Gross Says U.S. Labor Market Faces Tough Slog: Tom Keene

Pacific Investment Management Co.’s Bill Gross said a strengthening U.S. employment market still faces a “tough slog” even after a government reports showed that more jobs than forecast were added last month.

The U.S. is benefitting from a weaker dollar, (DXY) the Federal Reserve’s accommodative monetary policy and relatively less fiscal drag compared with other countries, yet the economy still faces challenges, Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

U.S. employers added more workers than forecast in December and the jobless rate declined to an almost three-year low. The 200,000 increase last month followed a revised 100,000 gain in November that was smaller than initially estimated, Labor Department figures showed in Washington. The median projection in a Bloomberg News survey called for a December gain of 155,000. The unemployment rate unexpectedly fell to 8.5 percent, the lowest since February 2009.

Employment has been “on an uptrend as opposed to static and negative, and we should applaud that,” Gross said. Improvement will remain slow as “employment on a secular basis is really a function these days of globalization, technology as well as demographics. Technology destroys jobs and globalization continues to send them to China for cheap labor.”

Revised Outlook

Earlier this week, Gross backed away from Pimco’s “new normal” outlook after lagging behind the majority of his peers during the biggest bond-market rally in nine years. The period of muted growth in developed economies, high unemployment and “relatively orderly” deleveraging that Mohamed El-Erian, who shares the title of chief investment officer with Gross, coined in the aftermath of the 2008 financial crisis is morphing into a world of credit and zero-bound interest-rate risk, Gross wrote in his monthly investment commentary released two days ago.

“There is potential for a paranormal, a bi-model world” Gross said today, referring statistical models that signal about equal probability of different outcomes. The two worlds are ones “of deflation and one of re-flation.”

Pimco advised investors to buy U.S. Treasuries, long-term inflation-indexed U.S. debt, “high-quality” corporates, senior bank debt and municipal securities. The recommendations are a departure from Gross’s call last year, when he advised buying emerging-market debt and cautioned investors to stay away from the U.S., noting that growth would be higher in developing economies, while excessive borrowing would lead to inflation.

‘Fat-Tailed World’

Gross eliminated his holdings of Treasuries in February and had a net bet against the securities in the $244 billion Total Return Fund, missing the biggest rally in Treasuries since 2008. Gross issued a “Mea Culpa” to investors in October and boosted the debt to 23 percent of the portfolio by the end of November.

“We are looking at either higher inflation or a declining rate of inflation that promotes debt deflation,” Gross said. “It’s a fat-tailed world. Bond investors have to prepare for that. You buy Treasuries in a safe-haven world.”

Treasuries returned 9.8 percent in 2011, while Gross’s Total Return Fund gained 4.2 percent, underperforming about 70 percent of its rivals, according to data compiled by Bloomberg. Bonds worldwide returned 5.9 percent last year, according to Bank of America Merrill Lynch’s Global Broad Market Index. That was the biggest increase since a gain of 8.9 percent in 2002.

Pimco Total Return Fund (PTTRX) had $5 billion in client redemptions last year, its first year of withdrawals in records going back to 1993, according to Morningstar Inc. (MORN), a Chicago- based research firm. Overall, Pimco had $60 billion in net deposits last year as investors put money into stock funds and products designed to weather falling markets.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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