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The Rainwater Prophecy

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    INVESTOR S GUIDE 2006 ENERGY PROPHET The Rainwater Prophecy Richard Rainwater made billions by knowing how to profit from a crisis. Now he foresees the biggest
    Message 1 of 1 , Dec 19, 2005
      INVESTOR'S GUIDE 2006
      ENERGY PROPHET
      The Rainwater Prophecy
      Richard Rainwater made billions by knowing how to profit from a
      crisis. Now he foresees the biggest one yet.
      FORTUNE
      Tuesday, December 13, 2005
      By Oliver Ryan


      Richard Rainwater doesn't want to sound like a kook. But he's about
      as worried as a happily married guy with more than $2 billion and a
      home in Pebble Beach can get. Americans are "in the kind of trouble
      people shouldn't find themselves in," he says. He's just wary about
      being the one to sound the alarm.

      Rainwater is something of a behind-the-scenes type—at least as far as
      alpha-male billionaires go. He counts President Bush as a personal
      friend but dislikes politics, and frankly, when he gets worked up, he
      says some pretty far-out things that could easily be taken out of
      context. Such as: An economic tsunami is about to hit the global
      economy as the world runs out of oil. Or a coalition of communist and
      Islamic states may decide to stop selling their precious crude to
      Americans any day now. Or food shortages may soon hit the U.S. Or he
      read on a blog last night that there's this one gargantuan chunk of
      ice sitting on a precipice in Antarctica that, if it falls off, will
      raise sea levels worldwide by two feet—and it's getting closer to the
      edge.... And then he'll interrupt himself: "Look, I'm not predicting
      anything," he'll say. "That's when you get a little kooky-sounding."

      Rainwater is no crackpot. But you don't get to be a multibillionaire
      investor—one who's more than doubled his net worth in a decade—
      through incremental gains on little stock trades. You have to push
      way past conventional thinking, test the boundaries of chaos, see
      events in a bigger context. You have to look at all the scenarios,
      from "A to friggin' Z," as he says, and not be afraid to focus on Z.
      Only when you've vacuumed up as much information as possible and you
      know the world is at a major inflection point do you put a hell of a
      lot of money behind your conviction.

      Such insights have allowed Rainwater to turn moments of cataclysm
      into gigantic paydays before. In the mid-1990s he saw panic selling
      in Houston real estate and bought some 15 million square feet; now
      the properties are selling for three times his purchase price. In the
      late '90s, when oil seemed plentiful and its price had fallen to the
      low teens, he bet hundreds of millions—by investing in oil stocks and
      futures—that it would rise. A billion dollars later, that move is
      still paying off. "Most people invest and then sit around worrying
      what the next blowup will be," he says. "I do the opposite. I wait
      for the blowup, then invest."

      The next blowup, however, looms so large that it scares and confuses
      him. For the past few months he's been holed up in hard-core research
      mode—reading books, academic studies, and, yes, blogs. Every morning
      he rises before dawn at one of his houses in Texas or South Carolina
      or California (he actually owns a piece of Pebble Beach Resorts) and
      spends four or five hours reading sites like LifeAftertheOilCrash.net
      or DieOff.org, obsessively following links and sifting through data.
      How worried is he? He has some $500 million of his $2.5 billion
      fortune in cash, more than ever before. "I'm long oil and I'm
      liquid," he says. "I've put myself in a position that if the end of
      the world came tomorrow I'd kind of be prepared." He's also ready to
      move fast if he spots an opening.

      His instincts tell him that another enormous moneymaking opportunity
      is about to present itself, what he calls a "slow pitch down the
      middle." But, at 61, wealthier and happier than ever before,
      Rainwater finds himself reacting differently this time. He's focused
      more on staying rich than on getting richer. But there's something
      else too: a sort of billionaire-style civic duty he feels to get a
      conversation started. Why couldn't energy prices skyrocket, with
      grave repercussions, not just economic but political? As industry
      analysts debate whether the world's oil production is destined to
      decline, the prospect makes him itchy.

