TUMULTUOUS GLOBAL ENVIRONMENT AHEAD

The global economy could be a very difficult environment in which to find shelter. For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded austerity deepens recession in many member countries, and a credit cruch in the periphery and high oil prices undermine prospects of recovery. The eurozone banking system is becoming balkanized, as cross-border and interbank credit lines are cut off, and capital flight could turn into a full run on periphery banks if, Greece stages a disorderly euro exit in the next few months. Moreover, fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. Indeed, the eurozone may require not just an international bailout of banks (as recently in Spain) but also a full sovereign bailout at a time when eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy.

In the United States, economic performance is weakening. There's still not enough job creation. Worse the risk of adouble-dip recession next year is rising: even if what looks like a looming US fiscal cliff turns out to be only a smaller source of the drag, the likely increase in some taxes and reduction of some transfer payments will reduce growth in disposal income and consumption. Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barak Obama or Mitt Romney wins Novzember's presidential elections. Thus, new fights on the debt ceiling, risks of a government shutdown, and rating downgrades could further depress consumer and business confidence, reducing spending and accelerating a flight to safety that would exacerbate the fall in stock markets.

The China growth model could be underwater by 2013, as its investment bust continues and reforms intended to boost consumption are too little too late. A new Chinese leadership must accelerate structural reforms to reduce national savings and increase consumption's share of GDP; but divisions within the leadership about the pace of reform, together with the likelihood of a bumpy political transition, suggest that reform will occur at a pace tht simply is  not fast enough.

The economic slowdown in the U.S., the eurozone, and China already implies a massive drag on growth in other emerging markets, owing to their trade and financial links with the U.S. and the European Union. At the same time, the lack of structural reforms in emerging markets, together with their move towards greater state capitalism, is hampering growth and will reduce their resiliency.

Finally, long-simmering tensions in the Middle Esat between Israel and the U.S. on one side and Iran, on the other on the issue of nuclear proliferation could reach a boil by 2013. The current negotiations are likely to fail, and even tightened sanctions may not stop Iran from trying to build nuclear weapons. With the U.S. and Israel unwilling to accept containment of a nuclear Iran by deterrence, a military confrontation in 2013 would lead to a masive oil price spiral and global recession.

These risks are already exacerbating the economic slowdown: equity markets are falling everywhere, leading to negative wealth effects on consumption and capital spending. Borrowing costs are rising for highly indebted sovereigns, credit rationing is undermining small and medium-size companies, and falling commodity prices are reducing exporting countries' income. Increasing risk aversion is leading economic agents to adopt a wait-and-see stance that makes the slowdown party self-fulfilling.

Compared to 2008-2009, monetary and fiscal authorities are running out of policy options. Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for futher fiscal stimulus.

Using exchange rates bot boost net exports is a zero-sum game at a time when private and public deleevraging is suppressing domestic demand in countries that are running current-account deficits and structural issues are having the same effect in surplus countries. After all, a weaker currency and better trade balance in some countries necessarily implies a stronger currency and weaker trade balance in others.  Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns' inability to absorb additional losses from their banking systems. As a result, sovereign risk is now banking risk. Indeed, sovereigns are dumping a larger fraction of their public dent onto banks' balance sheet, especially in the eurozone.

Best Advice:

• Conserve cash, cut costs, plan for much higher operating costs
• If you are working on a financing, get it down sooner than later. If things in the Middle East or Europe blow up, the debt and equity markets will freeze.
• Get ahead of the wave that is coming. Be prepared for the tough times.

If all the world problems described above go away, you will be ahead of the game. You will not have missed an opportunity. The opportunity cost is a fraction of the potential risk cost.