New Investments Needed to Stem the Tide of Water ShortagesMar28

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Daily Intelligence Briefing – March 27, 2018

FEATURED TOPIC: NEW INVESTMENTS NEEDED TO STEM THE TIDE OF WATER SHORTAGES

Last month, MRP covered the extremely damaging drought in South Africa and the detrimental consequences to the country’s agricultural output, tourist industry, and overall employment. However, as the Western Cape continues to spiral toward day zero, day that the city of 4 million’s municipal water supply will be cut off for most households and businesses (July 9th), new data is proving how critical new investments in water technologies are as population growth and corporate laxity increasingly push reservoirs to the brink.

The OECD estimates that new investment in water projects will range from $6.7 trillion by 2030 to $22.6 trillion by 2050. Over that same span, the UN estimates that nearly6 billion people will live in areas that suffer water shortages for at least one month a year. The areas listed include 36% of metropolitan areas around the world as urban water demand is expected to go up by a whopping 80% from the current level over the next 32 years. Even with current demand levels, infrastructure is not cutting it. The center for Science and Environment, showed that at least 200 cities globally are facing a serious water crisis.  Along with Cape Town in South Africa, 9 other cities currently within day zero territory, including Beijing, Istanbul, Mexico City, and Sao Paulo.

This new rising threat creates serious concern for human life, but also for business. Although 81% of companies in industries that require relatively large amounts of water — for example, the manufacturers of food and beverages, clothing and semiconductors — have water programs in place, but just 37% of them have set targets for prioritizing action in areas that pose the greatest risk to water resources. Another report found that, out of 600 publicly traded US companies, representing 80% of the country’s market capitalization, 45% do not disclose any evidence that they manage water-related impacts in any formal way. Further, only 20% have set time-bound quantitative targets to manage impacts to water resources.

The US has repeatedly felt the squeeze of water shortages in California over the years, but now, it isn’t just crops that need water. Sprawling Google and Amazon data centers, requiring hundreds of millions of gallons of water now dot the land. It is estimated that the US is falling so far behind that an estimated $1 trillion of capital will be needed over the next 25 years. While other developed nations in Europe are actively working toward the proliferation of water-saving technologies, around 38% of the European Union’s water consumption is reliant on water availability in other countries, to grow soybeans, rice, cotton, and other products that it imports. The US also imports a number of water-dependent goods from across the world.

A large portion of those originate in emerging markets like India, where about 54% of wells are emptying at a faster pace and almost 600 million people are at higher risk of surface water supply disruptions. In China, 80% of water resources are in the south. In the north, eight provinces suffer from acute water scarcity, a further four from scarcity. They account for 38% of China’ agriculture, 50% of its power generation, 46% of its industry and 41% of its population. According to a 2015 Asian Development Bank report, more than three quarters of countries in Asia face serious water shortages. Similar deficits persist across Africa as well.

It is clear that emerging and developed markets alike will have to begin tempering their response to the growing global water shortage. While new investments may be lacking in number, the new technological solutions that are in development are very innovative:

The world’s largest and cheapest reverse-osmosis desalination plant, Sorek, is already providing 20% of the water consumed by the country’s households on its own. 40% of Israeli water demand is filled by the country’s desalinization plants.

While the digital age has increased water demand, digitalization also opens the doors to a more sustainable business model that not only allows companies to produce more with less, but also avoids unnecessary waste of resources such as energy and water. The sustainable Singapore movement aims to decrease each citizen’s water use by nearly 3,000 liters per year via smart home devices by 2030.

If water saving and desalinization can’t create enough water, there is even the prospect of harnessing humidity in the air to produce liquified water. Veragon Water Solutions air-to-water system provides potable water in hot or tropical environments. It has already been used by the Italian Armed Forces, UN WFP and NATO, in some of harshest climates in the world. The technology has now arrived in the UAE and, after successful trials, the process of water capture was developed and expanded on a commercial scale. At this stage, Veragon’s system has the capacity to produce up to 1,000 liters per day.

