Review & Resolve

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2015 was filled with big developments.  Oil prices plunged, Chinese growth slowed, and relations with Cuba and Iran thawed.  Terrorists attacked in Paris and California, hopes for peace in Colombia appeared, the Middle Eastern refugee crisis deepened, and the Volkswagen scandal shocked many.  Cecil the Lion and Star Wars joined Donald Trump in making headlines.  Two of my favorite "2015 Reviews," which you may enjoy, are from Dave Barry and Visual Capitalist.  So what will 2016 bring?

It is impossible to know, but I am as convinced as ever that zooming out, taking the long view, and adopting the generalist mindset offer the best shot at navigating radical uncertainty in a complex, chaotic world.  It's for this reason that I refuse to make annual predictions.  Instead, I believe that it is easier to distinguish signal from noise over a 5 year window.  For a look at last year's predictions, click here.  Next week, I'll be publishing my 2016-2021 predictions.  Stay tuned.

As I reflect on 2015, I also want to thank you for your support. I am filled with gratitude for the readers and interlocutors who make my commentary possible. I value this community greatly and always love receiving your feedback.  I'm also thrilled to report that there has been rising interest in my work.

Last year, my articles were viewed over 770,000 times, a more than 10x increase over 2014.  They generated appearances on CNBC, Bloomberg, and NPR.  LinkedIn named me its #1 writer on money and finance, and Worth listed me as a "Future Power Player" in its issue dedicated to the 100 Most Powerful People in Finance.  Fortune and PBS regularly reprinted my work.  That my writings resonated is a testament to the many of you who have brainstormed with me, while also commenting, liking, tweeting, and sharing my articles.

Looking forward to 2016, I am excited to continue connecting seemingly irrelevant dots to help uncover unconventional insights.  Please do send me any ideas that catch your attention.  In addition to my weekly commentaries, I also have a book in the works that I will soon share with all of you. To follow my work on Facebook, please like my page here.  And for those receiving this email from a friend or colleague, you can add yourself to my mailing list here.

Best wishes for a healthy, joyful, and productive 2016. Happy New Year!

 



Managing Oneself in the Year Ahead

I follow Peter Drucker’s advice to “manage myself” by applying some preliminary feedback analysis to my predictions for 2015-2020. Click here to read more.


Naked Unicorns in Subprime Valley

The signs of a new tech bubble are everywhere. My survey of the evidence that ‘naked unicorns’ are afoot in ‘Subprime Valley’ was originally published by Worth.


Why The Fed's Decision Probably Doesn't Matter

We focus too much on individual rate hike decisions, when it’s really the overall trend of changes that matters. I argue that weaknesses in the global economy suggest that the Fed will have to move slowly, or else risk a self-inflicted downturn.


How to Turbo-Charge Meetings

Too often, we use meeting time to share information, when it should be devoted to collaboration and decision-making. My take on getting the most out of meetings.


The Future of Energy

Nuclear fusion and methane hydrates present starkly different visions for the future of energy. In this short piece, I suggest what we can learn from peering at the fringes of energy innovation.


Give Thanks for The Turkey!

Thankfully, fears of Thanksgiving turkey price disruptions proved unfounded. Long-term trends, though, could make such meals break the bank. My take on the economics of Thanksgiving and the future of food.


One Child Creates an Economic Ripple

China made the landmark decision to end its one-child law, but it will continue to feel the effects of its demographic policies for years to come. My case for continued slowing in China.

Managing Oneself in the Year Ahead: Review, Reflect, Resolve

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The end of each year produces a jumble of reviews, predictions, and resolutions. Inevitably, we look back on the prior 12 months and go list crazy, generating reviews of the year’s best books, movies, and music; the most popular search terms; and even lists of our favorite lists. But we also look forward, predicting what’s in store for the world in the coming year and hoping that our guesses will help us claim unique forecasting insight. And many of us also reflect on our shortcomings, resolving to be better next year.

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Rarely, though, do we do all three at once: reviewing our predictions in order to resolve to make better ones. We should, and that’s what I’m going to attempt here.

Each year, I produce a set of predictions. Unlike others, I don’t focus on the coming year and instead look out five years. The conventional wisdom is that predicting five years is much more difficult than predicting one year. Who could possibly know what will emerge over half a decade?

