Riding the Fire Horse: Making Extraordinary Uncertainty Ordinary
My favorite local Vietnamese restaurant is run by a friendly young couple. Karen saw me looking a little down on my last visit a few weeks ago. “What do you think of 2026 so far, John?” I shook my head and looked a little grim. “That’s right — and me too,” she said. “This is the Chinese year of the Fire Horse — only once every sixty years. This is what it feels like to ride the Fire Horse.”
Karen’s words have been running in my head since then. The business and economic press are being dragged by the same steed, with stories about growing uncertainty. Some examples:
AI will displace professionals and middle class jobs (also: the amount of debt incurred by tech firms to build data centers is unsustainable and potentially destabilizing traditional and private banking),
oil shocks from the Iran War will continue to ripple through global economies, increasing inflation rates and inflaming political tensions in countries that had seemed stable,
political parties are realigning and in some level of turmoil in many countries, leading to policy and regulatory uncertainty,
the costs of increased defense spending (e.g., NATO support for Ukraine’s military) are diverting funds from other areas, such as healthcare, foreign aid, and infrastructure, and,
trade and tariff shocks leave many companies and investors unsure how to allocate funds or protect supply chains, and if they should maintain current operations or begin to move potentially safer areas.
I could go on, and I’m sure you could too. The financial and business press are trying to explain increasing volatility in currencies, commodities, and stocks, as well as a search for potentially calmer harbors for investment, including crypto currencies like Bitcoin or gold whose value is independent of government policies. The fraying of multilateralism is another result, which also makes solving complex international problems even harder. Economists and investors are right to be anxious.
A billionaire investor in the US said on an interview recently that we have no idea what the world will look like in five years but we can expect transformational social, economic, and political change. Interestingly, he felt that economic decision makers may not be nervous enough — and they are likely watching for the wrong triggers for additional change.
Mostly by force of habit, financial and economic systems largely assume that environmental shocks are both reasonably predictable and effectively addressed by existing financial and political systems, such as futures pricing and insurance. But those assumptions seem flawed right now too. If we’re headed for a series of big transitions, the triggering events to transformational change may not be just visible to economic decision makers. A phrase I’ve heard more than once is that economic decision makers may be absorbing information about risk gradually and slowly but in “quanta” — a term from physics, which refers to sudden jumps. Epiphanies over careful deliberation. A new piece of data reveals a new insight about how different systems are connected to each other.
As just one example, last week climate forecasters have suggested that we are almost guaranteed to experience one of the three most extreme El Niño events ever recorded — and perhaps beyond the scope of any registered in the 140 years of recorded data. (Meteorologists won’t be certain until July or August, but early signs right now are alarming.) This news has been completely absent from the financial and economic press. A super El Niño will bring us “compound extremes,” which will shift disasters from local tragedies to serious strains within larger financial and economic systems that last for years. At a minimum, food systems in the northern hemisphere are likely to be very stressed this year and next, while flood, fire, and drought response institutions and funds should feel intense shocks globally. What might these look like on a local scale? I’m not a gambling man, but I think it’s very possible that at least one of the world’s largest hydroelectric dams ceases to generate energy by August for the first time since the 1930s, straining an already tensely managed grid over a large region of North America. That power doesn’t just fuel hospitals and schools and homes and data centers. That power also pumps water over mountains and through regional economies.
In contrast to the silence around a 2026 super El Niño, the financial and economic reporting has been quite thoughtful about non-climatic drivers of uncertainty, speculating about major changes in sovereign debt, foreign exchange and reserve currencies, investment flows (especially outside of the formal banking system), disruptive technology, and employment levels. These are Fire Horse impacts on the financial and economic system as a whole. The blind spot seems to be the climate system — especially with regard to water cycle impacts — which can create impacts in the same way as a war, a global pandemic, or radical technology like AI and crypto currencies. We’re only looking at the horse’s head, not those strong back legs. The billionaire investor I mentioned above described “environmental events” — he mentions mostly water extremes — as what concerns him most as triggering major perturbations to the economic and social system that could define new compounding extremes.
How do we get ready? Can we maintain financial system stability in the face of such threats? Is the Fire Horse a different kind of economic animal? I can see a handful of strategies for breaking the Fire Horse to a saddle:
Assume more uncertainty than you had imagined and prepared for.
Consider environmental hazards in conjunction with broader economic impacts. Part of living in the time of the Fire Horse is understanding synergies and cascades and bringing in the awareness that unprecedented eco-hydrological impacts are also occurring.
Stress test macroeconomic multi-hazard scenarios rather than just using climate projections; the latter tend to underplay the amount of change in variability and can rarely predict when particular eco-hydrological systems will enter a new state. Climate models are good at what they do, but they don’t really do much, and they do a lot less than what they are used for. Economic forecasting has tended to rely primarily on IPCC-style projections instead of examining economic-environmental system connections, hiding and amplifying uncertainties in economic analyses.
Water is both an economic and ecological connector, so tracing the threads of water across sectors and institutions and finding the weak points and possible synergies is critical. Stress testing water connections is especially good at revealing these potential breaking points. Water is increasingly important for AI through data center management (both direct cooling and for energy generation), which could place data and AI services in potential conflict with agriculture, urban water supplies, and even rural WASH in some economies. Water-related food pricing crises have triggered major political-economic conflict, such as the Arab Spring movement.
Implement resilience thinking at the level of programs and projects. In terms of financial systems, this could mean introducing criteria that promotes systems thinking and resilience planning required in the early stages of a project, throughout a whole program. The Climate Bonds Initiative’s resilience bonds criteria are an exciting approach (and just approved last week as well), using a certification process. These criteria could also be brought into corporate and public sector decision making. The Water Resilience Tracker is a more policy-based approach designed to reach the same end.
Lastly, be aware of and open to positive changes that may be coming as well, even if the very idea of opportunities from climate impacts seem surprising. The Fire Horse is not only a harbinger of negative forces! In some areas, increases in the intensity of precipitation are occurring at the same time that overall precipitation levels are falling. Can we slow down runoff for the extreme events, ideally through nature-based approaches such as wetlands or passive aquifer recharge? Reducing flood impacts while growing water storage is a powerful win-win.
Recent work, for instance, suggests that climate-driven changes in forest cover in western North America will quickly (i.e., over 10 to 25 years) transform the hydrology of a region that is already water scarce. Given that we can see how landscape changes will alter water availability at a system level, that timescale is probably appropriate for making the governance and infrastructure adjustments (and the financial arrangements to enable those adjustments) necessary to compensate and prepare for those changes. Scale on this order of magnitude is happening everywhere now.
The Fire Horse may be with us for a while. But perhaps Karen and I can take some comfort that next year we enter the year of the Fire Goat, which promises breakthrough level positive change.
John Matthews
Corvallis, Oregon, USA