The threat of a large scale global drought scenario is very frightening, especially give the deficit many regions are already starting from. However, where there is a will, there is a way and investments in water tech are already picking up to save the world from an existential shortage that it cannot afford to experience.

Investors can gain exposure to water via the Water resources ETF (PHO).

HERE IN THE MEANTIME are some articles relating to WATER (the stories are summarized in the COMMODITIES section of today’s report):

• Water -Almost 6 billion people will suffer from water shortages by 2050, U.N. report finds
• Water – How the Biggest Companies Score on Water Sustainability
• Water – We can’t engineer our way out of an impending water scarcity epidemic
• Water – Is Day Zero on the horizon? Taps could run dry in Bengaluru, Pune

CHART: Water Tech (PHO) vs S&P 500 (SPY)

OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

• Markets: 
  • Bonds – The Bear Market In Bonds Is Just Getting Started
  • FX – China Prepares Death Blow To The Dollar
• Economics and Trade: 
  • Tariffs – Trump’s Latest China Tariffs Could Hurt Tech—and Even Social Media
  • Trade War – China steps up effort to avert US trade war
• Finance: 
  • ICOs – France’s Finance Minister Plans ICO Regulations in Bid to Attract Crypto Startups
  • M&A – Organic Never Comes Cheap, as This Deal Shows
• Services:
  • Retail – The Latest Trend in Online Shopping: Marijuana
• Manufacturing:
  • Firearms – U.S. gunmaker Remington files for bankruptcy
• Technology: 
  • 5G – Trump Bill Paves Way for US 5G Spectrum Auction Later in 2018
  • Aerospace – Omnibus spending bill funds big-ticket military communications satellites that DoD did not request
  • AI Chips – Microsoft’s Brainwave makes Bing’s AI over 10 times faster
• Transportation:  
  • Autos – Auto Dealers Worry New Vehicle Prices May Be Getting Too High
• Commodities: 
  • LNG – LNG global demand to hit new record high
• Energy & Environment: 
  • Batteries – New Lithium-Air Battery Lasts Hundreds of Cycles Longer Than Past Designs
  • Renewables – Duke Energy To Invest $36B In Renewables, Grid Modernization
• Endnote: 
  • Bearish Sign for Stocks as Majority Below 200-Day Average B *

JOE MAC’S MARKET VIEWPOINT

• Joe Mac’s Market Viewpoint: Beyond the HOUSING HEADWINDS 
• Joe Mac’s Market Viewpoint: The Coming Value Rotation
• Joe Mac’s Market Viewpoint: Beyond the BOND BUBBLE
• Joe Mac’s Market Viewpoint: The Gathering Storm
• Joe Mac’s Market Viewpoint: Contrarian Crude Call

CURRENT MRP THEMES

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

• United States, Chicago Fed National Activity Index, FEB: 0.88 from prior 0.02
• United States, Dallas Fed Manufacturing Index, MAR: 21.4 from prior 37.2
• France, GDP Growth Rate, QoQ Final, Q4: 0.7% from prior 0.5%
• Netherlands, GDP Growth Rate QoQ Final, Q4: 0.8% from prior 0.4%
• United Kingdom, Finance Mortgage Approvals, FEB: 38.1K from prior 40.0K
• Republic of Korea, Consumer Confidence, MAR: 108.1 from prior 108.2

Bonds – The Bear Market In Bonds Is Just Getting Started

The recent drop in yields will be tested by a surge in borrowing by the U.S. government and a ballooning budget deficit.

The Bloomberg index declined as much 3.67% between early September and late September. Lately, though, the bond bears seem to have lost some of their resolve as yields on intermediate-term Treasuries fell back from their highest levels since 2010.

The Federal Reserve meeting last week, where the central bank raised interest rates for the fifth time in the last 15 months and signaled two more are on the way by the end of the year, should have breathed new life into the bears. Instead, bonds rallied.

The central bank boosted by one the number of rate hikes it expects in each of 2019 and 2020. At the same time, its unemployment rate projections were lowered to an eye-popping 3.6% and its inflation estimate rose above its 2% target level, to 2.1% – finally acknowledging that inflation is likely to overshoot its target.

