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Water Rights .. and The Next Bubble

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Water. It’s a precious commodity.


Several years ago, a friend of mine moved from Southern California to Canada.  When I asked why?  He said – Water.  After I thought about it – it made perfect sense. 

When we moved to the mountains we were on an Augmentation Plan.  Each homeowner was allocated so much water per year.  If you used more than the allocated amount  – the state could come in and shut down your well. 


Recently a 546 acre farm sold at auction on the front range of Colorado.  The sale brought in close to $15 million. A single unit of CBT (Colorado Big Thompson) went for $60,000 – which brought in $10 million just for the water rights. Buy and dry deals have traditionally been done behind closed doors. But, land and water rights auctions are becoming increasingly common. Few things are more valuable than water to a farmer  – many times the water rights will go for far more than the actual land.


Our planet is covered in roughly 71% water. Agriculture and food account for 69% of the world’s water resources. This is set to increase as the world population hits 9.7 billion in 2050. And increased wealth usually leads to a demand for luxury goods – including food.  

The increased demand will draw on our aquifers that have been in decline since 2003. NASA has discovered that 21 of the 37 worlds’ aquifers are currently being depleted.  The Chinese government admitted that 80% of their country’s surface groundwater is not fit for drinking.  Jacques Cousteau years ago recognized that the water and air on our planet had become global garbage cans.


A single cup of coffee requires 36 gallons of water to travel from a coffee farm in Brazil to our table.  To raise one beef cow requires 4,072 gallons of water.  Every American on average uses 152 gallons of water daily.  By 2025, it’s estimated that 66% of the world will live in water-stressed areas according to the World Resources Institute.

The result of all this consumption is that – we are slowly drinking the planet dry.  


Water in Colorado is administered according to the Doctrine of Prior Appropriation. The basis of this doctrine is the concept of first-in-time, first-in-right. Water rights are established when water is put to beneficial use. Someone who is benefiting from the water may request the water court to officially recognize the right by decree. The process is called adjudication. In Colorado, water courts have jurisdiction over all applications for decree of water rights.


In Colorado, water rights are considered private property.  The water rights can be sold or inherited and prices vary according to supply and demand.  The value of a water right is based on its amount and availability.  The priority of water use is based on seniority. “Senior” water rights are the oldest and have first priority in times of shortage. Senior rights holders are entitled to receive all available water before any junior holders.  During times of water shortage, a senior water right holder may place a call on water.  When a call is granted – any upstream junior right holder must stop diverting water until the senior user receives their full decreed entitlement. 


Generally, if you hold shares to water rights from a ditch that runs through your property, you will have a deeded water right that entitles you to water during the irrigation season. A Ditch Company controls how much water is allowed.  The amount of water represented by a share varies greatly among ditch companies from year to year – depending on how much water is available in storage and from the current years snowpack.  

Ditch company’s act as a delivery system for the ditch that runs through the land. A single share can go for as much as $165,000 along the front range of Colorado.  One share on average is approximately 5 acre feet – which is 5 acres in 1 foot of water.  The ditch company determines in the Spring how much water will be allocated to the share holders. 


Water is gold.  


When the well dries up – it’s over.  Even so – I  believe there are brilliant minds at work who will figure out our water dilemma long before this happens. 

When the banks decided to move from banking to compete with hedge funds – it wasn’t pretty. It caused the financial meltdown of our economy and the housing market. What does this have to do with water – and water rights?  We’ll get to that .. 


The major players in banking saw how much return hedge funds were getting – and wanted in on the action. Call it greed or envy – or both.  In the late 1970’s Lewis Ranieri came on the scene – with the deal of a lifetime. The Mortgage Backed Security.  MBS’s were comprised mainly of high risk loans – CDO’s .. and sold to third party investors – known as Securitization. A term and financial vehicle invented by Ranieri.  The banks made billions. 


A couple of brilliant fund managers recognized the bubble early on – and decided to bet against the housing market. Ingenious. A couple of names come to mind – Dr. Michael Burry and Steve Eisman.  They made billions buying credit default swaps – knowing a financial crisis was imminent.  How did they know?  It’s simple – they paid attention. 


The financial industry and housing market eventually made a serious correction – as predicted by Burry and Eisman. Part of the crisis came because MBS’s were comprised mainly of subprime loans, ARM’s, and tranches. The Adjustable Rate Mortgages began to reset in early 2007 – and went up – to the point where no one was able to pay the adjusted payment on their loans.  As a result, people lost jobs – their homes – and life savings.  We now know it as the financial crash of 2008.


In the late 1970’s mortgage backed securities were given a triple-A rating by the rating agency  – Standard & Poor. In 2011 the SEC announced it was considering taking action against the credit rating agency for the financial collapse of 2008.  Mortgage bankers have since repackaged the infamous CDO – Collateralized Debt Obligation – into a Tranche Opportunity. 


The major banks knew there would be a bailout. Following the crash – AIG/ American Investment Group – along with most of the major banks – was given $85 billion by the Treasury – $182 billion in total – which they used to pay themselves huge bonuses. The reality is – they should have taken the hit like everyone else. Instead – it was left to hard working middle America to pay for the bailout. Why?  Because we always always do.  


How could this happen .. who even understood what was in MBS’s or CDO’s? None of it made any sense.  Many believe it wasn’t just stupidity – but fraudulent. The joke among traders was –  “Tell me the difference between stupid and illegal – and I’ll have your brother-in-law arrested”.   Everyone made the assumption that as long as home prices were going up – they would continue.  Even Greenspan – and the powers that be – were saying how solid the housing market was. Well – they were wrong. 


It’s been over a decade – and some areas have not recovered from the 2008 financial crisis.  Today you can buy a home in Detroit for $1,000. The question is – after you’ve brought it up to code and remodeled – who will buy it?  

So – this begs the question .. Is there another bubble on the horizon?  According to Dr. Burry there is. Steve Eisman is on the fence – saying it’s too early to tell. 

Eisman has been betting against the Canadian and European banks. According to Eisman, if there is a correction in the market place – the Canadian banks will not need to be bailed out. Eisman claims the global economy is safe. Dr. Burry is trashing index funds and ETF’s – known as passive investing – comparing the funds to subprime CDO’s.  Burry has been focusing on one commodity – water. 


So – why should we care about the stock market?  There is a symbiotic relationship between the stock market – real estate – and the global economy. If the stock market tanks – it effects everything else. Like a pebble thrown into a pond.  

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