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The China View from 30,000 Feet

I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So, I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director, Dominic Barton, when he passed through San Francisco visiting clients.

These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China?s GDP will triple relative to our own from current levels.

A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this didn?t work, they had another $500 billion package sitting on the shelf. But with GDP of only $5.5 trillion today, don?t count on China bailing out our $15.5 trillion economy.

China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC?s, and to live in big cities. Asia has a huge edge over the West with a very pro-growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75-story skyscraper is going up there every three hours!

Some 1,000 years ago, the Silk Road was the world?s major trade route, and today intra-Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths.

Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth.

To me, this all adds up to buying on the next substantial dip big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

FXI 6-12-13

DBA 6-12-13

PHO 6-12-13

Great Wall of China

Why Water Will Soon Become More Valuable Than Oil

If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long-term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.

Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.

Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert sea water into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost of water to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in concentrated form.

The UN says that $11 billion a year is needed for water infrastructure investment and $15 billion of the 2008 US stimulus package was similarly spent. It says a lot that when I went to the University of California at Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!

At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 14% since the October low. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.

CGW 2-11-13

PHO 2-11-13

FIW 2-11-13

Water Fall

Why Water Will Soon Become More Valuable Than Oil

If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long term investment theme. One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.

Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.

Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost of water to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in concentrated form.

The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the 2008 US stimulus package was similarly spent. It says a lot that when I went to the University of California at Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!

At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 14% since the October low. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.