Monday, January 10, 2011

Unsustainable growth: Apollo Asia Fund: the manager's report for 4Q2010

When the time comes to write each quarterly report, I frequently start by listing all the developments which have most struck me during the quarter, and all of the issues which I consider most important. The latter list is increasingly dominated by big global issues - limits to growth, the disconnect between growth and welfare, environmental destruction, and the revenge of Gaia, to take a few which range beyond the unmended cracks in the financial system and the many vulnerabilities of stockmarkets.

None of this usually helps me to write the report, because the subjects are too big, the timetables too vague, and the implications for pricing of the Fund's securities relative to alternatives hard to determine. Yet the evidence of approaching limits, and of the ill-heeded consequences of past development, is coming closer and closer to home.

Much of the current Indonesian boom comprises the burnup of irreplaceable resources: unsustainable development without heed to externalities. And the same is true in too much of Asia. When I first came to Malaysia, jungle reserves seemed huge relative to the population and to the level of exploitation. How quickly that changes: from the air one now sees extraordinary urban sprawl, and heartbreaking devastation. It used to be a joy of life in the tropics that ugly development eyesores were quickly greened over, or even reclaimed by the jungle: now I am told that the topsoil is completely gone in many areas.

The video to the right is one which I considered mentioning on this site when it was first published, but hesitated to do so, in case my sophisticated readers thought it too simple. The power of compounding is very well understood by value investors, and bullish Asian analysts, yet not fully appreciated by all. The limits to exponential growth are well understood by another group, which includes indigenous tribes and others who are close to nature. The two groups do not necessarily overlap. Yet compound growth of financial assets may only be possible in a world experiencing economic growth. We have lived through a period when this has been unusually rapid and smooth, and arguably attributable to the discovery and exploitation of fossil fuels. This simple animation illustrates the limits to growth, and Liebig's law of the minimum. It comes to my mind repeatedly, in varying contexts, which are no longer distant and abstract - I commend it to you.