FX's Taylor sees U.S. stocks diving again

NEW YORK (Reuters) - The U.S. economic recession is likely to drag on until the final months of 2009, pushing equities prices down to new multi-year lows by mid-year, the manager of the world's largest foreign exchange hedge fund said on Tuesday.

The Standard and Poors 500 index .SPX by July could sink to 500 points, or the lowest level since mid-1995, said John Taylor, chairman and chief executive officer of FX Concepts Inc, which has $14 billion under management.

"The bond market has bottomed. I don't think the stock market has. We need to go to a place where it's cheap, and it's not cheap," Taylor told the Reuters Investment Outlook Summit in New York. "I am a bear."

The S&P on Tuesday closed at 888.67 points. It had fallen to an 11-year low of 741.02 on November 21.

"You have another 10 to 12 months of (negative) employment numbers, putting you into the fourth quarter of next year," before the U.S. economy starts to stabilize, Taylor said.

"I don't see fast growth in the United States for several years," he added. "People need to get their personal finances back in order."

Taylor said the consumer-driven U.S. economy is in the early stages of a major structural shift that could take two years or more to play out.

"We have to take the consumption sector from 71 to 72 percent (of the U.S. economy) to 67 to 68 percent," he said.

That echoed a comment at the Reuters Summit from Tom Atteberry, partner and portfolio manager at First Pacific Advisors in Los Angeles, on the pitfalls of the rise of consumer spending as a proportion of gross domestic product from about 61 to 62 percent in the early 1980s.

"It wasn't that we were making more and spending more. We borrowed. Plain and simple," Atteberry said.

As consumers trim their spending, the slack will be taken up by higher government spending, pushing the U.S. budget deficit much higher for a few years, Taylor said.

Some forecasters have suggested that the annual deficit could hit $1 trillion at some point in the next few years as the incoming administration of President-elect Barack Obama ramps up a massive program of infrastructure spending.

At the summit on Monday, James Poterba, president of the National Bureau of Economic Research, said a trillion dollar deficit was "not an outlandish prediction."

Taylor said running record deficits for a while was not a huge issue. "The projected size doesn't bother me. It's something that needs to be pulled back at some point, but relative to the size of the economy it's not so large."

Crude oil prices, he said, are getting close to a low after tumbling from record highs hit in early July and could hold in the $32 to $33 per barrel level. On Tuesday, crude oil futures settled at $42.50.

Longer-term, though, global growth and constraints on production will push oil prices to $200 by 2015, he said.

Taylor said 2009 would be a year of "ice," or a frozen economy with subdued price pressures, that will flip to an inflationary "fire" by 2012.

FED'S CHALLENGES

Taylor said the Federal Reserve, in managing the U.S. financial industry through its most severe crisis since the Great Depression, has "done a good job."

The central bank's biggest task now will be to find market-based solutions for the housing market, he said.

"They have to figure out some way to flatten that yield curve further out, and get mortgage rates down."