Christopher Collins is a fellow with the Polycrisis Program at the Cascade Institute at Royal Roads University
Wall Street loves to talk about “walls of worry.” Markets can climb them, the story goes, despite whatever risks lurk below. And for years, the “Armageddonists” predicting catastrophe have been wrong. But today, the financial system is facing a set of structurally interconnected risks that could converge in ways that traditional risk management is not designed to handle. This is the architecture of a polycrisis, and it goes further than the traditional understanding of systemic risk. Investors should keep this in mind when planning their climb up the wall.
Systemic risk, in an investing context, typically focuses on contagion within the financial system – one institution’s failure transmitting stress to others. A polycrisis is broader, occurring when simultaneous crises in different systems – fiscal, geopolitical, technological, monetary – interact in ways that accelerate each other and cause outsized harm. So, as realists, not doomsayers, let’s explore the conditions that may be forming a polycrisis in the markets.
First, look at what’s sitting beneath the surface of the U.S. Treasury market. Hedge funds have built over $1.5-trillion in leveraged basis trades – bets on tiny spreads between cash Treasuries and futures, financed with enormous amounts of borrowed money. These trades can become deeply unsafe when volatility spikes, causing liquidity problems in a market that’s supposed to be a global safe haven.
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Then there is growing sovereign debt pressure. OECD governments borrowed a record $17-trillion in 2025 and are forecast to surpass this in 2026. France, the U.K., and the U.S. all face deteriorating fiscal positions, with federal debt in the U.S. exceeding 120 per cent of GDP and projected to grow. In many countries, political dysfunction and aging populations exacerbate these fiscal problems.
High levels of debt can increase sovereign borrowing costs. And if investors start demanding a higher risk premium on government bonds, that directly destabilizes basis trades, bank balance sheets loaded with sovereign debt, and the $875-billion in commercial real estate loans scheduled to mature in 2026.
Commercial real estate is a good entry to the next link in the chain: non-bank financial institutions, which have sizable exposure to the sector.
These so-called “shadow banks” now hold roughly half of all global financial assets, and they have become deeply intertwined with traditional banks. In this space, private credit funds are becoming a particular concern. These funds often don’t mark to market in real time, meaning losses can accumulate invisibly. As the Governor of the Bank of Canada Tiff Macklem recently warned, weakness in this sector could spill into the broader banking system.
Another risk is what some call “the great narrowing,” where equity markets have become heavily concentrated in a handful of companies making massive bets on AI. This is a point of structural fragility, and if AI does disappoint, the unwind will ripple through retirement accounts, trigger margin calls, and crater risk sentiment globally – what some have called “a multidimensional economic disaster.”
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Finally, there’s a geopolitical aspect to the potential market polycrisis. The Iran war will cause higher prices and lower growth around the world. It may also lead to higher interest rates, which will further exacerbate debt risks. Russia is actively engaged in an escalating “shadow war” with Europe, leading to increased economic and market risks. And, closer to home, as crucial institutions decay, the U.S. is increasingly resembling “a troubled emerging-market economy.” All of this narrows the global financial system’s margin for error, creating a set of conditions where a single catalyst could trigger a cascading set of shocks that no single regulator or central bank is positioned to contain.
This is what makes the polycrisis framework useful for investors, and why polycrisis thinking is distinct from generic pessimism. Standard risk management treats each of these threats independently and manages accordingly. But this misses the feedback loops between shocks occurring in different systems, and it assumes one can hedge a risk without being exposed to the chain it sets off. Meanwhile, polycrisis analysis anticipates cascading failures across interconnected systems.
Looking at the markets right now, nobody knows which thread will get pulled first – or if any will be pulled at all. But it’s clear that the hyperconnected architecture of the world’s financial system carries significant systemic fragilities. And, unlike 2008, when a crisis originated in one sector before transmitting stress outward, today potential problems are distributed across multiple different systems, ready to synchronize and amplify. Markets can climb a wall of worry, but they cannot climb a maelstrom.