I see the future differently. To me, the opposite is true. A one-year timeframe is noisy, while a longer horizon allows you to zoom out, analyze overarching trends, and look through the short-term cross currents that domineer the day. Looking further helps identify signal amidst short-term noise. For me, this works best if I deliberately evaluate and integrate feedback about how my predictions fare over time.

In his essay “Managing Oneself,” management guru Peter Drucker highlighted the importance of deliberate self-assessment: “The only way to discover your strengths is through feedback analysis. Whenever you make a key decision or take a key action, write down what you expect will happen. Nine or 12 months later, compare the actual results with your expectations.” The end of a year is a logical point for such self-evaluation; we all should reflect on where we thought our actions would take us in the past year, and whether reality and those expectations lined up.

Since my predictions are on a five-year basis, it is too early to make definitive assessments. In the spirit of transparency, however, I’ll go over some notable—albeit highly preliminary—successes and failures in my 15 Predictions for ’15-’20. By reviewing my predictions in public in writing, I’m hoping to keep myself honest and resolve to improve my 16 predictions for ’16-’21. Watch for them in the near future.

On the global economy, a few of the trends I highlighted have borne out more quickly than I predicted. In 2015, India did indeed surpass China as the fastest growing large economy in the world. China’s GDP growth is falling, but it is unclear whether it will dip below 5% during the next four years as I predicted. It did, however, move to end the one-child policy this year, as I thought it would. Relatedly, the Chinese-funded canal in Nicaragua—which I worried would become endangered by turmoil in the Chinese economy—was jeopardized this past year, as the billionaire helping to foot the bill lost 85% of his net worth in the stock market. Clearly, China remains too important to dismiss and must be followed closely.

When it comes to oil prices, they haven’t yet rebounded as I suggested they might before 2020. Indeed, they’ve done the opposite – falling further than I expected as OPEC refused to cut production. Lower oil prices have spurred consumption as I thought they might, and interestingly, Arctic tensions are rising even as energy companies have pulled out of the area. Food prices have yet to rise as I predicted, instead falling to multi-year lows.  It's worth watching consumption patterns, particularly for animal protein, as the world's middle class continues to grow.

In the realm of international politics, I also had some notable successes—and misses. Sadly, my prediction that terrorism would strike previously “safe” places was tragically confirmed with the attacks in Paris and San Bernardino. China has continued its saber-rattling in the South China Sea, and state-sponsored cyber warfare made global headlines. In Europe, the flood of inbound refugees has both increased and decreased the likelihood of Europe’s dis-integration. They may help alleviate demographic pressures, but also risk encouraging nationalism and sealed borders. The jury is still out.

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Transparent feedback analysis is critical for anyone issuing any kind of forecast. In fact, it’s key to “managing ourselves” in general. As the new year rolls in, take a moment to look back and assess how you’ve been doing. Then resolve to manage yourself in the year ahead by learning from the past to navigate the future. Best wishes for a productive 2016.  Happy New Year!

 

 

Naked Unicorns in Subprime Valley

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The signs of a tech bubble are plain to see. But Silicon Valley doesn’t want to admit it—and average investors are at risk.

Shortly after the late 1990s technology bubble burst, many cars in Northern California sported a bumper sticker pleading, “Please, God, just one more bubble!”

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Those prayers have been answered. The signs of a new tech bubble are everywhere: Easy money, widespread exuberance, hidden leverage and mass participation by amateur investors. Many believe it’s different this time, insisting that valuations are reasonable and that Tech 2.0 companies have real business plans that will generate real profits.

How did we get here? Broader economic forces are one reason. With interest rates at unprecedented lows even after the Fed's recent hike, many investors have been forced to take extra risk to generate returns. Fast-growing tech companies offer the prospect of tremendous rewards. “It only takes one,” the venture capital guys say. The collective valuation of the 142 unicorns is around $500 billion.

Another phenomenon, the involvement of large mutual funds in private investments, is a contributor. T. Rowe Price, Blackrock, Fidelity, and Wellington–four firms that offer open-ended investment products with daily liquidity–have pumped significant amounts of capital into late-stage private tech firms. Two thirds of unicorns—companies valued at $1 billion or more—have a mutual fund, hedge fund or bank as a major investor.

