Gross Says Structural Changes Weigh on Employment: Tom Keene

Pimco Love Affair Repels Pensions as Allure Fades
Pacific Investment Management Co., the world’s largest manager of bond funds, said Oct. 3 that Mexican local debt was one if its favorites, three months after Bill Gross, co-chief investment officer, said he preferred them over German bunds. Photographer: Scott Eells/Bloomberg

Pacific Investment Management Co.’s Bill Gross said that while the drop in the unemployment rate last month shows progress, the U.S. economy is still being weighed down by structural changes rather than cyclical forces.

Globalization and technological advances are making it more difficult for the U.S. to add jobs as opposed to changes in the pace of economic growth, Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

“The dominant influence is structural,” Gross said. The fall in the unemployment rate does show “we’ve made progress. So let’s give some applause to the president and administration in what they have been doing. Obviously, they haven’t been creating enough jobs.”

Unemployment unexpectedly fell to 7.8 percent in September, the lowest since President Barack Obama took office in January 2009, as employers took on more part-time workers. The economy added 114,000 workers last month after a revised 142,000 gain in August that was more than initially estimated, Labor Department figures showed today in Washington. The median estimate of 92 economists surveyed by Bloomberg called for an advance of 115,000. The jobless rate dropped from 8.1 percent.

Reflation Bet

Inflation remains a concern over the next several years because of central-bank polices to add stimulus, said Gross, who has been buying Treasury Inflation Protected Securities, or TIPS, as part of a bet to profit from the likely rise in consumer prices over the next few years.

“An investor or bond fund or equity fund has to make a bet on reflation or deflation, and recognize that the market power currently rests with central banks,” Gross said. “‘We are betting at Pimco on reflation. We don’t want to fight the Fed, but we want to afraid of the inflationary consequences.”

The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, for 30-year securities touched 2.57 percentage points, the highest since Sept. 18.

Inflation in the U.S. could climb to 3 percent over the next five to 10 years as central banks endorse a higher rate because they’re limited in policy responses, Gross said. Consumer prices rose 0.6 percent in August, the most in more than three years, Labor Department data show.

Front-Running Bankers

Fed policy makers began a third round of debt purchases last month and said they will probably hold the federal funds rate close to zero “at least through mid-2015.” Since January, the central bank had said the rate was likely to stay low at least through late 2014.

Gross cut the proportion of U.S. government and Treasury debt in Pimco’s $277 billion Total Return Fund to 21 percent of assets in August, from 33 percent the previous month, according the latest available data on the company’s website. Treasuries remained his second biggest holdings after mortgages securities at 50 percent.

The Total Return Fund has gained 12 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. It has returned 8.9 percent in the past five years, beating 98 percent of comparable funds.

Gross, who purchases mortgage-backed securities earlier this year given expectation the Fed’s would announce a new round of quantitative easing using the debt, is also been purchasing debt of Spain and Italy ahead of possible purchases by the European Central Bank.

European Central Bank President Mario Draghi endorsed last month an unlimited bond-purchase program to contain rising yields in the euro area and fight speculation that nations might leave the 17-nation currency.

“We are looking to euro-land as the ECB is about to do their own program,” Gross said. “You want to own what they are buying before they buy.”

Download: Pimco’s Gross Says U.S. Inflation Will Average 3%


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