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Commentary:   October  2023

Dennis C. Butler, President
Centre Street Cambridge Corporation

Private Investment Counsel

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    of all guest columns written by Dennis C. Butler, CFA                                                        

October  2023

n our last missive we discussed how some Americans’ penchant for locating themselves in attractive locales that happen to be in the path of the occasional hurricane or wildfire has led to enormous property damage and suffering as those natural catastrophes have become more frequent and predictable. A new financial crisis of sorts has ensued whereby private property insurance has become impossible to obtain in some areas, necessitating a taxpayer backstop to protect homeowners. This crisis promises to spread as more coastal areas — such as New York City, for example — become subject to increased flooding risk

As bad as this is, we believe a crisis of perhaps even more far-reaching consequences is occurring. To introduce this topic, we need to provide some historical background.

Despite lacking such instrumentalities of the modern industrial age as electricity or rapid means of transportation, the people of antiquity possessed an impressive degree of technical sophistication. Roman waterworks are a well-known example, as is the mathematical precision with which the Egyptian pyramids were designed. The Greeks developed a remarkable device, apparently used in navigation, that predicted astronomical movements and employed gear mechanisms that resembled those in clockworks not appearing until the Middle Ages. Impressive also were the extensive dam and irrigation networks built in parts of the Middle East that enabled widespread agriculture in that relatively arid region.

Lacking among our ancestors, however, was an understanding of the impacts that some of their achievements were having on themselves and their environment. For example, Rome’s great aqueducts and water distribution systems employed a lot of lead piping. Research now shows that lead leached into the city’s water supply, resulting in a concentration of the toxic metal up to one hundred times the element’s naturally occurring presence in local spring water. While perhaps not enough of a problem to bring down the Empire, Rome’s water almost certainly would not have been considered safe by today’s standards, which view almost any amount of lead as unsafe for consumption.

Regarding the great irrigation projects in the ancient Middle East, unbeknownst to farmers at the time, the water irrigating their crops was depositing salt on their fields, which eventually made agriculture there impossible. Today, from altitude, large areas glisten in the sun from salt crystals embedded in the soil.

Lessons learned from the history of these ancient water systems is pertinent because it informs an examination of the developing crisis in the U.S. related to the overuse of water from surface and underground sources. Although decades in the making and mentioned from time to time in the media over the years, a recent series of articles in The New York Times highlights the extent of the problem and its causes.

While a U.S.-wide problem, it is the western regions of the country that face the most acute challenges currently. States dependent on the Colorado River and the big dams built in the last century for their water supply have long been siphoning off river flows at a rate far above what the system could realistically supply over the long term, a fact brought to light when a lengthy drought in the region drained reservoirs to alarmingly low levels. As a result, houses built in the desert, many with backyard swimming pools, represent an endangered style of life. Disputes have already broken out pitting farmers dependent on irrigation against cities that grew large based on piped-in water supplies. Planners are now struggling to find water for new developments to house their growing urban and suburban populations.

A second aspect of our pending water crisis is the overuse of ground water, a resource with which the U.S. has been well endowed. Ninety percent of drinking water systems across the nation depend on that source of supply, and for decades farmers in breadbasket and more arid regions of the country have relied on underground aquifers, tapping them at a rate exceeding that which they can be naturally recharged through rainfall. While these practices have supported growing cities and resulted in the abundant crops that have made the U.S. an important food producer, they have also lowered water tables — necessitating deeper and deeper wells — and caused ground subsidence that, through the compression of the water-bearing strata, renders them permanently unable to be recharged, and makes surface areas unusable. Already some homebuilding projects in western states have had to be canceled due to fissures appearing in the ground’s surface. Some farmers have reverted to pre-irrigation modes of farming, with correspondingly lower productivity.

Like the farmers of antiquity, we have made liberal use of a resource in limited supply. Unlike the ancients we understand the limits and implications, and they are ominous. Vast population centers, as well as big food-producing operations, grew amid a resource abundance that was always illusory because it was artificial. The limits to water use in an arid region have been obscured by the successes of tapping seemingly large surface and underground supplies. Now that those limits are being tested it is becoming clear that either new sources of water will have to be found, at enormous expense, or lifestyles and industry will have to adapt or change, with perhaps a potentially huge impact on global food supplies and prices.

Yet another aspect of the water crisis concerns the financial risks that are gradually coming into focus thanks to analyses such as those in the Times. Canceled building projects and falling crop yields bode ill for property values, and the increased expense of adapting to a new natural resource reality will probably make the price and availability of private property insurance problematic in more areas of the country. As with regions susceptible to catastrophic weather events, irrigation-fed growth and agriculture involves the intrusion of human activity into areas that are ill-suited to support it. Real estate might prove to be a poor investment where rain is scarce, and aquifers run dry.

