Not the Beginning or the End

  • James H. Lee

SYSTEM FAILURE.  A simple two-word error message summarizes virtually every major news headline over the past five years.  In fact, it is difficult to name a single public institution which we hold in high esteem.  Government.  Healthcare.  Education.  Religion.  Even libraries are being brought into question regarding their relevance for the future. 

How did we get here?

Economic historian Carlota Perez says that we’ve been here before, many times in the past.  For over two centuries, we’ve seen new technologies wreck and repeatedly rebuild our social institutions.

• The Industrial Revolution (started 1770)

• Age of Railways (1829)

• Age of Steel and Electricity (1875)

• The Age of Oil, Automobiles and Mass Production (1908)

• The Information Age (1971)

Each technology boom follows a pattern:  an initial breakthrough, followed by speculative frenzy and misallocation of resources, leading to a collapse in finances and public restructuring, eventually transitioning into a period of broader deployment, productivity and rising affluence.  The process finishes with near-universal integration of revolutionary technologies into existing systems.

cycle of capital1

We’re not in the beginning or the end of this cycle, but in the middle.   The “messy middle” is a turning point when public finances are still in a state of disarray, and a significant gap exists between the efficiency of our institutions and the productivity of our newest technologies.  It is a time when the public feels the most dissatisfied and the least confident.

This particular turning point may have been delayed, as government efforts to “fix” the financial crisis have interfered with the mechanisms that restore equilibrium via what economist Joseph Schumpeter refers to as creative destruction.

At the World Future Society Conference last summer, a friend and colleague of mine, Patrick Tucker, presented material from his upcoming book, The Naked Future: What Happens in a World that Anticipates your Every Move.  He comments that we are in a time of “declining institutions and rising individuals.”  In the Information Age, nothing empowers individuals more than the internet.

So, what if institutions were as easy and convenient as online shopping at Amazon?  Can schools develop personalized curriculums just as easily as Netflix finds good movie recommendations? What if hospital costs were competitively-priced, like hotel rooms on Hotwire?  Will peer-to-peer lending networks become more successful than traditional banks?  Is it possible that a network of autonomous electric vehicles might eventually solve our public transportation issues? 

We are still a few years away from the next golden age, but at least we can see it on the horizon.

Google Watching

  • James H. Lee

Google Glass Model

As I pass my 44th birthday, it is easy to look at everything that Google is doing with a certain degree of wistfulness and envy.  Now just 15 years of age, Google has already surpassed many of my accomplishments.

• While not yet old enough to get a driver’s license, Google’s self-driving car logged-in 500,000 miles without a single accident.   It (presumably) has a much better sense of direction and doesn’t “space out” at stop lights.

• My grasp of the French language is so confused that I can get native speakers lost in their own country.  Meanwhile, Google’s online tools can translate over 70 different written languages to English.  The company is also extremely close to practical real-time speech translation for the Android operating system.

• From the perspective of personal health, my vision is fairly good -- yet the new Google Glass (pictured) can potentially have near-perfect facial recognition and see into something called “augmented reality” – using digital overlays to project location-specific information onto the real world.  My personal OS is still stuck in version 1.0, a freeware project better known as “an overactive imagination.”

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The View is Better from the Edge

  • James H. Lee

A few years ago, sci-fi author William Gibson famously commented in a radio interview that “The future is already here, it just isn’t very evenly distributed.”  This suggests that the future can be tracked and (sometimes) found.

Some have lost their reputation, even their sanity, in pursuit of this elusive beast.

Trend hunting would be altogether much easier if only you knew where the future wants to live.  It might simply be question of finding the right habitat.

In his book, The Medici Effect, Frans Johansson explores where creativity and innovation is most frequently found.  Johansson writes that innovation wants to live at the edge of things.  More specifically, innovation thrives at the intersection of cultures and  geographies.   This explains why the U.S., with its melting pot of immigrants, has such a dynamic culture.  Also, why coastal cities — such as Boston, New York, and San Francisco, tend to attract the best and the brightest.

Johansson also shows that the most interesting and accessible intersection might be at the edge of academic or scientific disciplines, where concepts are allowed to “clash and combine, ultimately forming a multitude of new, groundbreaking ideas.”

Charles Darwin was geologist when he stumbled upon the theory of evolution.  It took an astronomer to explain the extinction of the dinosaurs.   Similarly, Clay Christensen notes in The Innovator’s Dilemma  that disruptive change often comes from outsiders.

Biomimicry has been credited with the aerodynamic shape of the Toyota Prius, which is modeled after the shape of the box fish.  Neurofinance has been a hot area of study for several years now – it goes a long way towards explaining why human behaviors and heuristics create market inefficiencies.

