Posted originally on CTH on May 28, 2026 | Sundance |

That’s a diplomatic way for the Bank of Canada to say the current financial situation in Canada is tenuously at risk, if the economic relationship with the United States severs as a result USMCA points of conflict becoming irreconcilable.  An interesting statement against the backdrop of Prime Minister Mark Carney having just visited New York making a pitch to American investors {citation}.

The Bank of Canada released their 2026 Financial Stability Report {see pdf here}, and Senior Deputy Governor Carolyn Rogers and Deputy Governor Toni Gravelle delivered remarks today about the analysis.  I’ve prompted the video below to the point of interest, as well as the transcript for the portion being highlighted [7:12 to 9:15].  WATCH:

[Transcript]  – […] “However, vulnerabilities have increased in some parts of the system. Stock and corporate debt valuations have risen and are high relative to historical norms. This makes markets more vulnerable to a sharp correction.

The issuance of global sovereign debt is also rising, and hedge funds are playing a bigger role in buying that debt, often using borrowed money. In normal times, hedge fund activity helps keep markets running smoothly. But if conditions become strained, this activity could amplify stress and disrupt core funding markets.

([Transcript]  – […] “However, vulnerabilities have increased in some parts of the system. Stock and corporate debt valuations have risen and are high relative to historical norms. This makes markets more vulnerable to a sharp correction.

The issuance of global sovereign debt is also rising, and hedge funds are playing a bigger role in buying that debt, often using borrowed money. In normal times, hedge fund activity helps keep markets running smoothly. But if conditions become strained, this activity could amplify stress and disrupt core funding markets.

Individually, these and other vulnerabilities look manageable. However, the economic and geopolitical environment has become more volatile. And this has made it more likely that a new shock or a combination of shocks could cause several vulnerabilities to crystalize at once. If this were to happen, these vulnerabilities could interact and reinforce each other.

A cascading series of events could cause a sharp loss of investor confidence and lead to a spike in demand for liquidity or rapid asset sales. Funding markets could come under pressure, and stress could spread more broadly.

To be clear, the FSR is not about what we expect will happen. It is an assessment of how existing vulnerabilities—or pockets of stress—could amplify shocks and ultimately spread across the financial system.” (more)

The financial markets in Canada are tied directly to the independent strength of the Canadian economy.  Which is to say, the financial system in Canada is dependent on historic ties to the United States.  Pull out all of the dependencies within the economy, a result of a fracturing of the “geopolitical relationship,” and suddenly the Bank of Canada faces a “cascading series of events” they have not previously had to entertain.

A significant number of multinational corporations within Canada are geographically centered due to American proximity and the dependency that has historically been considered a partnership.  That relationship has now changed, and despite Mark Carney saying that Canada can be stronger standing alone, there is no economic model for Canada to retain its wealth position without the inherent subsidy that proximity to America provides.

During his visit to New York, Prime Minister Mark Carney is quoted as saying, “the world is undergoing a rupture, led by the United States. Technological change is accelerating at a pace we have not seen in our lifetime. The U.S. is transforming all its commercial relationships, as is its right. The world is becoming more divided and dangerous. Canada has responded quickly to these shifts by diversifying our partnerships abroad. We have to care ourselves and be true to ourselves.” Given the nature of Carney’s anti-Trump political advocacy, he could say nothing else.

However, there is no independent Canada economic construct that can survive a disconnect from the United States.  There is no ‘partnership’ with Europe and/or China, or a combination of partnerships, that can replace the one-way nature of the subsidies from the U.S. economy that Canada enjoys.

If the Canadian people, workers and companies therein, have to rely on their own domestic economic activity to fund their GDP, their lifestyle will have to modify in very significant ways.

One large example that will no longer work is the Canadian energy policy.  No country is going to align with Canada to assemble goods for the American market if there is no way for the product to enter the United States.

If the U.S. blocks Chinese steel as a component good, then Canada has to make their own steel for whatever the product is.  The same applies to every raw material that is then processed at the industrial level before it takes the form of a component part.  Canada will have to extract the raw material, transition it via dirty carbon emitting industrial processes, then mold that product into the component – regardless of the finished product.  The Canadian economy is no longer set up to do this at scale.

Canada extracts a vast amount of raw material; but then ships that material elsewhere for industrial modification at scale (example: oil to fuel, wood to lumber, Canola oil into xxxx, etc.).  Shut down the transition phase of the product due to trade agreement conflicts with the USA and Canada is left with a bunch of raw materials they then need to sell at a discount to Europe and Asia.

Previously, in almost every FTA, the EU and Asia would purchase these materials in exchange for using Canada’s proximity as a gateway to the USA market.  The EU and Asia trading or selling back component goods, Canada assembling them and shipping the item into the USA.  Take the United States market out of this equation and what happens to the Canadian economy and all of those previous free trade agreements with third party countries.  See the problem?

Thus, within the New York Times article discussing Mark Carney’s visit to New York, it ends with this:

Lori Turnbull, a political scientist at Dalhousie University in Halifax, Nova Scotia, said that opening reflects the impossibility for Canada of fully or even substantially replacing the United States as a trade and economic partner.

“Canada is going to have to find a way to deal with this, and the American are still going to put on the tariffs,” Professor Turnbull said. “We’re in the weak position and they can call the shots.” (link)

The Bank of Canada is cautiously optimistic Professor Turnbull is correct.  However, given the severity of the trade friction, in combination with the antagonisms of Carney, the Bank of Canada is also saying: …”A cascading series of events could cause a sharp loss of investor confidence and lead to a spike in demand for liquidity or rapid asset sales.”…

more…)