by Arie Y. Levy-Cohen and Angelo J. Robles
Abstract
Can your wealth withstand a population explosion, global climate change, rampant pollution, political unrest or war where you live? Whether or not you believe in global climate change or other challenging scenarios, are you willing to risk your personal and financial security, and of future generations, that any of these calamities will not erupt?
In the face of political, economic and climactic crisis scenarios, many families could face dramatic reductions in their net worth and sustained well-being. In extreme cases, your lifestyle and life could become threatened. The good news is that investing in Four Core Asset Classes for Multigenerational Prosperity —water, energy, real estate and food—may offer a fundamental safety blanket; a hedge against system failures. These Four Core Asset Classes are akin to the four pillars in a building, providing structural support to your assets.
The strategy described in this white paper is both defensive (an ability to better withstand directional shifts and recessions) and offensive (the likelihood they will enjoy increased demand during the next century). The following pages explain the threats to usable resources and explore how ultra-wealthy investors might mitigate potential dangers to their families.
The Main Threats
Future demand for land, water, food and energy will increase steadily, if not dramatically.
- Population growth is likely to fuel huge worldwide demand for the Four Core Assets. The United Nations estimates the world’s population at 7 billion people, while in 1950 it was only 2.5 billion. In 2050, there will be between 9 and 11 billion living around the world (depending on global fertility rates). All those people will need food, water, housing and energy (as well as health care, education, clothes and a host of other products and services). Demand for the world’s most finite and important resources—the Four Core Asset Classes—tends to grow at a faster rate than the population, partly because of a concomitant increase in the standard of living, especially as the growing middle class swells in emerging markets such as China and India.
Not only are global populations growing, the size of cities is also on the rise. In 1990, there were 10 cities with 10 million or more people (six in developing nations; four in developed ones). By 2010, that more than doubled to 21 cities (17 in developing countries; four in developed); and by 2020 the UN projects there will be 27 such cities (22 in developing countries; five in developed). More than half of the world’s population currently lives in cities with populations of at least 1 million people.[1] Most of those cities are coastal and far from rural farming areas.
The quantity and quality of the Four Core Asset Classes are interrelated. The way land is used, for instance, will affect the purity of the water on and around it. Land can be farmed, adding to the supply of food. Some crops, such as corn, can be used to feed people and livestock or be converted to ethanol as a source of energy. Water on the land can be bottled or used to produce hydroelectric power. On the other hand, the way land is utilized and managed can also cause pollution, making water unsuitable for human or animal consumption and in some cases, making it toxic. Further, devoting crops to feed livestock or produce energy competes with demand for those crops as a source of food.
Protection and Preparation
Learning about demand and supply trends that affect the Four Core Asset Classes presents an opportunity to protect one’s wealth and prepare for whatever circumstances may come our way. We recommend a two-pronged approach:
- Investing directly or indirectly in companies, technologies and financial instruments related to land, water, food and energy;
- Using personal wealth to purchase enough of these core resources so that your family and future generations can become self-sustained no matter what local or global trends or crises may impact public supplies. Multi-generational lifestyle, health, wealth and purchasing power preservation requires families to consider owning interests and in some cases, even becoming self-sustained.
Land: Getting on Solid Ground
Many high net worth investors already own real estate—usually some combination of personal homes and developments of residential, commercial or industrial properties, and perhaps indirectly through financial instruments such as real estate investment trusts (REITs). But most of their property portfolio may not both produce revenue and hedge against shortages of water, food or energy.
Opportunities:
Owning fertile land can offer the possibility of access to the other three of the core asset classes of sustainability and prosperity: water to drink (if the land has a source of fresh water such as a river, aquifer or rainfall), farming to produce food (should the soil not be fertile for traditional farming, hydroponic farming could be explored), and a source of some sort of energy (depending on the geography, one could install solar panels, wind mills, geothermal capture, water turbines or other types of power generation), plus a place to build a home. The food, water, housing and energy produced on this land could be used by the landowner’s (single family or a cooperative community) or sold on the open market.
