China's Water Crisis

A story that colleague Chris Mayer has been following over the past few years caught our eye this morning.

“China Faces a Water Crisis,” reads the headline. This has been going on for quite some time now…and it’s no wonder. After decades of immense economic growth and the flood of hundreds of millions of villagers to cities, China can’t keep up with the demand for water.

Another big problem for the Chinese is access to clean water. Between drought and rampant pollution, clean water is becoming more and more scarce in the country.

Says Business Week: “In February, one of the most [severe] droughts to hit China in a half-century affected some 5 million people and 2.5 million livestock in the provinces of Hebei and Henan, near Beijing.

“Father south in Yancheng, Jiangsu, 300 kilometers from Shanghai, more than 200,000 people were cut off from clean water for three days when a chemical factory dumped carbolic acid into a river. Just before the Olympics last June, the coastal city of Qingdao, site of the sailing events, saw an explosion of algae in nearby waters that may have been caused by pollution.”

Additionally, the water resources that the country does have are greatly mismanaged. According to the World Bank’s statistics, of the estimated 65% of the country’s water that goes to agriculture, less than half of that actually makes it to the crops.

“Better management of water resources is a first step,” wrote Chris Mayer to his Mayer’s Special Situations readers in April of 2007. “One of the best ways to improve water use is to tackle the efficiency of the biggest users of water: farmers. In China, conservation is going to be forced on farmers simply because the supply is very limited. One of the best ways for farmers to improve water use in this area is through more efficient irrigation.”

Mayer’s Special Situation readers have been hot on the trail of the water crisis story in China – and the one occurring on the United States’ own soil – since the newsletter’s inception in the summer of 2006…and their water plays still continue to do well. Clearly, this is a story that won’t be going anywhere anytime soon.

Now we turn to Addison for a look at the second wave of the housing tsunami:

“Quick quiz: how can you own real estate like this…and lose money?” asks Addison in today’s issue of The 5 Min. Forecast.

“Leverage, of course.

“Faneuil Hall, the Boston historic site and tourist trap, was among the $29 billion portfolio of commercial real estate owned by General Growth Properties (GGP) – the second largest mall owner in the U.S. GGP also has a huge stake in the Inner Harbor, the biggest source of tourist revenue in Baltimore…and half the suburban Petri dish south of town known as Columbia, MD. Gack.

“This morning GGP grabbed the mantle as the biggest property bankruptcy in American history. GGP’s aggressive ‘growth’ model left it strapped with $27 billion in debt, which as you can imagine, has been increasingly hard to service. Oops.

“We’ve been expecting this ‘second wave of the housing Tsunami’ for some time. Looks like it may be coming crashing ashore in as spectacular a fashion as the bankruptcy of Lehman last September.”

And back to Kate in the land of Bohs, beehives and blue crabs:

We’ve been reporting this week that Bernanke sees the economic decline in the United States slowing…which is a bit confusing, judging from this week’s flurry of negative economic data. Foreclosure filings are at record highs…retail sales are down…and the economic stimulus just keeps coming. Is the economic decline really slowing?

Our intrepid correspondent, Byron King, tackles this question:

“My view is that there’s a lot of liquidation still to occur. We’ve seen a pause in housing prices going down, for example. This was because of a nationwide trend of banks and other mortgage holders to defer foreclosures during the winter. But now it’s spring. And many people who were living in places that they cannot afford are still living in places they cannot afford. When (not ‘if’) foreclosures go up, there will be more housing on the markets in many areas. This will depress prices even more.

“As for the stimulus programs? Well, about $90 billion is programmed to get disbursed – via federal programs and through state and local governments – by Sept. 30, the end of the government’s fiscal year. That’s about five months away. About $200 billion more will move into the spending pipeline in fiscal 2010, starting Oct. 1. All that money will pay for a lot of pothole patching over the summer, into the fall and well into the next election year. Are we surprised?”

And yet another sign of the times…the recession digs its claws into the almighty search engine: Google.

Its first quarter results show that Google had its first quarter-on-quarter decline in sales, citing cutback in online ad spending. Their outlook for future quarters is “muted” and no rebound is in the cards as of yet.

Speaking about the overall economy’s effect on the search engine powerhouse, “We’re basically in uncharted territory,” said Google chief executive Eric Schmidt. “The economic environment…remains tough. Google absolutely feels the impact.”

We tend to agree with Schmidt’s view over Bernanke’s. The economic environment is tough…and will most likely remain so for quite some time. Time to hunker down for the long haul.

That just about does it for us today. Bill should be back on Monday.

Enjoy your weekend,

Kate Incontrera

The Daily Reckoning