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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the Rene M Kern professor of practice at Wharton School, chief economic adviser at Allianz and chair of Gramercy Funds Management
When I began my career in economics and later finance, the “sources and uses of funds” exercise was an analytical anchor. Whether assessing a country’s balance of payments or evaluating how markets meet sovereign and corporate needs, maintaining an analytical handle on capital supply and demand was essential. It helped identify structural imbalances before they led to market disruptions, enabling policy and portfolio adjustments.
This approach was sidelined during a long era of abundant liquidity. In the run-up to the 2007-8 great financial crisis, capital markets functioned as all-out liquidity and credit factories, delivering wave after wave of financing that pushed leverage and debt to unsustainable levels. When that regime collapsed, it was replaced by a prolonged period of extraordinary central bank balance sheet expansion and floored interest rates. Even as this regime hits an inflation wall, endogenous private-sector liquidity has been rushing back in.
I suspect that evolving realities now warrant a return to the “sources and uses” discipline to minimise the adverse consequences of large imbalances between global demand for capital and the supply of it. The longer it takes for market participants and policymakers to acknowledge this shift, the greater the risk to orderly pricing and market functioning.
The demand shock is arriving at remarkable speed, including last week’s SpaceX initial public offering. This blockbuster is part of an ongoing structural shift towards unprecedented capital raising that is still building momentum with Elon Musk’s company soon to be joined by the likes of Anthropic and OpenAI at eye-popping valuations.
Given the ongoing technological arms race, these massive raisings may well prove to be relatively early-stage capital injections, with more funding rounds to follow. They are also headliners in a vast aggregation of smaller, tech-focused capital raisings.
All this comes at a time when governments across the advanced world are seeking funding for large structural budget deficits, more defence expenditures, and refinancing maturing debt at significantly higher interest rates. Corporations also are likely to increase their capital market activities. Re-orienting a company for AI is not cheap. As the competitive implications are too consequential to ignore, an increasing number of non-tech firms are being pushed into capital spending plans driven by the fear of missing out.
Matching all this surging demand with supply of capital at a reasonable cost is trickier. While some government funding is likely, the overall size is restricted by high debt and large deficits. Institutional investors possess “dry powder” in available funds, but the reliable vanguard of global capital — specifically sovereign wealth from the Gulf — faces shifting priorities in the short term.
Faced with these supply issues, investment bankers are seeking “retail money”. This is explicitly evident in how the SpaceX IPO book was specified and the speed with which index providers are fast-tracking its inclusion. It is part of a broader industry desire to expand retail pipelines into historically institutional domains like private credit. It’s an initiative fraught with tension between democratisation of investment opportunities and the worry that retail investors are being cast as the “fish at the poker table” — brought in to enable more sophisticated investors to monetise at high valuations. Both sides can summon historical precedent to justify their case.
Then there is the reallocation question: will retail and institutional investors liquidate some holdings to make room for new issues? This prospect should not be dismissed. It is symptomatic of a broader phenomenon of “robbing Peter to pay Paul” that manifests not only in the reallocation of capital but also in borrowing from the future to fund the present.
At a time of uncertain geoeconomics, too many segments of the global economy are exhausting buffers. This begins with the ongoing depletion of energy inventories and extends to dwindling household savings, overstretched consumer credit and the leveraging of both corporate and sovereign balance sheets.
While admiring the capital markets’ ability to fund borrowers at ever-bigger magnitudes, one should not dismiss the risk of an eventual capital crunch. If the supply of long-term funding does not expand to meet multifront demand, the price of capital must rise structurally, exposing the fragility of highly leveraged sectors. In this world, the long-neglected discipline of “sources and uses” will be part of the dividing line between market resilience and systemic disruption.