In the event that the entire global system should fail, landowners would have a sustainable way to care for the needs of their family—the Four Core Asset Classes reduce dependency on the grid. Wealthy families can purchase land in an area that is remote, far from political hotbed areas, with comfortable year-round climate and a source of fresh, potable water and fertile soil. They can build a home there, in which every wall is a solar panel and geothermal energy is used to keep a constant temperature inside the home. A hydroponic farm can supply fresh food. There are multiple safe-haven locations to consider depending on limitations for travel from your personal point of origin and where in the globe you might reside. For example, if you are living in New York City and your safe haven destination were in New Hampshire, this could prove to be less of a challenge than getting to Peru or Canada during a sudden breakdown in transportation or a major ecologic or economic crisis.
Be creative about other parts of the world where you can invest in land. The trick is to identify trends around your country of origin or other parts of the world that might fuel real estate development. For instance, during the 1980s, a real estate investor found a way to anticipate where to buy property. He listed the top 10 corporations in U.S. and figured out where their expansion efforts would be for the next five to 15 years. He made his fortune building in those areas to anticipate all the new workers they were going to hire.
Similarly, whatever you feel about hydraulic fracturing—fracking—benefits (more energy independence, job creation, billions of dollars in revenue, and lower greenhouse gas emissions) and dangers (contamination of underground sources of drinking water and air pollution causing increased rates of cancer and other health risks, and even some reported earthquakes), fracking is already changing the face of many parts of the U.S. Smart developers are building housing to accommodate the influx of workers who are building the pipelines to carry the natural gas that fracking produces. Retail chains, banks, and other providers of products and services are following the trail of future fracking sites. There are even fracking-related private equity and hedge funds as well as corporate and municipal bonds.
Real estate investment trusts, companies that sell building materials and heavy equipment and large contractors stand to grow to accommodate population growth and to rebuild homes and other buildings in the aftermath of the increasing number of weather-related disasters such as tornados, tsunamis, hurricanes and earthquakes around the world.
Water: Mining “Blue Gold”
Like land, water is also integrally related to the other three core asset classes. Water is necessary to produce and distribute energy and food, and to support residential, commercial or industrial development on the land.
Increasing urbanization, described above, boosts the demand for water by five times more than basic water needs—and that excludes water needed to generate power or other industrial activities that comes with urbanization.[2] As demand for water (aka blue gold) increases, the supply of fresh water is threatened. There are many factors depleting the availability of potable water:
[Melting: Only about 2.5 percent of the earth’s water is fresh water. And almost 70 percent of that exists in glaciers and the polar cap, which have been steadily melting into the ocean.[3]
NASA satellite photos show that during the summer, the polar cap has decreased more than 20 percent since 1979. The NRDC says that the permanent ice cover is shrinking at a 9 percent rate per decade. Unless this melting is stemmed, arctic summers could become free of ice by the end of this century.
- Contamination: The National Resources Defense Council (NRDC) believes that melting glaciers and sheets of ice on the land have contributed to rising sea levels, causing low-lying areas around the world to experience beach erosion, coastal flooding, and contamination of freshwater supplies. Any exposed body of water is vulnerable to contamination. For instance, many people jog around the reservoir in Central Park, New York. A terrorist posing as a jogger could easily hurl one tennis ball-sized biological weapon into a reservoir and poison all of Manhattan.
- Uneven distribution: This poses problems for many countries, which may have enough water overall, but not enough regionally or locally—this is true in China, the U.S., India and Spain. Other countries have sufficient water but at the wrong time, such as in Trinidad, the Bahamas and the Cayman Islands.
Unusually huge storms, earthquakes, tsunamis and other natural disasters have damaged parts of the infrastructure, from roads and bridges to underground pipes, water purification and sewage treatment plants that are needed to distribute drinkable water to people in those areas, especially those who have become homeless or displaced.
- Droughts: Steadily rising temperatures and depletion of global water resources have made droughts a recurring and growing threat. A National Center for Atmospheric Research (NCAR) study concludes that many highly populated countries face an increased threat of severe drought in the coming decades. This trend is already underway. In recent years, many parts of the world have experienced severe, long-lasting droughts.
