Canada Bank’s Grim Warning for All Canadians

Wow. So, the governor of the Bank of

Canada just gave a speech at the Global

Risk Institute, and buried inside of it

is a warning. A warning that the risks

of a worst-case scenario playing out are

increasing. It's a major financial

unraveling that connects directly to

your mortgage, your savings, the speed

of your cost of living increases, and

quite frankly to whether the financial

system is able to hold together over the

next few years. Now, the Bank of Canada

is worried about what happens when that

unraveling starts. And the most

concerning aspect is that the thing that

could trigger that unraveling, well,

it's already happening. So, let's break

it down simply because once you

understand what's actually being said

here, well, you're going to start seeing

things in a different way. Let's get

into it. Before we get into the

financial system stuff, we need to talk

about stagflation because it's the

backdrop for everything else. Now,

economists love their jargon, but this

is really simple. It's a split of two

words, uh, stagnation and inflation.

Stagnation meaning that the economy

stops growing. people aren't getting

richer, businesses aren't expanding,

jobs aren't being created. And

inflation, on the other hand, where

everything is costing more even though

things are stagnant. That equals

stagflation. Now, normally these two

things don't happen at the same time.

When the economy slows down, well,

prices will usually cool off too or

won't increase as quickly. Stagflation

is the worst of both worlds, though.

Your paycheck isn't growing, but your

groceries, your rent, your gas, all that

stuff is still going up. But why is that

relevant right now? Former Treasury

Secretary and chair of the Federal

Reserve, Janet Yelen, has recently said,

well, that what's happening in the

Middle East could push oil prices

higher, not because the economy is

booming and there's more demand for that

energy, but because of the geopolitical

shock squeezing supply raising prices.

That means higher prices with no

economic growth to go along with those

high prices. That is exactly the

stagflation setup. And Canada has a

version of this that's even more

concerning because we've got two

separate stagflation factors hitting at

the same time. The first is this oil

shock from geopolitical instability. Now

Canada does benefit from higher oil

prices because we export a lot of oil.

But here's the problem. We don't have

the infrastructure to export oil to the

world at premium top prices. We mostly

just send it to the US and they get to

make a lot of the value added gains on

that oil. So, we get some of the upside,

but not nearly what we could get if we

had the proper pipeline and export

terminal infrastructure.

So, at the end of the day, we're not

seeing the economic growth that would

come from higher oil prices, but

Canadians are seeing it in their

pocketbooks. The second, and this is

something that the Canadian central bank

has warned about a number of months ago,

is the unsettled trade relationship with

the US. We have this tariff uncertainty.

We don't know what things are going to

look at after KUSMA is renegotiated. uh

we have slowing business investment and

hiring, but import prices are going up

at the same time. That's slower growth

and higher prices. Remember, that's

stagflation. But here's where things get

really concerning because the typical

tools that the central banks would use

to restart a debt economy, well, they

can't use them anymore. Normally, when

the economy weakens, the central bank

will cut interest rates. And those lower

rates will mean people can borrow at a

lower rate, and that means more

spending, more investment. the economy

picks up, things start getting better.

But when you have inflation at the same

time as you would with stagflation, you

can't easily cut rates because cutting

rates can make that inflation worse.

More cheap money chasing the same amount

of goods, pushing up the prices of goods

and services. And that's what leads to

this headline. The Bank of Canada's

deputy governor said something pretty

remarkable recently, that monetary

policy sometimes needs to be tightened

even when the economy is weak. In other

words, sometimes you have to raise rates

or hold them high even when people are

already struggling. She says, "Many

people may find it surprising or

counterintuitive that at times monetary

policy needs to be tightened when the

economy is weak. Yet, that is exactly

the difficult trade-off we sometimes

face. Generally, when a supply shock is

expected to have large or persistent

impacts on inflation, some degree of

policy restraint will be needed to bring

inflation back to target." Now, think

about what that means in everyday

English. The economy is slowing down.

People are losing jobs, losing hours at

those jobs. Businesses are pulling back

investment and the central bank might

still have to keep boring costs high or

even raise them higher because of the

risk of inflation from oil prices and

tariffs and all of these external risks.

So, central banks are caught behind a

rock in a hard place. They're

potentially forced to do something that

deliberately causes more economic pain

for people who are already struggling.

