Flows, Not Fundamentals
How surplus savings and passive money, and now stablecoins and tokenization, turn the US stock market into a machine that prices shares by flow and funds the government
On 2 June, Alphabet, Google’s parent company, sold new stock for the first time since 2005. It announced an $84.75 billion raise, the largest in history and more than twenty times the roughly $4 billion it took in back then. Warren Buffett’s Berkshire Hathaway took $10 billion of it at a discount.
Alphabet had cash, just not enough of it. It held roughly $127 billion at the end of March, less than it now plans to spend in a single year. When the build outruns the balance sheet, even a company this rich has to raise the rest in the market. That build, of course, is AI.
Only a few days later, SpaceX went public in the largest IPO in history, valued at $1.75 trillion. OpenAI and Anthropic are preparing to follow. Washington and the firms’ own investor materials cast all three as national infrastructure, foundational capability the United States must dominate whatever the cost. The framing lifts them above ordinary products and into the language of strategic necessity.
Those events sit awkwardly inside the usual story about the US market, which says American stocks rise because American firms are the best in the world and that the market exists to fund them.
None of that seems to hold anymore. The US stock market now works less as a place where companies raise capital on their results and more as the world’s destination for spare money. Global capital comes here because nowhere else is big enough to hold it. Prices follow the volume and direction of those flows more than the earnings beneath them, pushed by the index funds and automated machinery that spread money across the market without judging value.
The newer development sits on the debt side. Foreign money has long helped fund the federal government, so that link is old. What is new is the machinery now taking shape to deepen it: dollar stablecoins, whose design turns every token issued into fresh demand for US government debt.
To see what moves the market, then, look past the earnings picture to the monetary one: money supply, capital flows, and the government’s borrowing needs.
The world’s surplus savings have nowhere to go but America
Let’s begin with where the money comes from. Michael Pettis, our most recent podcast guest, has argued for years that capital flows drive trade flows rather than the reverse. Surplus economies such as China, Germany and Japan hold down household consumption to support their industries, and the savings they cannot spend at home have to go somewhere. As Michael puts it,
If I am able to control my external account... then whether you like it or not, your economy will adjust to my industrial policy.
And so, most of those savings come to the United States, because no other market is deep or open enough to absorb them, directly or indirectly. The routing hardly matters: Chinese or German savings parked elsewhere displace other capital towards the United States, because the world’s surpluses must be matched by deficits, and America’s capital markets are both the most welcoming and the largest of all.
Oil exporters belong in the same story, even if they arrive by a different route. Kuwait, Qatar and Norway run surpluses because they earn a resource windfall and bank much of it rather than spend it. The source differs from China’s or Germany’s, a rent in one case and repressed demand in the other, yet the result is identical: saving that outruns domestic investment and has to go abroad. Most of their oil sells in dollars, which feeds a steady global demand for the currency. The dollars pile up and flow to the same place as every other surplus.
It’s true that the dollar’s grip on oil is loosening at the edges. A growing share of trades now settles in other currencies, mostly yuan, through channels that sidestep the Western financial system entirely. The shift is real but slow, since the convenience and depth of a dollar oil market are not easily undone. Even so, if that anchor keeps eroding, one of the steadier sources of demand for the dollar erodes with it.
Wherever the surplus comes from, whether from oil exporters such as Qatar or manufacturing powerhouses such as China, it converges on one destination. The United States runs a current account deficit of about $1.1 trillion a year, which supplies the world with dollars that have to be invested, and those dollars come back as purchases of American shares, bonds and property. The country works as a giant investment platform, an arrangement we can call “America Capital Partners”. By the end of 2025, foreigners held about $27.5 trillion more in US assets than Americans held abroad, close to 90% of GDP.
The dollars then spread across US assets, Treasuries, corporate bonds, shares and property. Foreign money lands first and heaviest in government debt, holding about a third of US Treasuries but under a fifth of the equity market. That weighting drives a kind of overflow mechanism. By taking so much of the bond supply, foreign buyers hold down the risk-free rate, which pushes domestic investors out of bonds and into shares in search of return. Foreign capital lifts share prices indirectly, through the rate, while the marginal buyer of US stocks stays American. Public-debt financing and asset-price inflation turn out to be two outlets for the same global plumbing.