For instance, Australia was walloped by ten years of drought at the beginning of this millennium, which its government claims was caused by global warming. Five of the country’s largest cities invested more than $13 billion on controversial (because they consume huge amounts of energy—most of which is powered by coal, a major producer of greenhouse gases) desalinization plants designed to provide more than 30 percent of its water from the ocean. Australia also subsidized the purchase of home water tanks that let people capture rainwater, built dams and pipelines to connect almost 20 water utilities in one grid, and facilities that recycle wastewater for industrial use. Saudi Arabia and Israel also run large-scale desalination plants, and new ones are sprouting in the U.S. and China.[4]
Some of the largest corporations in the world have been keenly aware of these trends, and are systematically cornering global water-supply outlets around the world (from glaciers to rivers, to aquifers, for example). The names of some of these companies may be surprising: players such as Nestle, Danon and Coca Cola. These companies understand that trends in global population, water tables, water consumption and pollution are threatening their most important asset: water. Without water there is no chocolate, yogurt or Coke. Nestle and Danon have amassed huge ownership in water rights around the world. Not only is water a major ingredient in their products, but in a possible, if not probable future scenario of scarcity, these companies stand to make more money on water than on candy, yogurt or pop.
Opportunities:
The water business is at the stage at which the oil business was in 1920s through 1940s. In other words, it is still a good time to get in. Water-related businesses that could be growing during the next hundred years include bottling, piping, desalinization, water treatment (sewage), power plants or filtration plants and in select global location rain capture. Or, as mentioned in the previous section, one can buy land that has a river, lake or underground aquifer to mine the resource or sell the water rights.
A November, 2011 Morgan Stanley report, “Peak Water: The Preeminent 21st Century Commodity Story,” concludes: “As urban populations continue to grow, and as the standard of living of those dwelling in cities improves, there will be a need for more stringent environmental regulation, as well as increased capital expenditures for water and wastewater infrastructure.” These trends may present many investment opportunities:
- Filtration, desalinization, and other clean-water technologies. Companies that have the ability to supply clean drinking water may encounter steadily increasing demand. In China, factories dump dirty water into the Yangtze River, the main supplier of water to Beijing, and other rivers in the country. Even so, the city’s sewage systems operate way below capacity. The government is investing 430 Yuan ($64 billion) to get the urban sewage treatment rate up to 85 percent.[5] The country is also encouraging the private sector to invest in sewage treatment. Many publicly traded waste-water treatment companies from other countries, which already do business in China, are likely to reap huge profits from their operations there. For instance, Veolia Environment, a French company, helps municipalities and industries throughout China renovate existing water and wastewater plants and build and operate new ones. General Electric in the U.S. is expanding its presence in emerging markets such as China, and sees water treatment as a major growth area. Beijing-based Tri-Tech Holding, which trades on the NASDAQ, is involved in water-resources management, water and wastewater treatment, municipal infrastructure construction, industrial production safety and environmental improvement.
- Bottling. New Zealand usually has a high rainfall (although it, too, experienced drought recently). One farmer in New Zealand invested in producing his own bottled water, selling it in Hong Kong. He makes more money on bottled water than in his multigenerational farming business.
- Distribution might be another opportunity to profit from the growing need for water. Even areas besieged with regular flooding will need access to clean water, as floods often result in sewage seeping into sources of fresh water. There might be a steady stream of demand for companies that create tubes and pipes through which water travels, as well as makers of trucks and tanks.
- Water-based financial instruments have been available to investors for some time now by way of ETF and CEF instruments. Their share prices, however, have not yet been able to reflect this rising tide in their share prices as effectively as direct investments would. This is changing and will continue to change, offering increased transparency and a more indexed baseline against which to base determine rates of returns. Many experts expect to see a globally integrated market for fresh water within the next 25 to 30 years. Once spot markets for water are integrated, futures markets and other derivative water-based financial instruments such as puts, calls, swaps—both exchange-traded and OTC—will follow.
There may be different grades and types of fresh water, just as we have light, sweet and heavy, sour crude oil today. Consider how the Carbon Credits market has evolved and they are not a resource. Water as an asset class, in our view, eventually could become the single most important physical commodity-based asset class in the world, dwarfing oil, copper, agricultural commodities and precious metals.
Food: Cars Competing with Cows
The same population trends that will feed demand and squeeze supply of land and water could impact food.
