December 7, 2011 / 10:21 PM / 6 years ago

FX Concepts's Taylor sees 90 percent chance of U.S. recession

NEW YORK (Reuters) - There is a 90 percent chance the United States will slide into recession next year, according to hedge fund manager John Taylor, who said such a scenario would likely once again benefit the safe-haven dollar.

“I can’t see any way out of this other than a recession. Europe is in a recession already,” Taylor, chairman and chief investment officer of FX Concepts, said on Wednesday at the Reuters 2012 Investment Outlook Summit.

“It appalls me that no banks, no mainline economists, will forecast that. It’s why I make a lot of noise,” said Taylor. FX Concepts is one of the world’s largest currency hedge funds with assets under management of about $4.3 billion.

Taylor’s view was in stark contrast with that of other asset managers at the Reuters Summit, most of whom believe there is only a very low chance of a recession in the world’s largest economy.

Taylor, however, believes the fiscal and monetary mechanisms in the United States are flawed.

“The knobs that the government uses to control things are pretty much broken. The fiscal knobs are broken, the interest rate knob is gone and I would argue that the QE (quantitative easing) knob is pretty much gone as well,” he said.

As a result, he expects the benchmark Standard & Poor's 500 index .SPX will resume its decline, falling below the March 2009 low of 666.79 points, which should result in outperformance of the dollar. The S&P 500 on Wednesday close at 1,261.01 points.

Taylor, who a year ago had predicted the euro would fall to parity against the dollar, is now more certain that will happen.

The euro has remained resilient the last few months, trading in the mid-$1.30s, which Taylor attributed to the extent of deleveraging among euro zone banks in the face of the region’s debt crisis.

European banks have been selling foreign assets, proceeds of which are being repatriated back into the euro zone, cushioning the euro against further declines.

“So the euros in the system are not there because they are optimistic but because they are afraid,” Taylor said.

He was adamant the euro cannot survive in its current form, no matter what leaders decide at the European Central Bank meeting on Thursday or at Friday’s European Union summit, which is being viewed as a critical meeting to reach a solution to the debt crisis .

    In laying out why the euro cannot survive as it now stands, Taylor cited the differences in cost among the 17 euro zone member countries.

    “To make a widget in Spain costs 30 percent more than to make a widget in Germany and that spread is growing every year,” Taylor said.

    That said, “There would still be a euro, but in a different form than what it is right now,” he said.

    Turning to U.S. politics, Taylor, who is a Democrat, believes President Barack Obama will lose next year’s presidential election because the U.S. recession Taylor foresees will do him in.

    With respect to the performance of Taylor’s funds, it hasn’t been stellar. As of October this year, his Global Currency Program was down 17.8 percent, as risk aversion waned and riskier assets rallied. Taylor had called for a gloomy global scenario.

    “Without a doubt, this has been one of the most challenging years we have faced,” FX Concepts said on its website. “The lack of dispersion (percentage differences in return between the strongest and weakest currency) means that we have not been able to identify and catch many moves and have been thwarted each time we were in a significant position.”

    Additional reporting by Steven C. Johnson; Editing by Leslie Adler

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