Raphael Stevens

The IIF said the combination of such high debt levels and rising interest rates has driven up the cost of servicing that debt, triggering concerns about leverage in the financial system.
“At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly,” the IIF said.

HIROSHIMA, JAPAN – MAY 17: People walk beneath a banner promoting the Group of 7 (G7) summit at a shopping street on May 17, 2023 in Hiroshima, Japan. The G7 summit will be held in Hiroshima from 19-22 May. (Photo by Tomohiro Ohsumi/Getty Images)
Tomohiro Ohsumi | Getty Images News | Getty Images

The global debt pile grew by $8.3 trillion in the first quarter to a near-record high of $305 trillion as the global economy faced a “crisis of adaptation” to rapid monetary policy tightening by central banks, according to a closely-watched report from the Institute of International Finance.
The finance industry body said the combination of such high debt levels and rising interest rates has driven up the cost of servicing that debt, triggering concerns about leverage in the financial system.

Central banks around the world have been hiking interest rates for over a year in a bid to rein in sky-high inflation. The U.S. Federal Reserve earlier this month lifted its fed funds rate to a target range of 5%-5.25%, the highest since August 2007.
“With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more ‘zombie firms’ — already approaching an estimated 14% of U.S.-listed firms,” the IIF said in its quarterly Global Debt Monitor report late Wednesday.
The sharp increase in the global debt burden in the three months to the end of March marked a second consecutive quarterly increase following two quarters of steep declines during last year’s run of aggressive monetary policy tightening. Non-financial corporates and the government sector drove much of the rebound.
“At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly: Despite concerns about a potential credit crunch following the recent turmoil in the banking sectors of the U.S. and Switzerland, government borrowing needs remain elevated,” the IIF said.

The Washington, D.C.-based organization said aging populations, rising health care costs and substantial climate finance gaps are exerting pressure on government balance sheets. National defense spending is expected to increase over the medium term due to heightened geopolitical tensions, which would potentially affect the credit profile of both governments and corporate borrowers, the IIF projected.

“If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer,” the report noted.
Total debt in emerging markets hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the largest upward contributors.
In developed markets, Japan, the U.S., France and the U.K. posted the sharpest increases over the quarter.
Banking turmoil and a ‘crisis of adaptation’
The rapid monetary policy tightening exposed frail liquidity positions in a number of small and mid-sized banks in the U.S. and led to a series of collapses and bailouts in recent months. The ensuing market panic eventually spread to Europe and forced the emergency sale of Swiss giant Credit Suisse to UBS.
The IIF suggested that corporations have undergone a “crisis of adaptation” to what it termed a “new monetary regime.”
“Although recent bank failures appear more idiosyncratic than systemic — and U.S. financial institutions carry much less debt (78% of GDP) than in the run-up to the 2007/8 crisis (110% in 2006) — fear of contagion has prompted significant deposit withdrawals from U.S. regional banks,” the IIF said.

“Given the central role of regional banks in credit intermediation in the U.S., worries about their liquidity positions could result in a sharp contraction in lending to some segments, including underbanked households and businesses.”
This contraction of credit conditions could particularly affect small businesses, the IIF said, along with causing higher default rates and more “zombie firms across the board.”
Zombie firms are companies with earnings that are sufficient to allow it to continue operating and pay the interest on its debt, but not to pay off the debt, meaning any cash generated is immediately spent on debt. The company is therefore “neither dead nor alive.”
“We estimate that around 14% of U.S. companies can be considered zombies, with a substantial portion of these in the healthcare and information technology sectors.” More

Check out the companies making headlines in extended trading.
Take-Two Interactive Software — Shares jumped 8.1% Wednesday during after hours trading. The video game company reported $1.39 billion in adjusted revenue in the fiscal fourth quarter, topping analysts’ estimates of $1.34 billion, according to Refinitiv. Meanwhile, the company’s estimates for bookings in the first-quarter and full-year missed Wall Street’s expectations.

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Boot Barn Holdings — Shares of the cowboy boot company tumbled almost 16% after revenue fell short of analysts’ expectations for the fiscal fourth quarter. Boot Barn reported earnings of $1.51 per share, excluding items on revenue of $425.7 million. Meanwhile, analysts polled by FactSet had expected earnings of $1.44 per share and $441.2 million in revenue. The boot retailer’s full-year guidance also fell below analysts’ estimates.
Synopsys — The software company’s stock gained 1.9% Wednesday evening. Synopsys’ fiscal second-quarter earnings and revenue came above Wall Street’s expectations, according to FactSet. The company reported $1.4 billion in revenue, while analysts had estimated $1.38 billion. Synopsys also reported an earnings beat of $2.54 per share, excluding items, topping analysts’ estimates of $2.48 per share. Synopsys also raised its full-year guidance for earnings and revenue growth.
Cisco Systems — Shares dipped nearly 4% despite the company reporting an earnings and revenue beat for the fiscal third quarter. Cisco posted adjusted earnings of $1 per share and $14.57 billion in revenue. Analysts had estimated 97 cents earnings per share and $14.39 billion in revenue, according to Refinitiv. More

Elon Musk, CEO of Tesla, speaks with CNBC on May 16th, 2023.
David A. Grogan | CNBC

Check out the companies making headlines in midday trading.
Tesla — Shares rose 4.4% following the company’s annual shareholder meeting the previous day. CEO Elon Musk announced the company would deliver its first Cybertrucks later this year. Musk said that although he expects an economic downturn for the next 12 months, Tesla is well-positioned for the long run.