But as the music stops, retail mutual fund investors may find hard-to-value illiquid assets getting rapidly marked down, possibly forcing indiscriminate selling of allegedly “safe” assets.  As Warren Buffett put it, “It’s only when the tide goes out that you can see who’s been swimming naked.” Recent reluctance to go public and valuation markdowns suggest we’ve reached high tide—and we’re about to discover who’s most exposed.

For investors frustrated with the challenge of generating returns in today's climate, the hopes offered by opaque private markets are more appealing than the reality presented by transparent public ones. Just consider two firms that operate in cloud storage: Box and Dropbox. Dropbox is private; Box is listed on the New York Stock Exchange. For no obvious reason, Dropbox garners a significant premium compared to its public peer. T. Rowe Price and BlackRock invested in Dropbox at a $10 billion valuation. But if it traded at the same revenue multiple as Box, the company would be worth $3 billion. What’s the difference? When reality isn’t sexy, investors throw money at potential.

Over the summer, BlackRock marked down its valuation of Dropbox by 24 percent. Then, this fall, Fidelity marked it down as well, along with its stake in Snapchat by 25 percent and its stake in Zenefits, a maker of online human resources software, by 48 percent. More recently, Fidelity marked up its stake in these three companies, but not enough to recover the losses of recent months, highlighting the radical uncertainty surrounding such valuations. Moreover, following its IPO, Square was trading around $12 per share, well below the $15.46 investors paid in the last private round in October. Gilt Groupe, once valued at over $1 billion, is now trying to sell itself for about a quarter of that. Valuation volatility is rightly leading many to question how many unicorns are overvalued.

And consider the over-the-top confidence of the Valley’s employees. They’re commanding ever increasing wages, with reports of $500,000 annual pay packages offered to recent college graduates. Interns are making $7,000+ per month. Expectations for such sky-high pay have become both inevitable and unsustainable; they’re reminiscent of the $1 million pay packages promised Wall Street associates in 1999. By 2000, once the party had ended, annual bonuses were being replaced by pink slips.

Financiers are so convinced that the good times are here to stay that they’ve begun lending money against overpriced and illiquid private stock or employee options. Paper-rich but cash-poor employees are borrowing money they can’t repay without a company sale, from specialist funds that have arisen for just this purpose—and even from banks. In effect, the “cash buyer” of a multi-million dollar property in San Francisco may actually be using 100% borrowed money.

So, let’s get this straight: Higher valuations drive higher incomes that drive higher housing prices using lots of leverage. Seems fair to assume that lower valuations will drive lower incomes and lower housing prices…with, uh-oh, under-collateralized loans. The dominoes are lining up.

One of the telltale signs the end of a bubble is near is popular obsession with get-rich-quick investing opportunities. Back in 1999, taxicab drivers were doling out stock tips. And because that was a bubble in publicly-traded stocks, and online brokerages made investing accessible to all, E*Trade and Schwab were opening accounts at dizzying rates. Today’s equivalents are the crowdfunding campaigns allowing companies to raise equity from Joe and Jane Sixpack, which were made possible by the 2012 JOBS Act. Since September 2013, investors have used crowdfunding platforms to pump more than $700 million into over 1,700 private companies.


The dominoes are lining up.


As with any proper bubble, there are rationalizations galore. Of course, it’s different this time—it always is. Uber is attempting to disrupt the entire global transportation system. Airbnb is permanently changing the way people procure temporary housing. And both companies are unlocking the productive potential of otherwise stranded capital in depreciating assets. Why have your car sit idle or your apartment empty when either (or both) can generate a return?

All of that may be true. But what happens when competitors enter the market and, say, do away with surge pricing? Or taxis respond with apps of their own, as they have in New York? Or states and countries start regulating Uber and Airbnb? Or the notoriously fickle millenials get bored of the platform and move on to the new new thing?

There’s no doubt that today’s resurgence of tech start-ups will generate world-changing companies. But with all the unicorns roaming in subprime valley, the fantasy grows more obvious by the day. As with all good fantasies, it’s easy to lose yourself in the story. But the story’s almost over.

