FT : $700mn superyacht tied to Putin is being refitted while impounded

$700mn superyacht tied to Putin is being refitted while impounded
Italy is allowing the unnamed owner of the Scheherazade to pay for staff, maintenance and a refit

It has been 15 months since Italy impounded the Scheherazade, a $700mn superyacht linked to Vladimir Putin.

But the time the yacht has spent sitting in the Tuscan port of Marina di Carrara has not been wasted: Italy has allowed its unnamed, but sanctioned, owner to pay not just for its staff and maintenance, but also for it to be refitted.

The 140 metre-long yacht, which is only four years old and boasts 22 guest cabins with gold-plated bathrooms, two helicopter decks and a spa, is being refurbished by the Milan-listed Italian Sea Group.

The company confirmed that a “refit” of the ship continued after the asset was frozen by authorities, and that the yacht’s owner has been paying for the works and for maintenance, but declined to give further details, including the identity of the owner.

The Agenzia del Demanio, which manages seized assets, confirmed it had agreed, along with the finance ministry, to allow the ship’s owner to pay for the “maintenance works”, but declined to go into further detail because “information about frozen assets is classified”.

Italy has never publicly identified the yacht’s owner, although at the time it was seized it said there was “evidence of meaningful economic and business connections with prominent elements of the Russian government subject to EU sanctions”.

According to people with knowledge of the situation in Rome and Brussels the owner is Eduard Khudainatov, the former chief executive of the Russian state oil company Rosneft who was sanctioned by the EU in June 2022.

A Bloomberg report last year said US officials had alleged in court filings that Khudainatov was the “straw owner” of two yachts, including the Scheherazade, on behalf of Putin. The Financial Times traced the boat’s ownership to a Marshall Islands-based entity called Beilor Asset Limited.

Meanwhile researchers working for the jailed Russian opposition activist Alexei Navalny have also alleged that the Scheherazade’s real owner is the Russian president, because a number of its crew were members of the Federal Protection Service, responsible for Putin’s security. The Kremlin denied the allegations at the time. The staff on board the yacht was subsequently replaced.

Kremlin spokesman Dmitry Peskov said in response to a question from the Financial Times: “All rumors about this are unfounded.”

A European Commission spokesperson said that “members states are responsible for implementing sanctions,” and that asset freezes do not affect the ownership of the assets.

When asked about the payment scheme for the Scheherazade’s upkeep, the spokesperson said that “maintenance costs of frozen assets can be paid by the designated person” under a “standard derogation”.

Public authorities in the relevant member state can also pay the maintenance costs given the “risk that the designated person will not be willing to . . . or that the designated person will be denying beneficial ownership of the asset,” the spokesperson added.

Italy and the European Commission did not confirm who the “designated person” is for the Scheherazade.

The EU has imposed sanctions on almost 1,900 Russian individuals and entities since Moscow’s first invasion of Ukraine in 2014, freezing their assets and banning them from travelling around the bloc. The assets are frozen, rather than seized, and would be returned if sanctions are lifted.

According to a list of Russian assets seized in Italy seen by the FT, the Scheherazade is the only one whose owner is not specified. The vessel is merely described as: “superyacht Scheherazade sailing under the Cayman Islands flag with a value of around €650mn.”

FT : Agaves/tequila: end of spike fortifies high plains snifter

Agaves/tequila: end of spike fortifies high plains snifter
A price decline in the plants is a boost to distillers

Wine connoisseurs are not the only ones who earnestly discuss the impact of “terroir”. The relative merits of tequila distilled from highland and lowland agaves now passes for dinner-party conversation between the spirit’s devotees.

Tequila’s rising popularity has driven the price of the spiky plants up tenfold over the past decade. But there are signs that the agave boom may be turning to a bust. 

It is not difficult to see why the price of agaves jumped from 2.7 pesos/kg in 2012 to over 30 in 2022. Tequila has undergone a reinvention, from party shot to posh tipple.


As a result, US tequila sales rose by 20 per cent annually between 2018 and 2021, according to Bernstein analysis, outpacing the wider drinks market. High-end, 100 per cent agave tequila is outperforming the lower rated 51 per cent mixes.

Agave production, concentrated in the Mexican state of Jalisco, is singularly inflexible. Plants take seven years to mature. Harvesting the fat central stem kills them off. That means supply is lumpy and takes a long time to respond to price signals. 