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Western Alliance — Western Alliance popped 10.2% after the regional bank said deposit growth so far this quarter surpassed $2 billion as of May 12. Other regional bank stocks moved higher, with Zions Bancorporation last up 12.1%. The SPDR S&P Regional Banking ETF added 7.4%.
Target — Shares of the big-box retailer rose 2.6% after the company topped Wall Street’s earnings expectations for its fiscal first quarter. Target’s revenue, however, barely grew year over year, and its shoppers bought more necessities. Target also said it expects sales to remain sluggish in the current quarter, and it anticipates a low-single-digit decrease in comparable sales.
TJX Companies — Shares rose 0.9% on Wednesday. The retailer reported an earnings beat before the market open, with earnings per share coming in at 76 cents, versus the 71 cents expected from analysts polled by Refinitiv. It also topped expectations for first-quarter comparable sales, per StreetAccount, but its revenue missed estimates.
Wynn Resorts — The hotel and casino operator rose 5.7% after Barclays upgraded the stock. The firm said Wynn has more to gain from its Macao properties’ post-pandemic recovery and that its business in Las Vegas can continue to do well despite worsening macro conditions.
EVGo — The EV charging station supplier fell 18.7% on news of a public offering of $125 million Class A stock. Earlier on Tuesday, Stifel initiated coverage of EVGo with a buy rating.

Kyndryl Holdings — Shares of the IBM spinoff dropped 12.9% on light guidance. Kyndryl also shared a loss of $3.24 per share for its fiscal fourth quarter. That’s wider than the $1.02 per share loss suffered in the year-earlier period.
Keysight Technologies — Shares popped more than 7.7% after Keysight Technologies topped earnings expectations for the fiscal second quarter. The company also issued earnings guidance for the current period that beat estimates.
Doximity — The medical software company lost 5.7% after offering weak guidance for the current quarter. The company said to expect between $106.5 million and $107.5 million in revenue and between $39 million and $40 million in adjusted EBITDA for the first fiscal quarter. Both of those estimates were below expectations, with analysts polled by StreetAccount forecasting revenue at $11.8 million and adjusted EBITDA at $45.4 million. That overshadowed the company’s fourth-quarter earnings, which were better than expected.
— CNBC’s Yun Li, Tanaya Macheel, Hakyung Kim, Alex Harring, Michelle Fox and Brian Evans contributed reporting More

FA Playbook

The share of Americans who think gold is the best long-term investment almost doubled in 2023, to 26%, according to a recent Gallup poll.
The share who prefer stocks declined to 18%.
However, stocks are the better wealth generator over long time horizons, according to financial advisors.
Gold is typically viewed as a safe haven during times of fear.
The U.S. is currently absorbing the fallout from higher interest rates and recent banking turmoil, while eyeing the possibility of recession and a high-stakes debt-ceiling standoff.

Carla Gottgens | Bloomberg | Getty Images

Americans are upbeat on gold and have soured on stocks — perhaps to their detriment.
Twenty-six percent of Americans ranked gold as the best long-term investment in 2023, almost double the 15% who thought so in 2022, according to a recent Gallup poll.

The share surpassed that of stocks: 18% of Americans ranked stocks as the top long-term holding, down from 24% last year, according to the survey.
It was the first time since 2013 that their perception of stocks was below that of gold. Both ranked behind real estate.

More from FA Playbook:

Here’s a look at other stories impacting the financial advisor business.

While Americans were asked to gauge sentiment about the long term, public perception is guided more by short-term swings in investment performance, said Gallup, which polled a random sample of 1,013 adults between April 3 and 25.
And that recency bias can be dangerous for investors saving for a goal like retirement, which may be decades away.
“As a long-term investment, [gold] is a very poor solution,” said Charlie Fitzgerald, a certified financial planner and principal of Moisand Fitzgerald Tamayo in Orlando, Florida.

“It’s more like a speculation,” he added.

