobre el buen y mal uso de los productos derivados y otras sofisticaciones financieras), y permite reflexionar sobre algunas de las virtudes que siempre se sitúan en la base del éxito personal (cualquiera que sea el ámbito).

La crisis de 2008 no fue algo inevitable, ni tampoco fue una sorpresa para unos pocos que escogieron abrir los ojos y mirar evitando seguir el “patrón rebaño”, la alternativa cómoda, de nadar siguiendo la corriente. La crisis no fue una crisis “cíclica” (los ciclos han pasado a la historia, ahora vamos de burbuja en burbuja, pero sobre eso hablaré otro día); fue esencialmente una crisis estructural que hunde sus raíces en una arquitectura monetaria de dinero fácil al servicio de los bancos privados convertidos en verdaderos casinos en donde se realizan peligrosas apuestas con dinero ajeno. Mientras la ilusión deuda/inflación sube, no hay problema: todos felices; cuando la música deja de sonar, el sistema se desmorona como un frágil castillo de naipes en donde da igual lo que uno haya participado de la locura financiera, los costes se colectivizan bajo el peligroso argumento de “hubiera sido peor”.

La Gran Apuesta explica como unos pocos inversores -más de diez, menos de veinte, según Lewis–  no únicamente fueron capaces de entender la falla sistémica del funcionamiento de los mercados de crédito sino que tuvieron el coraje de tener una posición de riesgo en coherencia con esta visión: es decir, ponerse en corto contra el mercado hipotecario americano, algo así como ponerse corto (apostar a la caída) del conjunto del sistema (“skin in the game”, según la terminología de Taleb). En efecto, la descomposición fue denunciada por no pocos economistas, pero tan solo unos pocos tuvieron la pericia y el valor de tomar posiciones de riesgo acorde con esta visión pesimista (realista) con respecto a un sistema estructuralmente disfuncional que favorece la irresponsabilidad de los bancos privados tendiendo irremediablemente a la iliquidez. Todo lo anterior estaba sustentado por teorías falsas, limitadas o ya superadas, que observan de forma equivocada la realidad bajo el prisma neoclásico de expectativas racionales y sistemas de ecuaciones que pretendían explicar la complejidad (creciente) de los mercados.

Las historia de Michael Burry y Steve Eisman (Mark Baum, en la adaptación cinematográfica) son especialmente emotivas por su comportamiento honesto, y por momentos heroico, cuando defienden sus posiciones antes sus clientes en contra del pensamiento generalizado y soportando la burla de los grandes gigantes de Wall Street (la escena de Burry solicitando garantías a Goldman Sachs para asegurarse el pago de sus permutas de riesgo de crédito en caso de falla de la solvencia del banco es sencillamente sensacional). Burry y Eisman, también otros (como el célebre John Paulson, quién más fuertemente apostó contra los bonos hipotecarios basura; la historia de Paulson marca el relato de otro libro notable sobre la misma temática de Gregory Zuckerman, The Greatest Trade Ever), supieron ver lo que los demás se negaban aceptar, y mantuvieron sus posiciones aunque esto supusiera alzar la voz en contra, con las consecuencias sociales y laborales que este tipo de comportamiento suele acarrear.

Este sesgo negativo en contra las voces disonantes, sobretodo cuando estas son negativas o contrarian al pensamiento dominante son una constante en la historia. Meses antes de la gran caída bursátil de 1929, Paul Warburg, preminente banquero y miembro ilustre del establishment de Wall Street, tuvo la osadía de alertar sobre una inminente caída de la bolsa que pondría en peligro la solvencia del conjunto del sistema y que tendría un impacto fortisimo en terminos de crecimiento y empleo. Su voz fue desoída y sus críticas le supusieron cierto abadono social y desprecio por no saber lo decía. Lo explica muy bien Niall Ferguson en su libro (muy recomendable para los amantes de la banca) High Financer: The Lifes and Time of Siegmund Warburg.

Con cada generación, olvidamos los errores del pasado, con cada proceso de gestación de burbujas, solo unos pocos son los suficientemente inteligentes y valientes como para recordárnoslo. Lección que nos recuerda una película que, por otro lado, se llevará más de una estatuilla.

The next financial crisis (reflections of Michael Burry via Jessica Pressler)

Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming

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.