P&L: Training for Modern Jobs Is the Answer to Wage Stagnation

Wall Street time November payroll report. Deputy Secretary Lou, thanks very much for being with us. Thank you for having me. All right, so just give us the specific details and then we'll get into things like the participation rating song. But the one and seventy eight thousand on the payroll and four point six on unemployment. One seventy eight thousand jobs that created in the month in November. That essentially matches the average that we've had during over the past

seventy four months. We've created fifteen point six million private sector jobs. That continues the longest trip of job creation in history. As you said, four point six percent unemployment. Uh that's the lowest than the August of two thousand seven. Uh in comparison to where we were at the peak of the recession about ten percent. Well, so what do

you say about the wages? I mean, we were hearing earlier from Bloomberg Intelligence is Carl Rickadonna about how perhaps the decline in wages that we saw in November was really due to a quirk really in October, so it was not such a big deal. But still, why has there been such a lack of momentum in wage growth? Well, look, you're right, there was an uptick in November that some

of that pulled back. So over the past twelve months wages have grown two point five p m. That's good, but it's only to be better when you consider the

long term stagnational wages that most workers have felt. You know, when you take a look at this long term trend though in for instance, the household income grew by the fastest amount and records, So, um, the trend is going in the right direction, but clearly much more needs to be done, which is why the President continues to call for increase in the minimum wage while we're pushing to

provide greater overtime protection to American workers. Have have you done any workers or maybe just give us your perspective on the ability for companies to pass along the price increases that they may experience if they do increase wages, because many companies are now able to avail themselves of labor saving technology, which means that they don't even have

to worry about passing along those increased wage costs. Well, what has been interesting, and today the White House released the new reports showing how the minimum wage increases that have um gone into effect in a number of states have not led to any decline and employment. And you actually see many companies raising wages. That's what happens when you have unemployment at for point six. In order to attract the workers you need and keep them, wages are going to go up and that you you start to

see that trend over the last couple of years. UM. One thing that has been talked about is that the job growth among millennials, among the younger generation just as lagged behind UM. How concerned are you about that? What? What kind of information did you kind of glean from this report? Well, I'm not sure, right, I'm not sure there's anything particularly in this report. Although I think your point is an important one. It's not only meant millennials

who are unemployed, it's millennials who are underemployed as well. Um, you know, we're in the middle of kind of longer term changes in the demographics of the workforce. You have older workers who are staying longer, which is probably diminishing opportunities for younger workers. You have more young people in school that weren't thirty years ago, and it's one of the reasons why labor force participation is where it is

right now. Well, that's what I was going to ask you next, is so if it sounds all great, then why is the labor force participation rate at the lowest level since nine eight? Well, again, you know, it's it's hard to it's hard, and this has been a long term trend. I mean, with all due respect, I mean, you know this is a move lower from a rate last month of sixty two point eight percent. Okay, now this is sixty two point seven. But this has been

a long term trend. You're right, it's been a longer term training over the last forty years where you've seen the drop in the labor force participation. In part, it's because you have more people UM now who are in school that um weren't in school before. You have people older workers, some working long or some not working as long. It does speak to the importance of sensible policies to get people off the sidelines and into the workforce. One of the ways we know that you can do that

is through paid leaf policies. We have far too many UM women who are not working UH and staying at home. And I shouldn't say women, fathers and mothers who are staying at home who's through sensible paid leaf policies would be able to work again. It was certainly seen that happen in other countries. So you were talking about how the increase in wage UH, the increase in wages has been about two point five over the past twelve months. What's your projection for the next twelve months of what

those how much those wages will increase. Well, I'm not sure I can make a projection. I will tell you though, that UM, when you have an economy that is at four point six percent unemployment, you would expect to see continued wage growth simply as employers need to pay more to keep more workers. But again, whether it's two and a half percent or three and a half percent, that's just not enough. I mean, we need there's been a longer term wage stagnation that's happened over the last couple