Vikram Mansharamani, PhD, is a Lecturer at Yale University in the Program on Ethics, Politics, & Economics and the author of Boombustology: Spotting Financial Bubbles Before They Burst (Wiley, 2011). Follow him on twitter @mansharamani.

Original Post:
http://www.worth.com/articles/naked-unicorns-in-subprime-valley/

Why The Fed’s Decision Probably Doesn’t Matter

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The Federal Reserve will announce later today whether it will raise interest rates for the first time since 2006. Whatever the Fed does, we need to look at the big picture. And when we do, we might conclude today’s decision probably doesn’t matter that much. Any rate hike will be small, and there's a chance it may have to be reversed.  Here’s why.

First, the US economy is not all it’s cracked-up to be. Sure, the US economy has been doing relatively well. Jobs have been created, unemployment has fallen, and home prices have recovered. But as Jeremy Grantham pointed out in his recent quarterly letter, we have stagnant median wages, a declining labor participation rate, and gloomy death rate statistics for middle-aged whites.

Further, we’re seeing brewing chaos in the junk bond market that might soon infect other markets. In fact, bond fund manager Jeffrey Gundlach highlighted “real carnage” in this market as reason the Fed should exercise caution if and when it chooses to raise rates.

And inflation in America has been contained. We have not (yet?) had the runaway inflation that many believe quantitative easing would produce. Rather, inflation has been stubbornly low. It stands at just .25%. Even if you disregard energy and food prices it works out to 1.3%, meaningfully below the Fed’s 2% target. In fact, the US economy has been missing the Fed’s inflation target for three and a half years. And inflation expectations are now declining.

One driver of this development has been the strong US dollar. As it strengthened, our import bill has shrunk. How’s that? Foreign goods become cheaper in dollar terms. The flip side of that coin is that a strong dollar hurts American multinationals and manufacturers that try to sell good overseas. US exports—from cars to medical equipment to drugs to airplanes—become less competitive.

To be fair, some economists argue that the risks of keeping rates low are greater than the risks of raising rates. After all, low rates hurt those on fixed incomes and other savers while encouraging investors to make increasingly risky bets to generate returns. And as I noted in Boombustology, easy money and cheap credit is a contributing factor to asset bubbles. There are also some respected economists, like Martin Feldstein, that are worried about looming inflation.

Second, the Fed may well end up having to reverse course in the near future if current global economic dynamics persist. Remember how the BRIC countries were supposed to drive the global economy forward for decades to come? Well, the BRICs are crumbling. Brazil is in the midst of a nasty recession, its currency has fallen more than 40% so far this year, and corruption scandals are rocking government and business alike. Russia too is suffering. Low commodity prices, economic sanctions, and an increasingly isolationist regime are hurting growth. India is sputtering along, but the battle between Modi and the bureaucracy continues. And China is coping with the bursting of a credit-fueled investment bubble. Its slowdown is also wreaking havoc throughout the world via plunging commodity prices. Unsurprisingly, the UN recently cut its forecast for global economic growth this year by .4%, to 2.4%.

Further, the world is suffering from having too much supply and not enough demand. That’s why prices have been falling. Look at oil – technology helped supply boom, while anemic global growth and alternative energies limited demand. Higher supply plus lower demand equals lower prices. This has happened to numerous commodities and many goods and services. It all adds up to deflationary pressures that have kept a lid on inflation.

And there are lots of other developments that could really hurt the global economy. Take oil prices, for instance. Countries like Saudi Arabia, Nigeria, and even Canada are facing tighter budgets, shifting politics, and economic uncertainty. Or what about the refugee crisis flowing from Middle East instability? Might it cause European borders to be less porous? Finally, consider demographics. Japan and Germany, for instance, are facing large headwinds as their labor pools begin shrinking in the near future. Sensing similar dynamics, the Chinese government just relaxed it’s one child policy. Where else might demographic policies affect economics in the near term?

Ultimately, however, a rising middle class in the emerging world will lead to an unprecedented consumption boom that will turn this global economic frown upside down. But until then, we must pay attention to these cross currents if we wish to navigate safely through a treacherous global economy.