An agave downcycle may already be under way. The start of the tequila boom dates back to the mid 2010s. Demand is now moderating. Volume growth, which peaked above 20 per cent in 2021, has fallen to mid to high single teens.

This combination of factors has already halved agave spot prices to 16 pesos per kg. In a glut, further falls would be inevitable. 

That changes the economics of tequila. It takes 7kg of agaves to make a litre of spirit. By this reckoning, the reported price decline would add $6 to the margin for each litre.

Good news for tequila producers. The biggest, Jose Cuervo, controlled by Mexico-listed Becle, accounts for some 30 per cent of volumes. Diageo is also exposed to the trend. Its premium Don Julio and Casamigo tequilas have been growing rapidly, and now account for 9 per cent of total sales. A sustained fall in agave prices warrants a tequila toast for distillers.

FT : Investors warm to riskiest US corporate debt

Investors warm to riskiest US corporate debt
Lowest-rated junk bonds benefit from ‘soft landing’ hopes for world’s biggest economy

Investors are warming to the riskiest US corporate debt, as optimism about the state of the world’s biggest economy narrows the gulf between the top and bottom rungs of the $1.35tn junk bond market.

The gap between the yield on double-B and triple-C bonds narrowed to its tightest level in 15 months at 6.53 percentage points in recent days, before widening slightly to 6.74 percentage points at Friday’s close — underscoring investors’ growing confidence that the US can avoid a recession even as the Federal Reserve has raised interest rates 11 times since March last year.

Such hopes of a “soft landing” follow a flurry of positive data, with persistent evidence of easing inflation and better than expected second-quarter growth US growth figures.


The shrinking gap between the top and bottom of the junk debt market — a closely watched barometer of US investors’ risk appetite — marks a turnaround from the aftermath of the failure of two US regional banks in March which compounded fears of a recession and piled pressure on highly-indebted companies’ bonds. The spread between double-B and triple-C bonds widened to 8.52 percentage points in April as investors shunned debt issued by companies most at risk of default in the event of an economic downturn.

“A few months have passed without more bank failures after First Republic”, Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, referring to the collapse of another lender in May. Many investors are also betting that the Fed has implemented its last interest rate hike, he added. “They’re clinging to that idea, even if [Chair Jay Powell] didn’t give a clear message that they’re done”.

Yields and spreads on junk bonds remain far higher and wider than their lows in 2021, when Fed stimulus was still sloshing around the financial system. Valuations have also been supported this year by a shrinking market, investors say, with upgrades to investment-grade territory and relatively low new issuance anchoring prices at artificial levels.

“We’re still quite a long way from where we were at the beginning of 2022”, added Andzrej Skiba, head of Bluebay US fixed income at RBC GAM, pointing to the period just before the Fed started tightening monetary policy. 

Skiba “is not looking to add exposure in triple-Cs in any meaningful fashion”, he said. “[But] I can easily see how managers are increasingly tempted to add exposure to lower-rated issuers. When the music is playing, people get sucked in into buying lower-rated assets.”

FT : Berkshire Hathaway’s cash pile nears all-time high at $147bn

Berkshire Hathaway’s cash pile nears all-time high at $147bn
Warren Buffett backs short-term Treasuries despite Washington political climate

Berkshire Hathaway’s cash and investments in short-term Treasuries surged to $147bn at the end of the second quarter, underscoring Warren Buffett’s faith in the backbone of global financial markets despite the rocky political climate in Washington.

The sprawling conglomerate — which owns the BNSF railroad and Geico insurer — increased the holdings by nearly $17bn in the second quarter, to sit just below an all-time high of $149bn set in 2021.

The disclosure came days after rating agency Fitch stripped the US of its prized triple A rating. Analysts cited Washington’s repeated stand-offs over the debt ceiling, which drove the Treasury’s cash balances to dangerously low levels.

Buffett, who has led Berkshire for more than half a century, told CNBC last week that Fitch’s decision would not change the company’s investment strategy and that he was not worried about the US dollar or Treasury market.

“Berkshire bought $10bn in US Treasuries last Monday,” he said. “We bought $10bn in Treasuries this Monday. And the only question for next Monday is whether we will buy $10bn in three-month or six-month” bills.

Berkshire has long kept cash in short-term Treasuries to give the company the flexibility to pay out catastrophic insurance losses and to have reserves ready to splash out on multibillion-dollar acquisitions.

