We’re in the depths of summer and the business news cycle is slow. It’s a good time to step back and assess the current investment landscape. As I camp out at our Crystal Lake office — a.k.a. the cottage — here are my observations about trends being overlooked, misunderstood, or in transition.

Interest rate impacts

What deserves more attention is the slow-moving but powerful impact that already higher rates are having on the economy. I say slow-moving because it’s taking time to play out. Mortgage renewals are spread over a few years. Higher financing costs for companies, particularly those with floating-rate debt, are currently being absorbed, but will become increasingly hard to manage.

Cheap debt and lots of leverage have also been a key part of private equity’s success. The cheap part is now gone. As for leverage, the financing tap is still open because fund managers haven’t stumbled yet but, like real estate, valuation multiples on existing holdings will need to come down to reflect the new rate reality. This is confirmed in the secondary market, where sellers of private funds are accepting larger than usual discounts for their units.

Many commentators are marvelling at how well the economy is holding up. The recession that seemed imminent is no longer a sure thing. Meanwhile, others are questioning deficit levels at the government and household level.

Both views are old hat now, but for some reason, few are putting the two together, which is curious given that the second observation partly explains the first.

Consumer spending is hanging in because we’re living beyond our means. Government revenue doesn’t come close to paying for the services it provides. My rough calculation suggests that an Ontario household is receiving $4,000-5,000 of services each year (based on their share of the federal and provincial deficits) that they’re not paying for — at least not yet. It’s being put on their tab. Buy now and a future generation will pay later.

China? What risk?

The likelihood of serious economic dislocation may not be high, but if it happened, the consequences would be off the charts, and devastating for many global companies. Suffice to say, Apple, Tesla, Volkswagen, and Starbucks desperately need China and the West to get along.

Urgent headlines may be missing, but it remains a fascinating time to watch the economy and businesses in transition. The most interesting developments are the ones not yet in the spotlight.