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So, the Fed raised rates again. It's hard to make money as a small bank when you supplied long-dated loans (i.e. 10 and 30 yr mortgages) at < 3% when your depositors are also asking for > 4% on their deposits. It's further harder to make new loans at 7% on fresh mortgages when that becomes too expensive for people on home prices that are already out of reach. Something has to give. There will be a housing crash (in some markets more than others) and, as commercial real estate investors can get 5% by just sitting in T-Bills, they will require higher cap rates which means Sellers are going to need to reduce their asking prices, further compressing profitability.

And this doesn't even take into account that many office landlords took out 5 yr loans prior to the pandemic and, now that workers are not returning to the office, tenants are breaking leases as those loans are about to reset at much higher rates.

_Sentinel 2y ago

Part 2

(This is just a collection of unstructured thoughts)

So I agree when you say something will break. It will take approx 12 months for this current market situation to break...But then again, one can argue that the bank are already blowing up.

Next will be commercial real estate (as you mentioned).

I, personally, do not think the layoff numbers will be like that of 2008 mainly because of the labor participation is low, the birth rate of what would be now-workers were low, and job openings have spiked. Even with record high salary, the labor participation is comparable to the 1980s (even with more women in the workforce). So due to lower birthrate in 90s (a going forward 2000s, and 2010s) human capital coupled with high mortality rate of working-age-adults due to COVID, it is going to be a problem for growth of a business firm unless US government opens doors for massive inflow of immigration (a hot topic in recent political campaigns). Hence, I do not think there will be massive layoffs as we saw in 2008 unless AI is implemented to replace some of these knowledge-based jobs (as we saw in the example of IBM)...But how else can you cause massive unemployment for inflation to dwindle down? Unfortunately, we will have no choice but to adopt AI and AI will eventually go mainstream to replace some of the missing human workers...

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_Sentinel 2y ago

PART 2 - Edited for improved reading

So I agree when you say something will break. It will take approx 12 months for this current market situation to break...But then again, one can argue that the bank are already blowing up.

Next will be commercial real estate (as you mentioned).

Due to low labor participation rates, a decreased birth rate of now-working adults, and an increase in job openings, I believe that we won't see layoffs on a scale like that of 2008. However, COVID's high mortality rate for working-age adults and the low human capital from the lower birth rate in the 90s and beyond may lead to growth problems for businesses unless there is an increase in immigration. Implementation of AI to replace knowledge-based jobs is also a possibility, but it may cause unemployment in the long run.

In other words, if more immigration-friendly policies are not implemented, the only other way to put knowledge-based workers out on unemployment is through adopting AI (which is what many companies, like IBM, are now doing). AI will have minimal impact of hard labor related jobs such as manufacturing and construction for now.