Passive money and an inelastic market turn those flows into prices
A flow of money does not become a price on its own. It needs a mechanism, something that turns the inflow into higher prices. Two pieces of research explain how that works in today’s market.
We owe the first to Michael Green, another podcast guest. In his work on passive investing and its impact on the market, Michael estimates that passive strategies, index funds and their variants, now account for close to 45% of the US equity market. Unlike active investors, index funds make no judgment about what a company is worth. They are required to buy more of whatever is already largest, at whatever price the market sets. They are, by design, price-insensitive.
Take the SpaceX listing on 12 June. The stock did not join the big indices on day one, but the providers had already cleared its path. FTSE Russell rewrote its rules in May to fast-track giant IPOs and will add SpaceX to the Russell 1000 from 26 June, with MSCI following on 29 June. Once those dates arrive, every fund tracking the indices has to buy, whatever it makes of the company. Only the S&P 500 held the line: its profitability and seasoning rules bar a firm that lost $4.3 billion last quarter, so SpaceX stays out until at least 2027.
AkademikerPension, a Danish fund managing about $25 billion, saw the trap coming. Judging the stock grossly overvalued and catastrophically governed, with Musk holding some 85% of the votes, it struck SpaceX from its whole portfolio by hand, knowing the passive machinery would otherwise load the position for it. Most institutions did not bother. How ironic: escaping the system takes an active decision, and a passive investor, by definition, will not make one.
So with the trackers committed to buy and SpaceX fast-tracked almost everywhere, the stock arrives with weeks of forced buying lined up behind it. Musk need only rally early retail buyers, an art he masters to perfection, to make SpaceX a heavy index weight, and the passive funds then have to follow him up.
The second finding is what price-insensitivity does to a market. Work by Xavier Gabaix and Ralph Koijen, known as the inelastic markets hypothesis, finds that each dollar flowing into equities raises total market value by roughly five, on their estimate. In a normal market, rising prices attract sellers and deter buyers, keeping valuations anchored to reality. But when nearly half your buyers must purchase more of something simply because it got bigger, that stabilising mechanism breaks down. The market becomes inelastic, and a relatively small flow can move prices by a large amount.
AQR, a quantitative investment firm, puts numbers on the same point over a longer span. Its researchers Antti Ilmanen and Thomas Maloney found that US shares beat the rest of the developed world by about 4.7% a year over the 35 years to 2024, and that only a small slice of that gap came from American firms actually earning more. Most of it, 3.8 of the 4.7 points, came from rerating: investors agreeing to pay more for each dollar of those profits, so the share price climbs faster than the profit beneath it. The American lead is mostly investors paying up. The inelastic multiplier is what lets it run: money flows in, prices rise, the gains pull in more money, and the loop repeats. The market has run it for three decades, and AI is its current fuel.
The loudest story pulls in the most money
How should a public company play this game? If one dollar of inflow moves five dollars of value, the marginal dollar is worth chasing, and the surest way to win it is a louder story rather than a better set of accounts. The flow reacts to attention faster than it checks the numbers. So the rational move for any large company is to manage its own narrative and pull the flow towards itself.
Keynes saw this long ago, describing the market as a beauty contest in which the prize goes to whoever guesses what the crowd will favour. Robert Shiller gave it a modern name, narrative economics, the spread of contagious stories that move prices on their own. What people file under meme stock is the same mechanism seen from outside.
Elon Musk has turned it into a repeatable operation, using X, the platform he owns, to push Tesla, SpaceX and Dogecoin to more than 200 million followers. Each post is a flow event. When a dollar of inflow becomes five dollars of market value, controlling the story stops being mere communications and becomes the most leveraged instrument a chief executive has. The system is built to reward exactly this.
The gains have narrowed to a handful of AI names
Put the two together. The world’s surplus arrives in the US and flows into the largest, most liquid vehicles available, which means index funds. Those funds buy mechanically and without restraint, and because the market is inelastic, each dollar they deploy has an outsized effect on prices. The result is a market where valuations are driven less by what companies earn and more by the volume of money that has nowhere else to go, amplified by the loudness of the story being told.
One sector is playing that game hardest and winning it: AI.