The last refunding two weeks ago surprised many by drawing strong demand. That was before the tariff tantrum in markets, causing concern, given that the Treasury plans to more than double its borrowing this year to some $1 trillion to pay for the expanding budget deficit. B

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FX – China Prepares Death Blow To The Dollar

On March 26 China will finally launch a yuan-dominated oil futures contract. With the approval of the contract from China’s State Council, the “petroyuan” will become real and China will set out to challenge the “petrodollar” for dominance. This could be a death blow for an already weakening U.S. dollar, and the rise of the yuan as the dominant world currency.

Back in 2015, the first of a number of strikes against the petrodollar was dealt by China. Gazprom Neft, the third-largest oil producer in Russia, decided to move away from the dollar and towards the yuan and other Asian currencies. Iran followed suit the same year, using the yuan with a host of other foreign currencies in trade, including Iranian oil. Now that China is the world’s leading consumer of oil, Beijing can exert some real leverage over Saudi Arabia to pay for crude in yuan.

However, it’s not all bad news. The petrodollar’s downfall could be a lift for gold – for the first time since the US abandoned the gold standard decades ago, physical gold is being reintroduced to the global monetary system in a major way. And as more and more nations become involved, a substantial rise in gold prices will follow. OP

Tariffs – Trump’s Latest China Tariffs Could Hurt Tech—and Even Social Media

Your smartphone, TV, and social network all rely to some extent on China’s technology and manufacturing industries, and could all potentially be affected by Trump’s campaign of economic sanctions. The 25% levies will focus on technologies in areas including computing and communications, industrial machinery such as factory robots, and aerospace.

The sanctions plan also creates a headache for US companies reliant on Chinese circuit boards, servers, chips, or manufacturing plants—and potentially their customers, too. The effects could be felt beyond hardware companies. For example, Chinese suppliers are important to the Open Compute Project that internet companies such as Facebook, Google, and Microsoft support to make servers and other data center equipment cheaper.

The announcement fired the starting gun on a backroom battle over the products that will be subject to the tariffs. There’s going to be a huge amount of lobbying now as specific sectors try to make sure they’re not caught up in the trade war.

However well Trump handles things from here, taking on China without some adverse effects at home may be impossible. WIRED

Trade War – China steps up effort to avert US trade war

Chinese officials are rushing to finalize new regulations by May that will allow foreign financial groups to take majority stakes in securities companies as they seek to avert a looming trade war with the US. Chinese officials had initially been working to allow foreign majority control of securities companies by June 30, but Liu He, China’s vice-premier, is aiming for formal State Council approval as early as May. 

Beijing has also offered to buy more semiconductors from the US by diverting some purchases from South Korean and Taiwanese manufacturers, in an effort to help reduce annual $375bn merchandise trade surplus with the US.

Liu He and US Treasury secretary Steven Mnuchin have exchanged letters during the past week about further opening China’s financial services sector and reducing Chinese tariffs on imported cars, with additional plans to ease limits on foreign investment in commercial banks and life insurance joint ventures within three to five years – moves to ease foreign ownership limits in China’s commercial banking and insurance sectors could be revealed next week when President Xi Jinping addresses the Boao Forum for Asia.

Officials have said that China would also lift or remove restrictions on foreign ownership in the telecom, medical and education sectors. FT

ICOs – France’s Finance Minister Plans ICO Regulations in Bid to Attract Crypto Startups

France’s finance minister Bruno Le Maire revealed that the country plans on creating a legal framework for initial coin offerings (ICOs) in a bid to become a leading ICO hub.

Le Maire claims he asked former central bank official Jean-Pierre Landau to draft a proposal for a legislative framework on cryptocurrencies, stating: “France has every interest in becoming the first major financial center to propose an ad hoc legislative framework for companies making an initial coin offering.”