But that same decision could also be the

thing that pulls the pin on something

that's been quietly building inside of

the financial system all along in the

background. We're talking about $6

trillion in borrowed money sitting in

one of the most debtfueled corners of

global finance. It won't take a crash.

It won't take a war. It might just take

a central banker doing exactly what

they're supposed to and exactly what

they're signaling they're going to do

and the whole thing could start to

unwind. And when it does, here's the

part that should actually concern you.

The people who built those positions of

risk, well, they won't be the ones who

pay for it. You will through your

groceries, through your rent, through

your savings. And I'm going to show you

exactly how all of this works step by

step. And why the Bank of Canada's own

speech is essentially a quiet admission

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more. Here's where the speech I was

talking about earlier comes into play.

This was given recently by Tiff Mlham,

the governor of the Bank of Canada at

the Global Risk Institute in Toronto. In

it, he outlines some of the largest

risks to not only the Canadian economy,

but to the global economy. In it, one of

the main risks he outlines is something

called leveraged trading in sovereign

debt. It sounds complex, but it's

actually really simple, and once you

understand this, everything else is

going to make sense. He talks about

these incredibly important financial

players called non-bank financial

institutions. uh that's usually hedge

funds. Now, unlike banks, these aren't

so strictly regulated, certainly not to

the same level. But these players have

quietly become massive holders of

government bonds, sovereign debt. When

the government spends more than it makes

from tax revenue, well, it needs to take

on debt. And these are the people who

are providing it. In fact, they're

financing over half of the government's

debt. Uh they say here they purchase up

to 50% of government of Canada bonds

sold at auction and account for a big

portion of secondary market trading. In

short, they've become central to how

sovereign debt markets function both

globally and in Canada. Now, here's the

part that matters. They're not buying

these bonds with their own money.