StratFI can be found at the intersection of strategic foresight and investing.  We offer a new perspective, keeping in mind that “the view is better from the edge.”  In coming articles,  we’ll go big-game hunting for some of the dominant investment themes of the next decade.    Meanwhile, I’ll share some of my own favorite “hunting grounds” for new trends — follow the link here to the resources section of our website.

A Revolution in Batteries?

  • James H. Lee

BatteryFor all the buzz, Tesla’s electric cars still rely on lithium-ion batteries, a technology that was commercialized by Sony over twenty years ago.  Today, these batteries power everything from sports cars to laptops and cellphones.

It is time for a recharge.

Lithium-ion batteries are by far the most expensive component of electric cars, adding about $10,000 per vehicle.  This is one reason why the electric and hybrid vehicles still rely on economic subsidies.  But there are other concerns, too.  Li-ion batteries don’t hold as much energy as petroleum-based fuels, suffer from slow recharge times, and have lingering safety issues.  Clearly, this is a transitional technology.

Significant progress is being made in the effort to update the rechargeable battery.  Three new approaches are gaining the most attention:

Lithium-Air batteries can “breathe” by using surrounding oxygen to form chemical reactions and generate an electric current.  IBM was first the standard-bearer for this technology.    While lithium-air batteries can store up to ten times more energy, they take much longer to recharge and lose their effectiveness after fewer cycles.   But, the technology shows promise and Tesla has filed 8 patents for air-based battery technologies. 

Toyota is working on a solid-state battery that could shrink the size of a conventional battery pack by 80 percent – with possible reductions in manufacturing cost, too.  Because solid-state batteries don’t use corrosive or flammable fluids, they survive thousands of charge cycles, and can withstand high temperatures. GM has invested money in a related technology through privately-held Sakti3.

Graphene Batteries.  Researchers at Northwestern University have made significant improvements in Li-ion batteries by replacing graphite anodes with porous ribbons of graphene.  The resulting batteries charge in one-tenth the time and carry ten times more power.  In experiments at Rice University, graphene mixed with vanadium oxide was used to make batteries that retained 90% of their capacity for over 1,000 recharge cycles.

And there are even more variations… lithium-sulfur, silver-zinc, and flow batteries are all emerging platforms for research and development.

The science supports possibilities that are hopeful for a less petroleum-dependent world.  Within a decade or two, we may see electric cars with a better driving range than fuel-combustion vehicles, and can recharge in less time than it takes to fill a tank of gas.

Riding the Hype Cycle

  • James H. Lee

Wondering what’s hot and what’s not?  Take a look at the Gartner Hype Cycle, which follows the progress of new technologies. According to Gartner, emerging technologies typically move through phases of overenthusiasm and disillusionment before becoming commonplace reality.

Gartner just released its 2013 Hype Cycle last week.  The focus this year is on human-to-machine interactions.

2013 Hype Cycle

The Hype Cycle was never intended as a guide to buy, sell, or hold specific companies or industries.  From the perspective of process, however, it may be useful as a model for evaluating appropriate tools and time frames for investment.

Companies at the early stage of the Hype Cycle tend to have strongly negative cash flows, but increasingly abundant and positive media coverage. Traditional accounting analysis just does not work here – revenues and earnings are often non-existent.

Stock prices usually accurately reflect public perception, however, and standard technical analysis tools such as moving averages, accumulation/distribution ratios, and relative strength can be very useful in spotting when these companies are turning the corner into a period of disillusionment.

Stocks rising up the first leg of the Hype Cycle are ideal for short-term speculative trading. These companies typically see the biggest price-movements on a day-to-day basis.

By the time a company hits the peak of inflated expectations, you typically find their shares trading at unrealistic multiples to both earnings (if they exist) and revenues.  These companies and technologies have moved into the public conversation and receive glowing coverage from mainstream media.

Bubbles sometimes peak with high-profile IPOs in “the next big thing.”

Companies that are overpriced and experiencing negative momentum make excellent candidates for short-selling.  Short-selling is a bit like making money in reverse – you borrow shares to sell them high, and then repurchase them for replacement at a lower price later (if your hunch is successful).

As news coverage comes back to reality, companies sometimes get oversold. This may actually be sweet spot for making long-term investments. It is the point when technologies are reaching acceptance, valuations are reasonable, and public perceptions are stabilizing.  Everything starts to come together at the same time. This is a foundation for what I refer to as convergence investing.  Companies which survive the trough of disillusionment sometimes have the most attractive risk/return profiles.

The Hype Cycle is a useful reality check – just one tool to help determine if you are on the right side of a trade.  Your personal temperament and style may decide how you use it – speculating, shorting, or investing.

 

At TEDx Wilmington

  • James H. Lee

Jim Lee 5 smaller


It was a pleasure speaking at last week’s TEDx Wilmington! I presented a new talk, “Why the Millennial Generation Isn’t Broken” to group of really smart and interesting people. (photo credits to Joe del Tufo, Mobius New Media)