see, and thats where i keep guessing:
i DID run the unchanged version of your water_demo
thats very strange, its working great on my end - try reinstalling panda 1.8.0 or higher to see if that solves it because something is weird on your end lol.
well, i think im going to go with a simpler design:
a partially see-through blue plane of weirdness,
or a plane with a movie of a water animation playing on it. since in my game you cannot get level with the water, but the camera is always above it, that should work just fine.