It is interesting to speculate on why people insist on locating in areas subject to hurricanes or wildfires, or build homes and grow crops where water supplies are scarce. Spencer Glendon, a former Wall Street analyst turned risk-advisor whose clients include insurance companies, offered some insights in a recent interview. According to Glendon, humankind has, in effect, come of age during a 12,000-year period when the earth's climate has been relatively stable. This stability permitted humans to settle into permanent communities, develop civilizations, and plan long-term. Climate change is upsetting this comfortable situation that was long assumed to be permanent. Flooding, wildfires, and destructive weather patterns are creating intractable long-term problems, as humans are resistant to change and struggle with anything requiring united action by a large group. Yet change is being forced upon us by irresistible natural forces. Glendon concludes by suggesting that re-acquainting with the physical world is a “grounding experience” that can help us get away from easy assumptions of permanence in an ever-changing natural environment.

The financial markets also offer a useful analogy in a phenomenon known as the “Minsky moment.” After lengthy period of favorable market trends, risk accumulates in the financial system as participants engage in ever more speculative behavior; margin debt rises, prices are bid higher, dodgy companies are brought to market, and so on. All rests on the assumption of permanence — that favorable conditions will continue indefinitely, or at least until the speculator wants to sell. This continues until something comes along — higher interest rates, perhaps, or a sudden bank failure — that calls into question the pillars supporting the bullish consensus. The spell is broken, and markets react accordingly. The trends we have been discussing, of moving into areas subject to the whims of nature, or attempting to bend nature to serve our needs, follow a similar trajectory. A pleasant climate or the harnessing of rivers to create a seemingly plentiful resource come to be seen as permanent conditions to exploit. As in the financial markets, risks build up over time in the background until they reach a point where they are unleashed, resulting not in market crashes, but uninsurable houses or inarable land.


As dire as these long-term issues may be, on Wall Street their urgency pales in comparison with the passion devoted to the latest short-term concern, now focused on rising interest rates. Rates offered on long-term U.S. treasury securities have climbed to levels not seen since before the Financial Crisis; foreign markets are also experiencing higher yields as global investors flee bonds (higher rates = lower bond prices). Central banks are the main players in this arena as they take action to suppress inflation through higher borrowing costs — a reasonable response given continuing economic strength even in the face of higher rates (a strong economy tends to produce inflationary pressures, while higher interest rates lead to slower economic activity that in turn lowers inflation, so goes the policy equation). It is worth pointing out that the economy and financial markets have done well during periods of significantly higher interest rates; for the past fifty years the average rate on 30-year mortgages has been 7.7%, for example, and since 1961, 10-year treasury bonds yielded slightly under 6% on average, versus less than 5% currently. Furthermore, measures of underlying inflation (which strip out certain temporary factors influencing prices) are pointing to receding price pressures, a fact leading some economists to complain that central banks are “overshooting” their way to an unnecessary recession. All trends contain the seeds of their own destruction, and rising rates are no exception. Eventually, higher borrowing costs will slow economic activity, causing interest rates to decline. When that will occur is anyone’s guess but given their capacity to “price in” current opinion and anticipate turning points, expect the markets to respond to the change well before anyone is aware of what has happened. When it makes the news, it is already “old news.”


Dennis C. Butler, CFA, is president of Centre Street Cambridge Corporation, investment counsel. He has been a practitioner in the investment field since 1983 and has been published in Barron’s. He holds an MBA from Wharton and a BA in History from Brown University. His quarterly newsletter can be found at <>.

Current low valuations reward the long-term view”, an article by Dennis Butler, appears in the May 7, 2009 issue of the Financial Times (page 28).   “Intelligent Individual Investor”, an article by Dennis Butler, appears in the December 2, 2008 issue of NYSSA News, a magazine published by the New Yorks Society of Security Analsysts, Inc. “Benjamin Graham in Perspective”, an article by Dennis Butler, appears in the Summer 2006 issue of Financial History, a magazine published by the Museum of American Finance in New York City. To correspond with him directly and /or to obtain a reprint of his featured articles, “Gold Coffin?” in Barron’s (March 23, 1998, Volume LXXVIII, No. 12, page 62) or “What Speculation?” in Barron’s (September 15, 1997, Volume LXXVII, No. 37, page 58), he may be contacted at:

Dennis C. Butler
Centre Street Cambridge Corporation
Post Office Box 390085
Cambridge, Massachusetts 02139

Telephone: 617.441.9695

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