“There are some things people shouldn’t worry about,” he said. “This is one.”

The company on Saturday reported that it swung to a profit of $35.9bn between April and June, from a loss of $43.6bn in the same period the year before.

The figures are distorted by movements in the value of Berkshire’s mammoth $353bn stock portfolio, which includes stakes in Apple, American Express and Bank of America. Berkshire is required by US accounting rules to include those shifts in its earnings, even if it has not sold the stocks.

Excluding those gains, Berkshire’s smattering of businesses reported operating earnings of $10bn, up from $9.4bn a year before. The results were buoyed by the company’s core insurance businesses, where underwriting profits climbed 74 per cent to $1.2bn, as well as its large holdings of cash and Treasury bills.

The company, which uses the premiums it receives on insurance policies to fund its investments, has benefited from the Federal Reserve’s move to increase interest rates. Berkshire disclosed it earned $1.4bn of interest income in the quarter and just over $2.5bn in the first half of the year.

“Our investment income is going to be a lot larger this year than last year, and that’s built in,” Buffett said at the company’s annual meeting in May. He estimated the Treasury bill portfolio could earn the company $5bn annually in income, given interest rates are now above 5 per cent.

Berkshire’s insurance results stood out in an industry that has struggled with higher costs to repair or replace automobiles, as well as the string of catastrophic storms that caused billions of dollars in property damage.

Geico reported a second quarter of underwriting profits, following more than a year of losses. The unit cut advertising spending, lifted insurance premiums and said it had significantly reduced the number of consumers it was insuring.

The company spent $1.4bn on share buybacks, a far slower pace than in the first three months of the year when it repurchased $4.4bn of its stock.

Barrons : The Fed Eventually Will Disappoint Wall Street and Main

The Fed Eventually Will Disappoint Wall Street and Main

If you ever doubted that the markets and regular folks inhabit two different planets, consider the latest employment report released this past Friday.

The Bureau of Labor Statistics reported that the jobless rate fell back to 3.5% in July, matching the halcyon days in 1969 when men first walked on the moon. Payrolls expanded by 187,000 while hourly wages were up 4.4%, a Goldilocks combination of a not-too-hot or -cold labor market, as economists see it. At the same time, Bank of America and J.P. Morgan have joined the list of forecasters that have canceled their recession calls for 2023.

But in the latest CNN poll, 51% of respondents said the economy still is in a downturn and getting worse. Even worse for President Joe Biden’s re-election prospects next year, his approval rating for handling the economy was 37%—and that was even lower than his overall approval rating, a dismal 41%. Those numbers were right in line with an array of other polls tracked by RealClearPolitics.

Consumer sentiment as tracked by the University of Michigan has been picking up, hitting 72.6 in the most recent reading, the highest since September 2021. Still, that remains well below the scores that bounced near 100 in the years before the Covid-19 pandemic hit in early 2020.

You’d also think that working Americans would be pleased to have their wages finally rising faster than prices. Average hourly earnings were up 4.4% in the latest 12 months and rose at a 4.9% annual rate in the past three months. Consumer prices were up 3% in the most recent 12 months ended in June, down by more than two-thirds from the four-decade inflation peak hit in 2022.

What has economists and market watchers more encouraged is that the economy and employment continue to expand even after the Federal Reserve has raised interest rates by a huge 5.25 percentage points while also shrinking its balance sheet. All of which has futures markets betting that the Fed is done hiking and will leave its federal-funds target at 5.25%-5.50%—and possibly begin cutting rates as early as next spring, according to the CME FedWatch tool.

As Fed Chairman Jerome Powell indicated following the latest hike on July 26, what happens at the next policy meeting on Sept. 19-20 will depend on data released by then. After Friday’s solid job report, attention turns to July’s consumer price index, due this Thursday. Economists’ guesses center around a 0.2% increase for the month in both the headline and core (ex-food and energy) measures. But the improvement in the headline year-over-year change could reverse, to 3.3% from 3.0% in June, owing to the comparisons from 2022.

Those base effects suggest that the inflation picture in the June CPI is as good as it gets. Meanwhile, the economy continues to chug along. After gross domestic product expanded at a 2.4% annual rate in the second quarter, up from 2% in the prior quarter, the Atlanta Fed’s GDPNow tracker for the third quarter is running at a 3.9% pace.