As one of the four core, interrelated assets, food production requires land, energy and water. Further, the demand for food competes with the demand for the other core resources. For instance, Brazil, which is trying to become energy independent, generates most of its power using ethanol from sugar cane. Not only does this detract from sugar cane supplies that could be used for food production for people (in spite of the controversy around sugar’s impact on health), but keeping up with demand has meant razing more and more of the Amazon jungle to make way for new farms. Furthermore, the use of pesticides and water needed to grow sugar cane is polluting nearby water supply supplies and impregnating the soil with harmful pollutants, which combine with the acidic Amazon topsoil—an unhealthy cocktail for the land. Similar challenges face the U.S., where corn-based ethanol is a huge business, not very well received by farmers that who see the cost of grain rise to feed their livestock.
One result: cars essentially compete with cows for grain. A large percentage of all grain produced in the U.S. is used to feed the 1 billion or so heads of cattle raised in the U.S. The amount of water, energy, topsoil and other resources required to produce that grain has a financial and social cost in the form of its commodity market price and the environmental impact.
Opportunities:
You can hedge against possible food shortages by funneling significant resources to production of food on your own land, for your own family’s consumption should the supply of food be interrupted or contaminated.
From a Four Asset Class perspective, you may also want to factor in how asset classes are interrelated when deciding your investment and consumption choices. For example, consider water and food: Producing one pound of meat requires about 2,500 gallons of water. Compare that with just 49 gallons of water it takes to produce one pound of apples.[6]
Many families feel conflicted about reaping profits from technologies that pollute the planet. What good is enhancing one’s wealth by brilliantly investing in companies or industries that produce products or services that benefit by or even contribute to climate change? A multigenerational consciousness begs a similar question: What good are such profits if future great-great grandchildren won’t have a planet to live in? (For those of you who are concerned with social impact of this, stay tuned to a forthcoming white paper that will address this issue.)
- Food technology—such as hydroponic (food grown without soil), aeroponic (cultivating food without water) and aquaponic (filtering and recycling water used in aqua-cultural systems)—has advanced to the point that one doesn’t even need land to grow food. Consider investing in companies that are advancing or using these technologies, and think of which systems you may be able to develop on properties you already own.
Those who choose to invest in food production companies may find it prudent to devote only risk capital to such high-risk, high- reward investments because food production and therefore prices are tied to weather, which is impacted by global warming. Therefore, it’s reasonable to expect many spikes in the price of the soft commodities.
Energy: the Promise of Technology
Energy is the most vital resource in today’s global environment. Wars have been fought over access to oil. Energy, also interdependent with the other three core assets, is essential for desalinizing and transporting water, for production and distribution of food, and for every endeavor, company and industry. There is little indication that the world’s energy needs, demand or consumption will go away.
All the sources of fuels used today—not just nuclear or carbon-based sources, but even solar, wind, ethanol and sugar cane—can have dangerous or negative side effects. Their supplies are finite and dwindling, even as demand for energy continues to rise. But we believe the fuel of the future will not be organic. Technology will catalyze energy out of the most elemental source: our planet’s magnetic field. Oil companies are already transforming themselves into energy companies as they see their evolving role as service providers and keepers of the energy grid more than commodity-centric producers.
Non-organic fuel may not be viable at this time, but there are ways to invest in all sorts of creative energy technologies, including geothermal (drilling into the ground and inserting a pipe to suck out hot air from the earth’s hot core.) There are even companies trying to develop processes to splice atoms and draw energy from the plasma. Not to mention the host of efforts in the fusion, fission and pebble-bed nuclear reactors.
As with the other three asset classes, it’s important to invest in energy to protect and expand your wealth and to ensure that you and your family have access to power despite potential shortages or interruptions in service due to extreme weather, political tensions or terrorist attacks on infrastructure. Despite gasoline interruptions, such as those caused by OPEC in the early and mid-1970s, more recent oil spills in the Gulf of Mexico caused by Hurricane Sandy, if you had been “off the grid” you would have been less affected, if at all. And had you had invested in energy companies such as Generaq that capitalize on weather-pattern issues, you would have made measurable returns.
Opportunities:
There is no way to tell right now which technologies will emerge to replace natural gas, coal, oil or any of technologies we have today. But in the not-too-distant future, one or more new sources of energy likely will become viable: whether fusion, electro-magnetic, a new form of nuclear power, hydrogen or some new discovery or invention not yet on anyone’s drawing board.