Let’s be honest, today’s Fed actions are unlikely to actually matter. A one-time .25% increase will have a minuscule effect. It’s not really about the rate hike per se. It’s about the trend the Fed expects to take in 2016 and beyond. If the Fed does take an assertive stance, the cost of credit might increase substantially. If the Fed increased rates towards 2%, for instance, we’d see sizable hikes in credit card, student loan, and mortgage monthly payments. And by the way, let’s not forget that higher credit costs dampen economic activity.  Too sharp a hike too fast might generate a self-inflicted downturn. 

The reality of an interconnected global economy is that what happens in China doesn’t stay in China. And what happens in the United States won’t stay in the United States. So however the Fed proceeds, it’s clear its actions are constrained by forces outside of its control.

 

How To Turbo-Charge Meetings

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Type “meetings are” into Google, and the search engine will suggest “toxic,” “useless,” “waste of time,” “unproductive,” “pointless,” and “bad."  Meetings have a terrible reputation in business, and for understandable reasons.  The overwhelming impression we have of the conference room gathering is an inefficient time-suck, where self-important managers rattle off facts and figures that could have been shared with us beforehand.

Here’s the main problem: we are using meetings to share information, a practice made completely obsolete by technologies as simple as email. Even though we  know this, we still meet in person to disseminate data, a process only slightly less anachronistic than filling in paper spreadsheets with a pencil.

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This practice absolutely sucks the life out of meetings, because all participants know in such moments that their time could be better spent doing almost anything else. Plus, the information isn’t being absorbed by anyone, because it’s not needed at that point. Most people will simply wait for the "meeting summary" email that inevitably follows for any information they actually need.

So here’s a rule of thumb: anything that you can convey in an email, a PDF, or even a Youtube video, should not be meeting material. It’s a waste of precious time. In fact, it’s been estimated that $37 billion per year is wasted on unproductive meetings! Although shocking, it’s understandable, given that the average employee spends 31 hours per month in meetings. It adds up quickly.

But not all meetings are a waste. Some are useful. Getting together for a meeting makes sense when you need to collaborate or make important decisions – two tasks that benefit from face-to-face interaction between colleagues in real time. Synchronous communication should be saved for such duties.

In fact, this is precisely how I run the business ethics class that I teach at Yale. I don’t lecture. I rarely even discuss the assigned reading, instead confirming students have done it via short written reactions they email me the night before we meet. Precious class time is protected for dynamic, multi-directional cooperation, interaction, and collaboration. In this day and age, there is absolutely no reason for me to burn minutes sharing information.


Precious class time is protected for dynamic, multi-directional cooperation, interaction, and collaboration.


Rather, in-person meetings and collaboration go together. In education, this insight is reflected in the “flipped classroom” approach, where students imbibe instructional content in the evenings and use class time to work together with their peers and teachers. There is some (very preliminary) evidence that this approach improves educational outcomes and student engagement.

So how can we do this in the office setting, given the historical baggage of regular meetings to “update” teams? Well, consider this: the rapidly growing office communications startup Slack recently cancelled all recurring meetings. Why? To see which were really necessary. As the company’s founder Stewart Butterfield stressed, this was about respect: "Respecting people’s time is important…If you’re going to call a meeting, you’re responsible for it, and you have to be clear what you want out of it.”

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Slack’s software allows businesses to make all of their communications accessible to all employees. Need to know the latest sales figures for the Southern District? Just search for it. Want to know how recruitment is trending? Just search for it. By making information free for all to find, employees can effectively have on-demand access to what they need, when they need it. Start-ups and new media companies have adopted Slack’s software, and it’s even used to help improve collaboration and information flow at NASA’s Jet Propulsion Laboratory.

Turbo-charging meetings may be as simple as changing how we think of them. If a meeting is for sharing info, try eliminating it. If it is for collaboration, encourage interaction and engagement from all. Doing so is likely to raise participants’ engagement, happiness, and feeling of impact, and ultimately produce more creative ideas and better decisions.

If we follow this rule of thumb, Google’s search suggestions could look entirely different in ten years, maybe even starting with something we would never have expected to see if we hadn’t changed our thinking: “Meetings are fun.”

 

The Future of Energy: Fusion and Flammable Ice?