The just-right jobs report gave some respite to the bond market after its recent swoon, which lifted longer yields back to near 2022 highs. But the statistical reality of a solid economy and inflation stuck well above the Fed’s 2% target should keep monetary policy on hold longer than the futures market expects. That, in turn, could bring longer-term Treasury yields closer to the fed-funds rate. The resulting hit to stocks could then make Wall Street as blue as Main Street.

Barrons : Nike Stock Has Had a Tough Run. The Case for Buying Now.

Nike Stock Has Had a Tough Run. The Case for Buying Now.

If the stock market were a race, Nike would be near the back of the pack. Don’t expect it to stay there much longer.

Nike stock (ticker: NKE) has fallen 8.2% in 2023, putting it in the bottom quintile of all S&P 500 stocks this year. Its list of ailments runs long: There’s too much inventory; not enough demand; a sluggish economy in China, its second-largest market; and competition from upstarts like On and Hoka. Nike has also laid out big targets—targets that look increasingly out of reach—and trades at a premium valuation multiple, one that looks too high, given the aforementioned issues.

But like a runner who leaves enough for a big kick at the finish, Nike stock might be ready for a big push higher. Most of its problems—from high Covid-era shipping and raw-materials costs and too many shoes that no one wants to buy—are fading, while the focus has returned to innovation. As markdowns in the U.S. slow and China begins to recover, Nike’s rate of sales growth should start to accelerate and margins should improve. Investors would be wise to buy now in anticipation of that happening—or risk missing the move.

“Our view is that as soon as the market starts to sense [the] sales growth rate and margin improvement, the stock will start moving higher,” writes UBS analyst Jay Sole. “This could happen when Nike reports...earnings in late September or even sooner.”

Nike may be down, but it isn’t out. Its Jordan-branded sneakers and apparel, for example, raked in sales of about $6.6 billion for the 12 months ended in May, more than triple the $2.1 billion in expected sales this year for On. Anecdotally, people still love and trust the Nike brand and turn to it when considering a new pair of shoes.

“My go-to shoes and the brand [I] trust the most, for me it’s Nike,” says Payum Payman, a 39-year-old senior vice president at Citi Private Bank, who grew up playing tennis in Nike sneakers.

It has taken a while, but inventory has started to decline, and markdowns should get less onerous. Inventories fell to $8.5 billion in the second quarter of calendar-year 2023 from $8.9 billion in the first quarter of the year. Chief Financial Officer Matthew Friend said on Nike’s second-quarter earnings call that the company expects to see a “modest improvement in markdowns versus the prior year” in the second half of the year.

Nike’s big challenge is getting its “direct to consumer” channel to work the way it has envisioned, cutting out the middleman at places like Foot Locker (FL) and reaching shoppers online, through its website or app, and at Nike stores. That allows the company to keep the entire sale price, earning it a higher margin. Nike said on its most recent earnings call that it expects DTC sales to get to about 60% of total sales “long term,” from about 45% in its most recent quarter.

Worries about that strategy have cropped up recently, as Nike announced that it would start selling at Macy’s (M) once again—a sign, perhaps, that the DTC strategy isn’t going as well as it should. But Nike isn’t all that far away from meeting its goals. Its current-quarter sales guidance calls for a mid-single digit sales increase, and takes into account mild product markdowns and a stronger dollar. “Their DTC business is much better developed than most others,” says Oppenheimer analyst Brian Nagel, who has a $150 price target on the shares, reflecting a 40% upside from their recent $107.51. “Behind all this noise, the Nike model is frankly in great shape.”

If that’s the case, Nike should get more profitable. That’s what it predicted in 2021, when it said margins on earnings before interest and taxes would reach the high teens by 2025. Instead, Nike’s margins were 11.5% in fiscal-year 2023 and are expected to hit 12.3% in the current fiscal year.

UBS’ Sole, though, argues that Nike is much closer to its target than it appears. Strip out the higher shipping costs, the surging input prices, and the impact of inventories, and then account for the growth in Nike’s online business, and margins could get a 6.5-percentage-point boost, to about 18%. “While macro dynamics have impacted margins near term and macro could further delay the timing...the company still feels the targets are achievable,” he writes.

China is the wild card. Although Chinese consumer spending remains a question mark, the People’s Bank of China has recently cut several key lending rates that should help boost the economy. Longer term, middle-to-upper-income households in the country could grow at about 11% annually through 2025, to 209 million, according to a McKinsey report. That would drive more purchases of premium brands, including Nike. Indeed, Wall Street analysts model 13% annual sales growth in China through the next couple of years, to $9.9 billion, according to FactSet. That would help total sales get to about $65.7 billion by 2026 from an expected $52.3 billion this year.