They're borrowing most of it using a

mechanism called repo or repurchase

agreements where they pledge bonds, the

same bonds that they're purchasing as

collateral to borrow more cash to use

that cash to buy more bonds which they

then can put up as collateral to borrow

more cash to buy more bonds and lather,

rinse and repeat. This chart is from a

report that the Federal Reserve put out

back in November. Now they say that debt

amounts that have being taken on by

these hedge funds have reached historic

levels. the highest level since data has

become available, reaching a ratio of

nearly 10. That means for every $1 of

actual capital or every $1 that these

hedge funds are given to manage, well,

some of these funds are holding $10

worth of bonds, for every $1 that

they're given. Now, the largest, most

active players in sovereign bond markets

and the ones doing this basis trade,

well, they can be leveraged far beyond

that 10 times ratio. Let me explain what

that means simply. Imagine you have

$1,000 of your own money. Now, you go

and spend that $1,000 on $1,000 worth of

government bonds. But here's where it

starts to get indesting. You take those

bonds to a lender and you say, "Well,

hey, I've got these totally safe

government bonds. Why don't you lend me

some money against them?" Then, let's

say the lender gives you $900 in cash as

a loan, and you have this collateral

that's supporting it. Now, you take that

$900 and you spend it on $900 more

dollars worth of government bonds. Then

you take those bonds back to the lender

and they give you $800 more. And with

that money, well, you buy $800 more

worth of government bonds. And you keep

on doing this over and over and over

again. The same original $1,000 has now

been used as the foundation for a tower

of bond purchases. each layer borrowed

against the last layer. By the time

you're done, this $1,000 might be what

is supporting this $10,000 worth of

bonds. I mean, that's the 10x number I

was showing you in that chart. That's

the average that hedge funds are doing

with some going far beyond that. And

here's the thing, as long as these bond

prices stay stable and the cost of

borrowing from the lender stays low,

well, this is a machine that just prints

you money. It just prints small but

consistent returns over time. And in

good times, it looks genius. But that

entire tower is built on the assumption

that you can always keep borrowing

against those bonds, that the lender

keeps on saying yes to you, that the

bonds don't drop in value enough to make

the lender nervous and question your

collateral. But the moment any of these

assumptions break, well, things can fall

apart very quickly. Let's say that the

lender says, "Actually, these bonds are

worth a little bit less than they were

before, so we think that you can only

borrow three bonds against that five

that you previously had." Well, all of a

sudden, you have to sell some of the

bonds higher up in order to be able to

continue to support the rest of the

tower. And once you start taking these

pieces out, well, you're going to have

to start selling these bonds very

quickly to be able to come up with your

money. Now, multiply that tower and the

potential falling of that tower across

the entire hedge fund industry, which in

Canada alone holds hundreds of billions

of dollars worth of government debt. Um,

this could be a big problem. This is

where everything starts to connect

together because remember what we said

about the central bank's uh tough

position, unable to fight stagflation

because they can't cut rates because

they're worried about inflation popping

off again. Um, they even go so far as to

suggest that they might need to raise

rates into weakness. As we saw the Bank

of Canada, deputy Bank of Canada deputy

governor just say, hedge funds get their

money from investors. Investors will

give hedge funds their money in order

for them to manage it and try to make

them a larger return. But what happens

if that investor wants their money back,

but that same money has been used to buy

assets, which then secures 10 times the

amount of assets sitting on top of it.

And what happens if multiple investors

come at the same time saying, "Hey, you

know what? I'll just take my cash.

Things aren't going so well in the

economy right now. I don't want to have

any additional risk. Just give me my

money back." What happens to the tower

that's built on top of that collateral?

That is exactly what the Bank of Canada

governor warned about today. He points

out that global growth alongside

investors expectations of having

positive returns while it's being

supported by the boom in AI and fiscal

stimulus or government spending, both of

which could run into limits. Strip away

AI company valuations and government

spending, well, you'd have a very

different looking equities market. And

here's why that ma matters for our bond

tower story. If the AI boom slows down

or if the war escalates and spooks

markets more broadly, well, investors

aren't going to just lose money in

stocks, they're going to panic and pull

money out of everything. Those hedge

funds could face redemptions and

investors could want that cash back at

the exact moment when their bond

positions are already under stress. So

yes, a large enough stock market selloff

could result in investors pulling their

money, but that's not the only factor

that could light this fuse of the bond

market bomb. If the Bank of Canada or

the Federal Reserve in the States have

to keep rates high for longer or even

raise them into a weakening economy, as

suggested here, well, two things are

going to happen to that debtfueled bond

tower that we built. If the central bank

raises interest rates, well, then bond

values fall. That's what happens when

rates go up. Lower bond prices. these

assets become worth less than they were

before. Now, also the cost of borrowing

goes up. That's what it means to have an

interest rate increase. People are going

to be paying more to hold the same

amount of debt. This is something that

the hedge funds are going to worry

about. This can also force the hedge

funds to start liquidating bonds, start

selling things off as they need more

cash. the collateral that they're

borrowing and reborrowing against is

worth less than before, reducing the

overall all amount that they can borrow.

To unwind that debt, they need to sell

these bonds to raise money. And that

starts this chain reaction that pushes

bond prices down further, pushing rates

up further, which then triggers more

margin calls, more forced selling. You

might be thinking, okay, you're sounding

a little bit like a doomer, some kind of

crackpot. Well, this is exactly the

worry that the central bank has written

here very clearly. One scenario we worry

about is a shock to markets that leads

to a spike in interest rate volatility

which causes lenders to increase

haircuts or curtail funding less lending

to the hedge funds. And because that

funding is very short-term, that

adjustment can happen fast. If leveraged

investors, read that as hedge funds, are

forced to reduce their positions, they

may need to sell bonds or government

debt, into already stressed markets.

Prices fall, liquidity deteriorates, and

the stress feeds back onto itself. It's

this continuous loop that we're talking

about. But what happens at the end of

that unwind, the end of that cascade

when everybody's selling these

government bonds and nobody wants to buy

them? That's what you call a sovereign

debt crisis. The government itself has

to pay hugely high interest rates in

order to borrow money to fund their

operations and that worsens the

financial picture of the country and

that makes investors even less willing

to hold the bonds. So they sell them,

prices go down and that pushes interest

rates higher. Still, you can see how

this turns into a feedback loop. You

might be thinking, "Well, Russell, that

sounds like an absolute financial

calamity, a huge crisis." And you'd be

right. But are they going to let it

happen? I don't think so. Here's the

part that's absolutely obvious to

everybody who's involved in this, but

that they never say publicly. If this

cascade does happen, if leveraged bond

positions start to unwind rapidly and um

interest rates start to spike and the

system gets messed up, it stops working.

Well, the main risk that the governor of

the Bank of Canada is outlining here

would have come to fruition. Now, if

that happens, there's no doubt that the

central banks are going to step in.