      "This is a nonrecurring event," he says. "The 100-year flood in
      Houston real estate was one, the ability to buy oil and gas really
      cheap was another, and now there's the opportunity to do something
      based on a shortage of natural resources. Can you make money? Well,
      yeah. One way is to just stay long domestic oil. But there may be
      something more important than making money. This is the first
      scenario I've seen where I question the survivability of mankind. I
      don't want the world to wake up one day and say, 'How come some
      doofus billionaire in Texas made all this money by being aware of
      this, and why didn't someone tell us?'"

      It feels like the last place you'd go looking for a rich man. Lake
      City, S.C., is a town of 6,500 in the low country two hours northwest
      of Charleston. Once the bustling home to small, independent tobacco
      farmers, now it's mostly a collection of abandoned gas stations,
      roadside churches, and fading brick walls with trust jesus painted on
      them in big black letters. Unemployment hovers around 10% and would
      be worse if the Taiwanese plastics manufacturer Nan Ya hadn't opened
      up a sprawling factory on the edge of town.

      Rainwater spends a lot of time in Lake City because of his wife,
      Darla Moore. A former star in bankruptcy financing at Chemical Bank
      who was once dubbed the "toughest babe in business" by Fortune,
      Moore, 51, grew up here. Her grandfather was one of the small tobacco
      farmers. Nowadays she lives on her grandparents' old farm. (Moore and
      Rainwater also own a lavish home in Charleston.) Rainwater calls Lake
      City the "middle of bum-fuck nowhere." But the truth is he's got
      everything he needs here: cable TV, a telephone, an automatic
      coffeemaker, a decent golf course up the road, and a fast Internet
      connection.

      Measured against the languid pace of the surroundings, Rainwater's
      usual surplus of physical energy seems even more pronounced in Lake
      City. Tall, tan, and sturdily built, he has a hard time sitting
      still. He's run four marathons and offers that, when he was 40, he
      unexpectedly set the record in his age group on something called
      a "modified Balke protocol" treadmill test, a measure of the body's
      efficiency in absorbing oxygen. Rainwater bounces around the farm in
      shorts, a polo shirt, and a baseball cap, maintaining a running
      dialogue with Moore (whom he calls "Precious"), his staff, and anyone
      else who happens to be within earshot or on his speed dial. "He's
      maternal," says Moore. "And I'm paternal."

      In the ongoing Richard and Darla show, Moore supplies the dry one-
      liners to his constant chatter. Lately she's been affectionately
      calling him "Dr. Doom." But she's not dismissing his concerns. Or
      harboring any illusions that she can talk him out of making a big
      investment once he settles on a theme. As president of Rainwater Inc.
      in the '90s, she was his partner in his last two big bets. And though
      she's at a stage in life where she might prefer to simplify her
      affairs rather than go off on another wild ride, she knows that soon
      he'll have to act. "We've been married for 15 years," she says. "This
      is the third time I've seen this. The massive intake of information
      has been complete. Now he's agonizing. We're in what I refer to as
      the raving mode—the latter stages of rave. This is the refinement
      stage. Then we're going to make decisions."

      "It's not raving," he says. "I promise I am not a kook."

      "You're kooking out a little. But I've seen the process before. I saw
      you go from zero to 100 miles per hour in real estate."

      "And you saw me get into oil ten years ago," he says, then
      protests, "But I'm on the edge of being so old that it doesn't matter
      anymore. I've won the heavyweight championship before. Instead of
      taking one more swing, maybe I should just retire a winner." Moore's
      not buying it. "Buckwheat," she says, using her nickname for
      him, "There's not a chance in a million you won't swing. He can't
      not. It's the nature of the animal."

      "Rainwater," the voice on the phone announces. "Now, type L-A-T-O-C
      into Yahoo, and scroll down to the seventh item." Rainwater doesn't
      use e-mail. Rather, he uses rapid-fire phone calls to spread the
      gospel he discovers every morning on the web. One day it might be the
      decline of arable land in Malaysia. The next it could be the Olduvai
      theory of per capita energy consumption. "L-A-T-O-C" stands for
      LifeAfterTheOilCrash.net, a blog edited by Matt Savinar, 27, of Santa
      Rosa, Calif. (which Rainwater calls "a hotbed for survivalist
      types"), who was on his way to being a lawyer when his side project
      began climbing up Google's rankings. The site is now the No. 2 result
      of a search on "oil." Savinar keeps a running diary of all manner of
      news and information relating to "peak oil," a once-wonkish
      geological debate that has recently crossed over not only to late-
      night talk shows but even onto the floor of the U.S. House of
      Representatives.