All told, Nike could earn $5.50 a share in 2026, up 16% annually from 2023’s expected $3.52. Growth will need to take the stock higher. The stock probably won’t get much cheaper, but it might not get more expensive, either.

Jefferies analyst Randal Konik expects the DTC business to drive growth. That would go a long way toward convincing the market that Nike’s brand remains powerful—and drive upside. Konik has a $140 price target on Nike’s stock, reflecting a 30% upside for the shares.

For investors still wondering whether to buy the stock, there’s a simple answer: Just do it.

>>> US CLose Dow -0,43% S&P -0,53% Nasdaq -0,36% Russell -0,20%

Closing Stock Market Summary

The major indices saw somewhat choppy action today as participants digested a slate of factors. Market participants were reacting to the earnings results from Apple (AAPL 181.99, -9.18, -4.8%) and Amazon (AMZN 139.57, +10.66, +8.3%), the July Employment Situation Report, and falling Treasury yields.

The pullback in market rates was in response to the jobs report, which showed a slowdown in nonfarm payroll growth that has the market considering the idea that it may be enough to keep the Fed on hold. The 2-yr note yield fell 12 basis points to 4.78% and the 10-yr note yield fell 13 basis points to 4.06%.

Those moves were a welcome development after longer-dated Treasury yields jumped over the last few sessions, keeping pressure on equities. The 10-yr note yield still rose nine basis points on the week.

Stocks found some upside momentum shortly after the open when the S&P 500 bounced off the 4,500 level. The major indices were trading up until selling increased in the afternoon trade. There was no specific catalyst to fuel the afternoon selling, but profit-taking activity was likely a driving factor. Ultimately, the major indices closed near their lows of the day, which had the S&P 500 below 4,500. 

Shortly after the open, advancers led decliners by a 5-to-2 margin at the NYSE and a 3-to-2 margin at the Nasdaq. By the close, advancers had an 11-to-10 lead over decliners at the NYSE while decliners had the same lead over advancers at the Nasdaq.

Only two of the S&P 500 sectors closed with gains -- consumer discretionary (+1.9%) and energy (+0.03%) -- while the information technology sector logged the biggest decline.

  • Nasdaq Composite: +32.9% YTD
  • S&P 500: +16.6% YTD
  • Russell 2000: +11.1% YTD
  • S&P Midcap 400: +10.3% YTD
  • Dow Jones Industrial Average: +5.8% YTD

Reviewing today's economic data:

  • Nonfarm payrolls rose by 187,000 in July (consensus 200,000) following a revised increase of 185,000 in June (from 209,000). 
  • Nonfarm private payrolls rose by 172,000 in July ( consensus 175,000) following a revised increase of 128,000 in June (from 149,000).
  • Average hourly earnings rose by 0.4% in July ( consensus 0.3%) following a 0.4% increase in June.
  • The unemployment rate fell to 3.5% ( consensus 3.6%) from 3.6% in June.
  • The average workweek fell to 34.3 hours ( consensus 34.4%) from 34.4.
    • The key takeaway from the report is that labor supply continues to be tight, which could make it difficult to achieve a more Fed-pleasing moderation in wage growth. That might not translate into another increase in the target range for the fed funds rate, but it does fit the notion that the Fed will be inclined to keep the policy rate higher for longer.

Notable economic data on Monday is limited to the June Consumer Credit report (consensus $13.0B; prior $7.3B) at 3:00 p.m. ET.

TechCrunch : SEC ends investigation into Better.com, which is bleeding cash ahea

SEC ends investigation into Better.com, which is bleeding cash ahead of planned SPAC vote

The U.S. Securities and Exchange Commission (SEC) said it does not intend to recommend an enforcement action against digital mortgage lender Better.com. The pronouncement comes after an investigation on the part of the SEC to determine if violations of federal securities laws had occurred.

Last July, the SEC began looking into whether Better.com had violated federal securities laws, requesting documents from both the company and SPAC partner Aurora Acquisition Corp. about their business activities.

Regulators sought information about the business activities of CEO and co-founder Vishal Garg and allegations made by Sarah Pierce, former executive vice president of customer experience, sales and operations, who claimed that Better.com had misrepresented the health of its business in order to move forward with a SPAC.