They're not going to let that happen.

They'll intervene. They'll inject

liquidity. They'll print money to buy

bonds to stabilize markets. That's

exactly what we saw in the States when

the bond market broke during the great

financial crisis of 2008. And it's also

exactly what we saw globally when

everybody rushed for cash during the

pandemic. The central banks printed

money to flood the system with

liquidity. And that solution will work

in the sense that the financial system

will be stabilized. We won't have a

total collapse of the financial system.

But the mechanism for protecting against

that, which is expanding the money

supply and buying bonds with newly

created money, that's incredibly

inflationary. That's already bad in

normal times, but if we're dealing with

stagflation, well, that's an even

greater concern. And this is what always

happens, and it's why I talk about it

all the time on this channel. There's

huge risks that are taken in the

financial system, and a few highly

connected institutional investment

players make ungodly amounts of money,

and governments don't really care. They

don't step in and intervene because all

of this is helping them, too. uh it

gives them cheaper borrowing rates for

governments that globally like to spend

far beyond their means. But then when

the system inevitably breaks or shows

signs of breaking, well, the government

and the central bank step in and they

take action because they have this

rationale where they say, "Well, it

would be far worse if we just let the

system collapse." That's true. Sure. But

in this action, they bail out and save

the very people who took on that risk.

uh even rewarding them via asset price

inflation, which typically happens after

these types of things. And at the same

time, they're offloading the

consequences of all of this onto the

backs of everyday working people uh via

consumer price inflation, the cost of

living going up and up and up without

wages keeping pace. They do this time

and time again, and I think they're

betting that you never get wise to it.

They just overco complicate monetary

policy and come up with all this jargon

that we've covered today that makes it

so boring sounding that not many people

even try to understand it. So we don't

realize that there's this huge

class-based injustice that's being

committed time and time again. So let me

tie all this together. The Bank of

Canada is quietly warning that the

financial system has a major

vulnerability. heavily leveraged

debtfueled largely

not so regulated funds are holding

enormous amounts of federal debt. Now

the policy response that stagflation

which is also a risk may require which

is keeping rates high or raising those

rates into this weak economy. Pair that

with the market uncertainty from the war

and the potential AI stock bubble. Well,

all of that is likely to be a trigger

for the unwinding and the rescue

mechanism when it comes will likely make

the inflation dimension of that

stagflation even worse. Now, in the

speech, Tiff Mam, the governor of the

Central Bank of Canada, well, he says

that the probability of a worst case

scenario, that's not 100%. It might not

happen. But the Bank of Canada's own

risk assessment shows that these

probabilities are rising. and being able

to understand this chain reaction, the

stagflation risk, the tightening into

weakness, the leveraged bond positions,

the cascade, and what the intervention

could look like. Well, understanding

this means that you're not going to be

so surprised if you start to see

headlines moving in this direction. And

this blows my mind because despite

outlining the risks all throughout this

paper or this speech, well, the Bank of

Canada governor concludes that, well,

this actually isn't a big problem. the

growing participation of hedge funds and

private credit in global finance is part

of a healthy financial system. And he

comes to this conclusion even though

such massive and leveraged involvement

in government debt markets has never

happened this way before. Instead of

coming up with another solution, maybe

daring to suggest that perhaps

governments should maybe scale back

their spending in order to reduce their

dependence on debt. Well, the conclusion

is just that we should accept the risks

as long as we're aware of them. But it's

easy to say that when you're not an

average citizen, when you're not

depending on cash or savings. It's not

the wealthy corporate political elite

that are going to suffer from what

happens in the response to these risk

risks being realized. It's people like

us. It's definitely a lot, but I think

it's better to be aware of what's

happening than to just shut our eyes and

be surprised by it when it happens down

the road. It gives you a chance to

prepare yourself for it. I think making

sure that you're investing as much as

possible in a diversified set of assets,

things not only the stock market, but

also in alternative assets. I think that

that can be a good idea. Now, let me

know what you think about all of this.

What have I gotten right? What have I

gotten wrong? What have I missed

entirely? Let me know in the comments. I

read every single one. And subscribe to

the channel if you haven't already done

so. But with all of that said, thanks so

much for watching everybody. I really

hope this video helped you out at least

a little bit. And I'll see you next

time.