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This week, world leaders are gathering in Paris to discuss climate change. In concert, a group of wealthy investors including Bill Gates launched the Breakthrough Energy Coalition, which will fund risky early-stage clean energy technologies that offer the promise of clean energy.

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The prime suspects for a sustainable future continue to be solar, wind, and nuclear fission. But as the public and private sectors collaborate on energy and climate matters to help slow carbon emissions, it is worth pondering other technologies and how they may affect the future of energy. After all, what’s considered fringy today may prove to be mainstream tomorrow. The two areas I’m watching are nuclear fusion and methane hydrates.

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For a sustainable, almost utopian option, nuclear fusion has long been touted as a panacea to our energy problems. For decades, scientists have claimed we were on the cusp of a fusion revolution. It hasn’t panned out (yet). Just think about the world’s most ambitious fusion project: the $14 billion International Thermonuclear Experimental Reactor (ITER) which is attempting to effectively put a star in a bottle. Originally begun in 1985 as a Reagan-Gorbachev initiative, ITER is today funded by many nations and has endured frequent delays. It’s still under construction. Fusion would provide abundant clean energy, but many fear proponents are re-stoking the same false hopes of the past.


After all, what’s considered fringy today may prove to be mainstream tomorrow.


Just because something hasn’t ever worked, doesn’t mean it never will. There’s a new wave of optimism surrounding fusion, and startups such as General Fusion, Tri Alpha Energy, and Helion Energy are trying to locate this holy grail of energy production. They’re also getting noticed by some of tech’s most innovative thinkers: billionaires Jeff Bezos, Paul Allen, and Peter Thiel are investing in fusion. Can Silicon Valley crack the energy and climate change nuts in one effort?

Just think about the fact that a mere fifteen years ago, very few professionals paid meaningful attention to energy’s fringy folks fiddling with hydraulic fracking technologies. It’s too bad more of us didn’t, because the US energy renaissance unleashed by the fracking revolution has had global ramifications as low oil prices disrupt government budgets from Nigeria to Saudi Arabia and Venezuela to Russia. It’s probably also hurt the commercial viability of many alternative energy projects, as cheap fossil fuels are economically addicting to developed and developing nations alike.

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So what other fringy technologies should we watch today that may change our energy future tomorrow? One candidate is methane hydrates. This flammable ice is effectively gas trapped by water crystals under the seabed. The magnitude of the hydrocarbons contained in these resources is enormous: methane hydrates are believed to contain between 100 and 3 million times the energy America consumes annually. It’s also global, with deposits near some of the world’s largest energy importers. Harvesting flammable ice is no trivial undertaking and has yet to be perfected…but then again, neither was fracking 15 years ago.

The global distribution of flammable ice also offers the prospect of significant geopolitical disruption. Meaningful volumes are believed to be near China, Japan, India, Indonesia, Pakistan, and Turkey, for instance. Some have speculated that China’s aggression in the South China Sea has been motivated by a desire to secure the energy resources contained in the flammable ice underneath. Perhaps unsurprisingly, China has plans to bring methane hydrates to market by 2030. How might energy independence embolden currently energy-dependent countries? It’s not surprising to me that energy-deficient Japan has been a leader in developing methane hydrate production capabilities.

But let’s not fool ourselves into thinking this is a realistic energy source anytime soon. The technical hurdles are daunting. As soon as samples are brought to the surface, the ice melts and releases methane into the atmosphere, creating large climate impacts over time. It’s believed by some that a pound of methane can trap 25x more heat than carbon dioxide over a 100-year period. And while burning methane will lessen this impact, let’s not forget that it is just another hydrocarbon and will have an environmental impact, something that leaders in Paris should address before the energy source is developed. Just as with fusion, it’s worth watching methane hydrates, because they might meaningfully impact the lives of every human being on this planet. But unlike fusion, an energy future dominated by flammable ice will most likely be harmful to our planet.

Ultimately, navigating uncertainty is difficult. There’s no way around that. But paying attention to today’s fringy ideas may help you identify tomorrow’s needle-moving developments. And when it comes to energy, fusion and methane hydrates may make the shale revolution look like a warm-up act for the two main events: putting a star in a bottle and lighting ice on fire.

 

 

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