      "Peak oil" theorists posit that global production is at or near its
      historic ceiling and will begin a long, inexorable decline. They
      worry that America is not ready for the downturn, for skyrocketing
      prices and even shortages. Savinar's site's opening line
      is, "Civilization as we know it is coming to an end." Rainwater has
      been checking it every morning since September, when his personal
      anxiety alert level moved to orange. "I can almost pinpoint the
      date," says Moore. "It was right after he read that book."

      In August a friend gave Rainwater a copy of The Long Emergency, a
      dystopic view of the future written by ex-Rolling Stone writer James
      Kunstler, otherwise known for his passionate dislike of suburbia.
      Taking peak oil as a given, Kunstler argues that Americans have
      been "sleepwalking" through the end of a "100-year fossil fuel
      fiesta." The problem, he points out, is not that the world will run
      out of oil tomorrow, but rather that the lack of growth in oil
      production will wreak havoc on a global economic system predicated on
      perpetual expansion. Kunstler's "long emergency" is a decidedly
      unpleasant interval during which the world—and Americans in
      particular—must adapt to a post-oil regime of scarce energy and
      economic stagnation, a time of likely wars and the disappearance of
      all-American things like Wal-Mart and cul-de-sac homes 45 minutes by
      minivan from the office.

      Rainwater doesn't completely buy into Kunstler's doom and
      gloom. "It's the Z scenario," he says. But at the same time, he
      worries that Kunstler isn't wrong enough, and he's been buying extra
      copies of the book and passing them around to the many titans of
      capitalism who are his protégés. It's not the first doomsday book in
      Rainwater's life: His big bet on oil in the late '90s was kicked off
      by a work called Beyond the Limits, the sequel to a '70s sensation
      called The Limits of Growth. Written by three professors armed with
      an MIT-bred computer called World3, the Limits books projected that,
      left unchecked, human population would, within 100 years, overshoot
      the capacity of the planet to serve up sufficient vitamins and
      minerals—let alone absorb all the waste and pollution—to keep
      everyone healthy. Rainwater took the book to heart. "Right after I
      read it, I said, 'They've figured it out, I'm going to follow this
      thing.' "

      His ensuing oil bet was only the latest triumph for the grandson of a
      Lebanese immigrant (on his mother's side) who, according to family
      lore, picked up his last name from a Cherokee ancestor. His mother
      had worked at J.C. Penney to put him and his brother through the
      University of Texas. In 1970, after a short stint at Goldman Sachs,
      he joined Stanford Business School pal Sid Bass in managing the Bass
      family money in Fort Worth. Over the next decade and a half, he
      helped turn the family's modest $50 million fortune into one worth
      upwards of $5 billion.

      In the process Rainwater's investing style emerged: analytically
      rigorous but opportunistic and Texas-sized in its audacity. He'd buy
      public companies or private. He'd use futures and leverage, sometimes
      20 to 1. He even started companies. If he thought an idea was right,
      he put capital behind it. With the Basses, he resurrected the likes
      of Disney—recruiting Michael Eisner to be CEO—and bet early on
      cellphones. Later, when he went out on his own in 1986, his office
      drew a who's who of hard-charging capitalists to Fort Worth. In the
      heyday of Rainwater Inc., Eddie Lampert, the hedge fund tycoon turned
      head of Sears Holdings, had a desk, as did Daniel Stern, now of $3
      billion Reservoir Capital. Ken Hersh, who has compounded money at 31%
      annually for 17 years at Natural Gas Partners, started there. With
      Rick Scott, Rainwater founded Columbia Healthcare, which merged with
      HCA and became the country's biggest for-profit hospital company
      (Scott was later forced out as CEO amid a federal fraud
      investigation). Even George W. Bush kept an office, when he and
      Rainwater were putting together the Texas Rangers stadium deal.

