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Future Money Trends: Greetings and thank you
for joining us at FutureMoneyTrends.com. I'm here with Rick Rule of Sprott Asset Management.
He's a legendary investor. Rick, thanks for joining us.
Rick Rule: Always a pleasure, thank you. Future Money Trends: Rick, this time last
year at this show, I asked you about water. And you said it was the best question of the
day, which made me feel pretty good because it was the end of the day. And I was kind
of thinking of Asia, and you said, “no, Southern California. That's where it’s going
to happen.” Now here we are, in the biggest drought ever on record. What is going on since
the last year, as far as the drought? Are you investing in companies that are providing
solutions and what kind of solutions? What kind of money is there to be made from the
drought? Rick Rule: I've been investing in water for
25 years, which would appear to be what it takes for me to be right. I say that jokingly,
investing in water has paid a lot of rent for me over the last two decades. But I think
where we're at right now where we call the question. Water hasn't been priced by markets,
it's been priced politically, which is a different way of saying it's been mispriced. We say
for water the free market physics don’t apply. Water flows downhill to votes rather
than uphill to money. And we're seeing the effects of that in California now. Probably
before you were born, 1977, was the last time we had a drought in California. And that caused
enormous economic dislocation. It caused dislocation such that 12,000,000 fewer people lived in
California. There were 12,000,000 fewer straws in the sponge, and in 1977 we were able to
take excess flows out of the Colorado river because nobody lived in competing places like
Phoenix or Las Vegas, but that party's over. We're going to have a reckoning in California
if we don't have substantially above average rainfall between right now, early February,
and April. We have two months left to avert what will be a very interesting set of circumstances.
Future Money Trends: You know, it's weird. I live in California and I haven't heard anyone
talk about turning off (the faucet), stop watering your grass, or anything like this.
Is that what you think is coming? Because likely it's not going to rain, we're not entering
our raining season, it's pretty much behind us now.
Rick Rule: Two answers to that question. The first is that the realization that the crisis
has occurred, comes when you turn the tap and nothing comes out of it. The second thing
is that water is irrationally cheap, so customers are happy. It takes you perhaps a penny to
flush your toilet. Now you're a young guy, you probably have one of those conservation
low flush toilets, so you have to flush it twice. So it's two flushes. What would you
pay to make that material go away? I don't know what the answer is, but it's more than
a penny. When you look at what it costs you to keep your lawn green, your landscaping
in good shape, your teeth brushed; relative to what it cost to deliver that water in the
first instance, but much more importantly, relative to the utility that that water generates
to you, water is pathetically cheap. So everybody is thrilled with the status quo, and they
will be thrilled until their lawns die, and their landscaping wilts. If we don't have
a rain, a good rain, in the next three months, that is precisely what's going to happen.
Water has been allocated politically, as I say in California. Those viewers of yours
who watched the movie Chinatown will know the history of water. Los Angeles went up
and, fair and square, bought all the water in Owens Valley, and diverted it from agricultural
uses to urban uses. The farmers in California who controlled the legislators, a hundred
years ago, said, “we don't want to compete with city users. We want to steal the water.”
They've done a great job. California agriculture contributes 3.5% to the state's GDP and they
use 85% of the water. There's a political arbitrage in water, where water is worth $45
an acre foot, to grow rice in the desert, and $1200 an acre foot to flush toilets and
brush teeth. When that arbitrage ends politically, and it will when the urban users don't have
water, the money that will be made re-using or, pardon me, selling water from agricultural
uses to urban uses, will be incredible. Future Money Trends: So is that the companies
you're buying? Is it in the agricultural sector, or?
Rick Rule: Yeah, pardon my pun, but we've bought the water front. We have principally
bought the agricultural companies who own water that we hope will be able to be re-deeded.
We have already, also for 25 years, bought physical water rights. In Sprott, we have
been negotiating now for three months, and are about to buy, the best US-based water
investment management company on the scene - a private water investment which we've been
working on for a long time. But there's a whole bunch of ways that people can play the
game. Because I'm a resource guy, I haven't bought the filtration companies, the utility
companies, the distribution companies, the process companies, because I believe them
to be service and supply businesses that I'm less good at. I have tried to focus myself
on owning water as a resource, the same way an oil company would own oil and gas.
Future Money Trends: Do you forsee if rain doesn't happen, actually water wouldn't come
out of our faucet? I mean, that just seems impossible.
Rick Rule: Absolutely. You'll remember six or seven years ago when we had a power crisis
in California. The legislators, in their genius, de-controlled what their...
Future Money Trends: That was fourteen years ago now, by the way.
Rick Rule: Was that fourteen years ago? Future Money Trends: That was 2000 Gray Davis.
Rick Rule: You see, you lose your mind over time. We were able to deal with that shortage
because you can transmit electricity easily. We called up the Canadian's and said, “we're
out of electricity. Send us some right now, we'll pay you any price.” The Canadian's
sent us the power, the lights went back on, and then we stiffed them. We decided not to
pay, because they were price gouging. The point is that when water runs out, there is
no infrastructure to get water here. When it runs out, it runs out. There is no more,
there simply is no more. Drive around any reservoir in the state that you want to. These
reservoirs are 20 - 25% of normal and we're in the winter. Look at the snow pack in the
Sierra's, what you'll notice is that there isn't one. The snow pack is less than 40%
of normal. But our consumption is not going down. If you consume something that runs out,
the result is simply that, and it's not pretty.
Future Money Trends: So, as far as the city is, is it the whole city of California, Nevada,
Arizona, that are at risk right now? Because I went to the Hoover Dam probably a year,
two years ago, I was shocked that you could see where the water was. It was dramatically
lower. Rick Rule: Those are two different questions.
The Colorado river compact, has, I think, seven states involved. And there's one state
that substantially exceeds it's maximum draw, that state is California. Nevada, Colorado,
Utah, Arizona, those states are living within their water budget. But California isn't.
So California will run out of allotment at precisely the wrong time for the state of
California. The problem that we have in California with regards to water distribution could be
solved. It could be solved by fallowing half the farm land in California. That would work.
Politically that is going to be a very difficult challenge for us. The farm workers, who are
certainly a disadvantaged population, would become much more disadvantaged. And California
farmers, who have contributed a lot to the California economy over the last hundred years,
would certainly be disadvantaged. But the easiest way to deal with the problem is to
let the market work. If you took $45 farm water and made it $400 farm water, you wouldn't
have a water supply problem anymore. You'd have a political squawk, to
be sure.