Stocks beat gold over the long term

Stocks generally serve as the long-term growth engine of an investment portfolio, financial advisors said.
The S&P 500 Index of stocks had a 10.43% average annual total return between 1970 and 2022, according to an analysis by Securian Asset Management. Gold had a 7.7% return over the same period. (After the U.S. gold standard ended in 1971, the price of gold was no longer fixed, making the early 1970s a good starting point for a price comparison.) 
The price of gold, which is often viewed as a safe haven, typically jumps during times of fear and economic malaise. For example, gold prices surged to multiyear highs in the early days of the Covid-19 pandemic, and spiked following Russia’s invasion of Ukraine.
The SPDR Gold Shares ETF (GLD) — an exchange-traded fund that tracks gold prices — is up 8.6% so far in 2023. The S&P 500 is up 7.6%.
Investors’ enthusiasm for gold comes amid recent turmoil in the banking sector and as the Federal Reserve has raised interest rates aggressively since early last year, to put a lid on high inflation. The Fed, the U.S. central bank, expects the country to tip into a mild recession later this year.
Meanwhile, 2022 was Wall Street’s worst showing since 2008, as the S&P 500 fell by more than 19%. U.S. bonds had their worst year in history.
A debt-ceiling standoff means the U.S. is also staring down the possibility of not being able to pay its bills within weeks — which would be a first in the nation’s history and likely to trigger economic chaos.
“Gold is doing well now because of the current economic condition,” said Ivory Johnson, a CFP and founder of Delancey Wealth Management, based in Washington.

Johnson, a member of CNBC’s Advisor Council, has been recommending more gold to clients over the past year or so.
However, it’s more of a short-term holding — a hedge for investors when gross domestic product (a measure of U.S. economic output) and inflation are both decelerating, as they are right now, Johnson said. If GDP starts to rebound, he’d generally recommend dumping gold and instead buying growth stocks.
“Gold is not a long-term investment,” Johnson said. “It’s not something you just put in the portfolio and keep it there.” More

It has been a torrid 18 months for investors who bet on tech. Softbank, a Japanese investment firm that epitomised the 2010s boom in venture-capital funding for companies with rapid-growth ambitions, is still smarting from the shift to a world of higher interest rates and lower corporate valuations. But there is one area in which the firm, run by Son Masayoshi, its charismatic founder, wants to peek above the parapet: investments in artificial intelligence (ai).The advances of generative-ai platforms, such as Chatgpt, have left just about every investor discussing what to make of the incipient industry, and which firms it might upturn. Mr Son sees parallels with the early period of the internet. Generative ai could provide a new pipeline of initial public offerings—and the foundation for the next generation of mega-cap tech firms. Investors face two questions. The first is which frontier technologies will make market leaders a fortune. That is difficult enough. The second, establishing whether the value will accrue to upstarts backed by venture capital or existing technology giants, is at least as tricky. Nobody knows yet if it is better to have the best chatbot or plenty of customers; having a head start in a whizzy new tech is not the same as being able to make money from it. Indeed, lots of the value of revolutionary innovation is often captured by existing giants. Alphabet, Amazon and Meta are three of the seven largest listed companies in America, worth a combined $3.3trn. They were founded between 1994 and 2004, emerging at a time when internet technology was new and people were spending an increasing amount of time online. Alibaba, a Chinese e-commerce giant, is another similar example (Softbank’s early $20m stake in the company helped cement Mr Son’s reputation as an investor). Spotting tech trends, and developing the best platforms, generated a gargantuan amount of value for early and even not-so-early investors. Legacy firms struggled to jump on the bandwagon. Will the story be the same this time around? The insights of Clayton Christensen, a management guru who pioneered a theory of innovation just as the internet giants were bursting onto the scene in the 1990s, can provide a useful guide. Christensen noted that smaller firms often gain traction in low-end markets and entirely new ones, which the largest incumbents eschew. The incumbents focus on deploying new technology for their existing customers and lines of business. They are not incompetent or ignorant of technological progress, but they follow the seemingly correct path from a profit-maximising perspective—until it is too late and they are fatally undermined. Investors like Mr Son, excited about the future of startups that focus on ai, are implicitly presuming that a period of disruptive innovation is under way. But most of the recent excitement about generative-ai platforms has focused on their potential as a new technology to be deployed, not as companies which could open up brand new markets. And in the case of other recent technological innovations, incumbents have won the day. Elad Gil, a venture capitalist, has noted that the value of previous advances in machine learning, the broader category of which generative ai is a part, have accrued almost entirely to incumbents. The early internet startups have benefited, as have Microsoft and chip firms like Nvidia and Micron. The earlier stages of machine learning produced no listed firms that might be considered the Amazon or Google of their niche. Christensen’s insights make clear that revolutionary innovation does not always end up being revolutionary in mere business terms. Yet existing tech companies are now spending enormous sums on ai, suggesting they should be well-placed if the tech does turn out to be revolutionary. It is possible that an investment in a broad index fund tracking existing listed tech firms will end up outperfoming the equivalent investment in private, strictly ai-focused startups. Theories about why innovation is sometimes disruptive and sometimes not are more often discussed by students of business and management than stockpickers. But the difference between the two possibilities is crucial in assessing whether the next generation of listed tech companies with market capitalisations in the hundreds of billions of dollars is to be found among private ai firms. As things stand, it looks more likely that the market value of the technology will end up as a new string to the bow of already giant tech firms. More