In an August 3 statement, the SEC also noted that while it does not recommend an enforcement action, the decision “must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation.”

Meanwhile, the long-awaited vote for Better.com to go public is scheduled for August 11 ahead of the extended deadline to complete the merger deal on September 30. The company originally began making plans to go public via a $6 billion SPAC in May 2021. Things took a dramatic turn for the worse later that year, and the SPAC was delayed.

In late July, Aurora said in an SEC filing that shareholders would be asked to vote on a proposal that if the SPAC did take place, with Aurora surviving the merger, that Aurora would change its name to “Better Home & Finance Holding Company,”

It added: “If Aurora is unable to complete the merger with Better.com by the extended deadline of September 30 and is not able to complete another business combination by the specified date, Aurora will cease all operations within 10 business days except for the purpose of winding up.”

Last year, Better.com declared that it intended to move forward with its planned public debut, despite lackluster performance of blank-check combinations in previous quarters. Better.com itself had seen its fair share of turbulence since it announced its plans to merge with a SPAC, including multiple botched layoffs (more on those here and here) and changing market conditions that impacted parts of its business, including a surge in mortgage interest rates.

A company spokesperson told TechCrunch Friday that Better.com is still in a quiet period given the SPAC so it “cannot comment publicly.”

More recently, in June, Better.com announced it was exiting the real estate business.

The embattled fintech startup laid off its real estate team on June 7, shifting from an in-house agent model to a partnership agent model. It also continues to bleed cash.

According to HousingWire, other Aurora filings from July showed that Better.com had posted a net loss of $89.9 million in Q1 2023 and had slashed about 91% of its workforce over an approximately 18-month period. Specifically, as reported by HousingWire, the company had about 950 employees as of June 8 compared with a peak of about 10,400 employees in the fourth quarter of 2021. While Better.com seems to have narrowed its loss compared to a net loss of $327.7 million in the first quarter of 2022, it’s clearly still struggling.

TechCrunch : AWS revenue growth dropped to 12% in Q2, but company remains optimi

AWS revenue growth dropped to 12% in Q2, but company remains optimistic about cloud biz

Amazon has seen AWS growth rates dropping substantially over the last three quarters, from 20% to 16% to 12% this quarter. That’s not the kind of trend any company wants to see, but especially for a division like AWS, which has been a growth driver for Amazon over the years. Still, Amazon CEO Andy Jassy believes that the company might have turned the corner in its cloud business, while putting those results into context.

“While customers have continued to optimize [their cloud spend] during the second quarter, we’ve started seeing more customers shift their focus toward driving innovation and bringing new workloads to the cloud. As a result, we’ve seen AWS’ revenue growth rate stabilize during Q2 where we reported 12% year-over-year growth,” Jassy said in the earnings call with analysts.

CFO Brian Olsavsky, who had warned analysts in their February meeting that growth was dropping into the teens, was much more optimistic this week, especially given the prospect of future revenue the company believes it will eventually be generating from interest in generative AI.

“I would add that we saw Q2 trends continue into July. So, generally I feel the business has stabilized, and we’re looking forward to the back-end of the year in the future because, as Andy said, there’s a lot of new functionality coming out with — and there’s a lot of spend that will be in this area for all the great solutions that are out there for generative AI and large language models, as well as machine learning solutions that we’ve always had for customers. So, [we’re] optimistic and starting to see some good traction with our customers’ new volume,” Olsavsky told analysts.

Jassy points out that given the size of the business, it’s still growing pretty robustly, even if it’s not growing at the rate it had been in prior years.

“If you think about the AWS business being an $88 billion revenue run rate business, to grow double digits on a business that size with the amount of cost optimizing that’s been happening, to grow double digits, you have to be adding a lot of new customers and a lot of new workloads just to grow double digits,” Jassy said.

And he sees AI, which even prior to the growing popularity of generative AI, was a decent business. “What I would say is that we have had a very significant amount of business in AWS driven by machine learning and AI for several years. And you’ve seen that largely in the form of compute as customers have been doing a lot of machine learning training and then running their models and production on top of AWS and our compute instances,” he said.

He says while generative AI is still very much at the early stages, it has the potential to drive much more business over time.

All that said, Olsavsky didn’t offer third-quarter guidance for AWS either, so it begs the question if he’s truly as optimistic as he and Jassy are suggesting, at least in the short term.

