Navigating the “New Era” for Water

By Seth Van Brocklin

“People should realize we’re in a new era. The idea of your nice, little green grass getting lots of water every day, that’s going to be a thing of the past.” So declared California governor Jerry Brown.

California has been suffering through one of the worst droughts in the state’s history. In response, state officials have mandated an unprecedented 25% reduction in water-use. This after Governor Brown issued an executive order that exacts punitive fines on citizens who water their lawns or wash their cars.

California is known as a social and political trendsetter. Is California setting the precedent for strict water rationing to make its way to much of the rest of the country?

Economic Illiteracy, Ideological Posturing Drives Water Restriction Campaigns

That such a thing is even conceivable shows just how ignorant policymakers are when it comes to the economics of water resources. Or at least they’re acting as if they’re ignorant.

Surely the people who devise water regulations know that agricultural uses (largely government subsidized) account for around 80% of water demand in California and other Western states. Surely they know that scolding people for watering their front lawns or taking long showers won’t save a meaningful amount of water.

And none of these “emergency” measures will do anything to secure future supplies of water to meet growing demand.

The economic reality is that water shortages don’t exist. There are only shortages of infrastructure to deliver water from where it’s plentiful to where it’s needed. The lack of infrastructure is due to the political mis-pricing of water and the regulatory controls placed on water utilities.

California borders a massive body of water. You might know it. It’s called the Pacific Ocean. Desalination technology makes it possible to convert salt water into potable water.

Of course, desalination is an expensive, energy-intensive process. But it works for Singapore, Australia, Dubai, and other countries. It can work in California. But first, the demand for water has to be allowed to express itself in a pricing mechanism that incentivizes capital investment in desalination plants and upgraded water delivery systems.

Liquid Investment Opportunities

In some form or another, new infrastructure to move water where it’s needed will need to be constructed. Famed analyst James Rickards calls it the “Water+Energy+Money nexus.” He sees investment opportunity in the water sector.

The Guggenheim S&P Global Water ETF (CGW) has gushed steady returns since 2009. And while these stocks are no longer as cheap as they once were, they still trade at a valuation discount to the S&P 500. (CGW’s portfolio is allocated 63% to foreign stocks.)

We would ideally like to see the broad market correct, perhaps sharply this fall, before getting super-enthusiastic about this sector. Caution is warranted six years into a bull market. Nevertheless, long-term investors can at least start dipping their toes in the water and earning dividends from these stocks.