You need to be invested in multiple forms of energy always, and monitor the entire gamut of the energy industry. That includes:
- Production and delivery. Production of energy is something that needs to be managed and processed very in line with the demand. A power plant may have the ability to produce 1 million kilowatt-hours a day, but if on any particular day there is only demand for 750,000 kilowatt-hours, the other 250,000 kilowatts cannot be stored until needed. Whatever is not used is lost. Worse, there is a cost to not use excess energy that cannot be absorbed by the grid. Con Edison, for one, is better at managing excess supply than Florida Power & Light. So you can short FPL and go long on Con Ed.
- Getting off the grid. Those with the means who are looking to build a new home should build a completely self-sustained home off the grid. First, it’s important to select a plot of land with access to a wind tunnel and good sun exposure. It also makes sense to tap geo-thermal energy by capturing heat from Earth’s core through a funnel and a series of filters. Except for this upfront expenditure, this is a free, constant source energy. If you live in the northern hemisphere, geothermal vents might be the way to go.
- Private equity, hedge funds and traditional OTC. Hire experts who trade energy. There’s a lot of money to be made in the energy futures market, such as coal and natural gas futures (fracking, despite all the environmental disadvantages is not going to go away with 100 years of stored natural gas under the soil).
- Access free due diligence. In the 1980s, one real estate investor made a list of the top 10 corporations in U.S. and figured out where their expansion efforts would be for the next five to 15 years. He made his billions by developing residential and commercial buildings in those areas to anticipate all the new workers those companies hire in those communities. Starbucks did the same thing by basing its roadmap of where it would open stores on where Chase Manhattan Bank established its new branches. Starbucks correctly reasoned that Chase engaged in careful due diligence before it opened a branch. So wherever Chase moved, that’s where Starbucks moved.
Today, real estate developers and some half a dozen or so companies are buying land in small towns along the carbon corridor, anticipating the need for housing and infrastructure as the natural gas companies come a-fracking. Many farmers have gone from making $80,000 a year growing corn to making millions by allowing gas companies to build wells on their land. Thousands of construction crews descend on these towns to dig the wells. They all need a place to live, places to buy food and clothes, health care, cars, and a host of other products and services. Even after the two years it takes to build a well and the construction workers move out, maintenance crews will need to move in. And the wells require one and a half times the number of service workers as construction workers to keep those wells running. All this influx will turn around these little towns.
Fracking is changing the face of the U.S. So invest in land, buildings, developers or real estate investment trusts that follow the fracking map. Also consider bond issues that are directly or indirectly in the fracking space.
As an investor, you may need exposure to energy in every way, shape or form: the greens (wind, solar, hydrogen, nuclear, electro-magnetic), the grays (natural gas and ethanol) and the blacks (oil and coal).
Conclusions
There’s no way even the smartest among us can become experts in each of the Four Core Asset Classes. But given the demographic, technological, political and other trends we have described, it would be foolish to ignore the realities and the opportunities that result.
The Four Core Asset Classes—land, water, food and energy—are dwindling. In addition to purchasing land that contains some or all of these resources for their family’s use, wealthy investors can invest in technologies and companies that may profit by providing these resources to a growing world population.
The beauty of The Four Core Asset Classes is that they can work separately or together, using capital market instruments, corporations that dominate the space, or by developing your own strategy of being self-sustaining off the grid.
[1] Source: The nonprofit research organization Population Reference Bureau.
[2] Source: Alexander Zehnder et al., “Water Issues: the Need for Action at Different Levels,” Aquatic Sciences, 2003.
[3] According to the environmental group Natural Resources Defense Council (NRDC).
[4] Source: Global Water Intelligence.
[5] http://seekingalpha.com/article/977201-3-profitable-companies-in-china-s-sewage-treatment-market
[6] Tom Aldridge and Herb Schlubach, “Water Requirements for Food Production,” Soil and Water, no. 38 (Fall 1978), University of California Cooperative Extension, 13017; Paul and Anne Ehrlich, Population, Resources, Environment (San Francisco: Freemna, 1972), pg. 75-76.