Le Maire further revealed that an action plan to be presented to the country’s government in a few weeks will propose seeing French market regulator Autorité des marches financiers (AMF) have the option to authorize companies to raise funds through ICOs, as long as they respect specific criteria that’s set on protecting investors. CCN

M&A – Organic Never Comes Cheap, as This Deal Shows

Givaudan SA’s $1.6 billion acquisition of flavor-maker Naturex comes at a lofty valuation typically seen in the health-care and technology industries, showing that burgeoning consumer demand for natural and organic products is trickling into the supply chain.

The Swiss fragrance company agreed Monday to pay 135 euros a share, or a 42% premium to Naturex’s most recent closing price, valuing the France-based company at 20 to 22 times earnings.

Givaudan CEO Gilles Andrier is having to swallow the cost of Naturex to bolster capacity in one of the fastest-growing segments in the personal-care and food industries, as consumers increasingly look to avoid artificial coloring and flavors. 

The Givaudan accord comes against a backdrop of multinational consumer companies snapping up more natural brands. Procter & Gamble in November announced the acquisition of deodorant-maker Native to help it reach out to a growing segment of consumers who want products free from some synthetic ingredients or full of natural ones. Unilever in December acquired Schmidt’s Naturals, offering deodorant variations including charcoal and magnesium, and lavender and sage. B

Retail – The Latest Trend in Online Shopping: Marijuana

A new study has used Google search history to study the “pot-purchasing behavior” of Americans. Its findings: Americans are buying weed online in droves.

The first step in tracking online marijuana purchases was to isolate certain search terms, checking how often people used them each month. It was found that, in the 12 years they studied, searches tied to buying weed online increased by 199 percent relative to all searches on the internet. In June 2017, the numbers were as high as 2.4 million in a single month.

The study also wanted to know where the list of terms would lead to, analyzing the first two pages’ worth of links. Of those links, 41 percent were to retailers offering mail-order marijuana. For two-thirds of the searches, the very first link led to such a retailer.

Though nine states and Washington D.C. now permit recreational marijuana use, none permit its sale online. When people buy online, states might miss out on the major financial benefit of legalizing recreational marijuana – taxes. Even more importantly, it’s harder to regulate who is buying the weed – it’s far easier for those below that limit to fake their ages online than in person. Futurism

Firearms – U.S. gunmaker Remington files for bankruptcy

Remington, one of the largest U.S. makers of firearms, filed for bankruptcy protection on Sunday to carry out a debt-cutting deal with creditors amid mounting public pressure for greater gun control. America’s oldest gunmaker announced in February it would reduce its $950 million debtload in a deal that will transfer control of the company to creditors, with plans to wrap up its bankruptcy as soon as May 3.

Major U.S. companies and retailers have taken some steps to restrict firearm sales. Citigroup Inc said last week it will require new retail-sector clients to sell firearms only to customers who passed background checks and to bar sales of high-capacity magazines, as well as restricting sales for buyers under 21. Kroger Co’s superstore chain Fred Meyer said it will stop selling firearms entirely.

Cerberus Capital Management, the private equity firm that controls Remington, will lose ownership in the bankruptcy. Remington’s creditors, which include Franklin Templeton Investments and JPMorgan Asset Management, will exchange their debt holdings for Remington equity.

Remington and other gunmakers have suffered from slumping sales in the past year as fears of stricter gun laws have faded. R

5G – Trump Bill Paves Way for US 5G Spectrum Auction Later in 2018

The Federal Communications Commission’s (FCC) chairman, Ajit Pai, is now promising an initial 5G auction later this year after President Trump signed an omnibus $1.3 billion bill last week. The bill includes the Ray Baum Act, which reauthorizes the FCC, allowing the agency to deposit upfront auction deposits with the US Treasury.

By fixing the upfront payments issue, this law will enable the FCC to commence a 5G spectrum auction later this year – selling the rights to transmit 5G signals. The FCC has previously said it wanted a 5G spectrum auction in November 2018. The agency is expected to auction off spectrum from the high-band 28GHz first, with 24GHz to follow shortly after.

The auction will potentially be good news for AT&T, Sprint, and T-Mobile, among others. Verizon currently holds the bulk of existing US 28GHz licenses, through its purchase of older LMDS (local multipoint distribution service) licenses – intended for fixed wireless applications. LR

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