Long term, however, it would seem that AWS still has a lot of room for growth in the years ahead, especially with plenty of workloads still left to move to the cloud, and the promise of building applications on top of large language models continuing to boost business.

FT : Five factors that signal headwinds for long-term investors

Five factors that signal headwinds for long-term investors
It might be more difficult to make money from risky assets than it was in the 2010s

It is all too easy for investors to get caught up in the short-term news and focus on the latest profit warning, or utterance from the chair of the US Federal Reserve. But those who take the long view should concentrate on five factors that help to drive the growth of the global economy and investment returns — demography, energy supply, debt, inflation and geopolitics.

These factors interact in complex ways that make forecasting particularly difficult. Take demography. The ageing profiles of western populations mean that overall economic growth will be even harder to achieve in the future, as Japan has already shown (although it has not done so badly in terms of gross domestic product per capita). To date, ageing populations have also been associated with low inflation and low interest rates. Baby boomers have saved money for retirement, keeping up the supply of savings while sluggish economic growth rates have discouraged business investment. 

All that may change, as Charles Goodhart and Manoj Pradhan argued in their book The Great Demographic Reversal. Old people will spend their accumulated savings, particularly when they need care for conditions such as dementia, while the shortage of workers will drive up the bargaining power of labour, and thus real wages. Inflation, and interest rates, will rise.

The recent surge in prices and rates owes a lot more, of course, to two of the other five factors: geopolitics and energy supply. Over the past 20 years or so, geopolitics have caused the occasional market wobble but investors have learned to regard wars and occasional terrorist attacks as short-term phenomena. In the very long run, however, geopolitics are highly significant; the world economy would look a lot different today if Deng Xiaoping had not shifted China towards being an export-oriented, market-tolerating economy in the 1980s.

The use of energy supply as a geopolitical weapon began in the 1970s with the Opec oil embargo and quadrupling of the crude price that created stagflation in the western economies. Russia’s invasion of Ukraine has demonstrated Europe’s dependence on Vladimir Putin’s regime for its gas supply. 

And as the western world tries to move away from fossil fuels, it faces another geopolitical challenge; two Chinese companies produce more than 50 per cent of electric car batteries in the world while China’s share of global solar panel production is a remarkable 80 per cent. Given the Chinese regime’s oft-stated desire to “reunite” with Taiwan, a country with a democratically elected government, there may be more geopolitical flashpoints to come.

China’s development may also determine the outlook for global inflation. The cheap goods produced by China over the past 30 years may well have played a bigger role than the supposed expertise of central bankers in keeping inflation low. But China’s working age population is now in steady decline and its growth performance has wobbled in recent years. In addition, geopolitical tensions mean that globalisation, while not in retreat, has stalled; in 2022, exports were slightly lower, as a proportion of global GDP, than they were in 2008. Since globalisation is such a competitive force, its slowdown may have reduced a constraint on inflation. 

If the world has moved into an era when inflation is more likely to surprise on the upside, this has important implications for markets. Central banks will have to keep interest rates higher than they did during the 2010s. One key bullish argument for risky assets, such as equities, is that low interest rates reduce the discount rate that needs to be applied to future cash flows. That increases the present value of assets. By extension, therefore, higher rates should reduce valuations. Furthermore, higher yields on bonds and cash increase their short-term attractiveness, relative to equities.

An even bigger problem is that consumers, companies and governments have taken advantage of low interest rates to borrow money cheaply. During the Covid pandemic, the ratio of public and non-financial private sector debt to global GDP peaked at 257 per cent in 2020, according to the IMF. It dropped back 10 percentage points in 2021 but was still more than double its level in the early 1980s, when interest rates were at a historic high.

Only a portion of that debt has to be refinanced in any given year but inevitably, when it does, some borrowers will come under strain. There has already been a mini-banking crisis in the spring of 2023 and, as Torsten Slok of Apollo Global Management points out, the default rate on both bonds and leveraged loans has started to pick up. 

To sum up, five big factors seem to be creating significant headwinds for global markets over the long term. Demography will mean slower growth; energy supplies may be more disrupted; the hangover of debt will be more costly if inflation and interest rates are higher; and all this will be exacerbated by geopolitical shocks. That doesn’t mean it won’t be possible to make money out of risky assets. But it is likely to be a lot more difficult doing so than it was in the 2010s.