This week we take a break from the anguish in the capital markets to look at the far more life-affirming topic of water (don't worry, you can still make money on it). But why water you ask? How can that be a profitable venture? The stuff falls from the sky, comes out of the tap cheaply, and nearly 60% of our beings are water. All true, but ultimately water is subject to the laws of supply and demand, and now, after decades of wastefulness, rising water demand is causing a major re-think in the provisioning and pricing of this essential good, and therein lies the opportunity. The pertinent details on the water story are as follows:

• Water consumption is driven by agricultural (70%), industrial (22%) and domestic (8%) users. Regional consumption varies widely, with Sub-Saharan Africans using roughly 16 litres per person per day, while Europeans use 350 litres each per day, and North Americans use (cue the oink oink noises) 600 litres per person per day.
• Over the last hundred years the global population has roughly tripled, while global water use has risen 6-fold thanks to growth in agricultural and industrial demand, advances in distribution technology making consumption more convenient and the growing preference for water-intense foods.
• On the supply side, the total amount of water available has not changed much from the times of Pangaea. Roughly speaking, there are 1.4 billion cubic kilometers of water on earth (can you picture that?), however, 97.5% of that is saltwater (i.e. oceans). Of the 2.5% that is freshwater, more than two-thirds is locked up in glaciers and permafrost. So all told, just 0.8% of the earth's water is readily available in the form of groundwater, lakes and rivers. And there's the rub; water is everywhere, but just not readily available.

All right, so the questions from an investor's perspective are "how are these supply and demand dynamics going to change in the future?" and "how does one invest to capitalize on these changes?" Well, I'm glad you asked. Here are some of the drivers for the supply/demand balance:

1. Overuse has reduced groundwater levels to the point where a third of the world's population are living in "water-stressed" or "water-scarce" countries (largely in the Middle East and Africa)
2. Global economic growth raises real incomes and increases overall water demand
3. Urban migration increases stress on local water tables
4. Global warming will result in warmer and drier climates (although there will likely be more rain in less-populated temperate regions) and reduce glacial river flow
5. Water pollution due to industrial waste, agricultural run-off and sewage discharge reduces the availability of fresh water

Taken together, these drivers point towards an increasing proportion of the world's population living in "water-stressed" countries in the coming years. By some estimates, two-thirds of the population will be living in such conditions within twenty years. So where do we invest today to stave off this future calamity? We're interested in the following industries:

• Recycling and pollution: sewage treatment, membrane filtration, ultraviolet disinfection
• Desalination: making use of reverse osmosis to turn saltwater into freshwater
• Infrastructure: water pipelines, leak detection
• Agriculture: drought resistant plants, advanced irrigation
• Domestic demand management: advanced metering, plumbing technologies, efficient appliances
• Water utilities

Lastly, it's important to keep in mind that this water opportunity is not simply a trade, but, similar to our views on renewable energy (see Earth, Wind And Fire - June 27th and Lying in the weeds... and woodchips... and garbage - September 12th for more), a multi-year investment theme that reflects ongoing global growth and the emergence of developing nations on the global economic stage. The earth's resources are finite, and as such, incorporating these new economic actors will require permanent changes in the ways that we create food, water and energy.

In other news...

Shooting the messenger has been a popular pastime since Sophocles' time and it still seems to be going strong. In the latest episode, a Korean analyst was fired for saying that part of the current financial crisis stems from investor greed. That'll teach him for speaking his mind. Somewhere, Gordon Gekko is weeping.

Drying up?