      On a Tuesday afternoon in mid-November, Rainwater and Moore are
      holding court in the 14th-floor conference room of Reservoir Capital
      in Midtown Manhattan, where he camps out when he's in New York (he
      has money invested with the fund). He has gathered Reservoir's Stern,
      Goldman alum and Crestview Partners co-founder Barry Volpert, and a
      couple of guests, and he is expounding on the implications of the
      peak-oil theory: "I believe in Hubbert's Peak. I came out of Texas. I
      watched oil fields reach peak and go over, and I've watched how
      people would do all they could, put whatever amount of money into the
      field, and they couldn't do anything about it."

      In the 1940s and 1950s, a Shell geologist named M. King Hubbert
      observed that the production from any given oil field follows a bell
      curve, with annual volumes increasing until half the oil in the field
      is depleted, and declining thereafter. Basically, the bottom oil is
      harder to extract. King reasoned that production from all U.S. fields
      would follow a similar curve and predicted in 1956 that total U.S.
      oil production would peak in the early 1970s. His analysis caused a
      furor and was widely disparaged, but proved correct. "Hubbert's Peak"
      entered the lexicon of oil analysis—one of the great geological I-
      told-you-so's. Forty-nine years later, a growing number of noted
      geologists and industry analysts suggest that the global oil supply
      may now be topping out, a claim that has been met by skepticism from
      yet other geologists and economists who say higher prices will spawn
      both more discovery and improved recovery from existing fields.

      Rainwater sides with the imminent peak crowd, and can rattle off
      facts to back up his argument. "In 1988 there were 15 million barrels
      a day of shut-in production"—meaning surplus that could be tapped—
      "and the world was using about 55 million barrels of oil. Today the
      world is using over 80 million, and there's no shut-in production
      left. We've used it up, through the combination of depletion and
      growth." In other words, the spigot can't be opened any wider.

      What concerns him most is the conflict that he thinks an oil shortage
      will precipitate. What happens when people get blindsided by prices
      rocketing past any level they have contemplated—especially when you
      factor in other challenges America faces? "We've got a lot of things
      going on simultaneously," he says. "The world as we know it is
      unwinding with respect to Social Security, pensions, Medicare. We're
      going to have dramatically increased taxes in the U.S. I believe
      we're going into a world where there's going to be more hostility.
      More people are going to be asking, 'Why did God do this to us?'
      Whatever God they worship. Alfred Sloan said it a long time ago at
      General Motors, that we're giving these things during good times.
      What happens in bad times? We're going to have to take them back, and
      then everybody will riot.' And he's right."

      Part of Rainwater's routine when he's down on the farm is to go for
      gizzards at Allison's, a no-frills truck stop up the road. Driving in
      a red BMW SUV on the Tuesday before Thanksgiving, he points out who
      lives where: the local doctor, the Taiwanese Nan Ya workers. He
      chokes up momentarily passing the home of a woman who worked at the
      farm, whose son has just returned from serving in Iraq. The sheer
      incongruity of his wealth in Lake City is not lost on him. But at
      Allison's he seems right at home, lathering the deep-fried gizzards
      with hot sauce and self-serving a large coffee which he spices at the
      hot chocolate machine.

      Back on the farm that night, he and Moore discuss future projects
      with their landscaper, Jenks Farmer, over a glass of wine. Farmer,
      who has a master's in horticulture and lives on the property,
      maintains Moore's extensive gardens, including vegetable beds that
      produce all year round. That morning Rainwater had been surfing the
      web, researching greenhouses in his quest to further ensure a steady
      flow of food through the winter. At his prodding, Moore has installed
      an emergency generator and 500-gallon storage tanks for diesel fuel
      and water. When Rainwater says that he's thinking about opening a for-
      profit survivability center, it's not entirely clear that he's
      joking.

      Later in the night Rainwater returns to musing on how different his
      lot is from the residents of Lake City. And then, returning to the
      debate in his head, he gets a serious look on his face and
      says: "This is going to get a little religious. I ask why I was
      blessed with this insightfulness. Everyone who has achieved
      something, scientists, ballplayers, thinks they were given their
      talent for a reason. Why me? Was I given this insightfulness at this
      particular time? Or was I just given this insightfulness?" He
      pauses. "I just want people to look out. 'Cause it could be bad."

      http://www.fortune.com/fortune/print/0,15935,1139979,00.html

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