of decades. The President is called for an increase in the minimum wage. It's one of the reasons why we're pushing to increase the overtime salary thresholds. But more broadly, why we are as focused as we are on training people for the good paying jobs of the twenty first century, whether it's advanced manufacturing, I T healthcare, that is really the ultimate solution to wage stagnation. If that's the solution to wage stagnation, I just want to bring your attention

back to that labor force participation rate. I mean, it's been declining, but it's been declining from two thousand Before that it was rising. So for the following sixteen years, for the two four year terms of President Obama, we've we've seen a small uptick in two thousand five, but then a precipitates dropped. Do you think that that's because

of the increased availability of credit inexpensive credit? You know, I'm not sure I would I would claim that as a reason as much as the demographic changes we've seen in the country. But you're right. I mean, whether it's UH mothers and fathers who would be working but aren't because of the lack of paid leave policy, whether it's younger people who can't find employment or who are underemployed. UM, there are broader demographic issues that we need to address.

UM going forward, what are you sort of looking for with respect to where jobs are, where people are gaining jobs, and what are you hoping for. What's the best case scenario for employment rates over the next year? And well, I would tell you that, I mean this past month, we have seen a strong growth and professional business services, UH, construction, healthcare, particularly when you look at healthcare UM, that's been a

long term positive trend. UM. I would note that since the passage of the Affordable Care Act, we've created two million jobs in the healthcare sector. So there are many many jobs that continue to do well. We know how to get some of these other ones kick started. One of them is through a long term UM infrastructure built, which not only creates good paying construction jobs, but good paying manufacturing jobs as well. Chris Leu thank you so

much for joining US. Unbridled optimism has been the key to stock markets since the US election when Donald Trump was selected as the next president of the US. Will it continue with us? Here is Peter Kenny, senior market strategist at Global Markets Advisory Group. He has been in the market for more than three decades. He sits on the boards of companies, he advises governments. Uh, Peter, you

have a good read on markets. How are the people you're talking about allocating now and are they shifting after the U s election? Well, I think it's very interesting, Lisa.

We're seeing several major themes really impacting US equities specifically, and the largest of those themes, of course, is the rotation out of dead instruments and into equities because of the the expectation that as a result of the stimulus provided by the incoming Trump administration, you will see some very significant gains in sectors of the economy that have

really not really generated a lot of investor enthusiasm. And I'm speaking specifically of infrastructure and defense areas where we have over the lay of state you've seen tremendous performance and investor enthusiasm. Like large cap tech probably going to be an underperforming sector moving forward, at least in time frame. Peter, I want to just press you a little bit here because this idea of infrastructure spending and more spending and the defense and aerospace industry, I mean I got that.

You can read that in the headlines, but the details are that none of that money is going to be allocated unless it is proposed and then ratified and passed by the House and the Senate. That could take quite a while. And last time I checked stock markets, they love to buy the rumor and they love to sell the news. You hit the nail on the head. Markets, particularly those sectors, are way ahead of themselves. I wrote a piece way overbought, way overbought. I wrote a piece

two days before the election. I said, by infrastructure, by US steel bar by Martin Marietta. US steel in the last four weeks is up seventy and it was up a lot before because of those towiffs that had been

previously imposed because of the cheap imports. When you see am of your wise to take some money off the table, I mean it's should There's no technical or fundamental reason to own something in that with that kind of a move in four weeks in my in my opinion, now, I do think that you're right about the infrastructure over this degree of over enthusiasm for the for the space, and we are going to probably see some modulation in that performance and probably a reset lower in the near term,

but in the longer term, I do think it's a trend that investors must pay attention to. You know, you started talking about the rotation out of fixing co instruments into equities. How much has that gone on already? I mean, is this is this sort of some a trend that will gain momentum and accelerat Yes, okay, so I uh, let's see November where was the worst month? I mean it was an absolute and you know you you at least you cover it was. Yeah, it was the worst

month on record. And depending on benchmark, you had that on a safe get key for for your columns. I think worst month, worst month, yeah, no, of course, yeah, yeah, best worst. So absolutely you were spot on absolutely a

blood path. Now will that continue? I don't think to that degree we're not going to see that's sort of dramatic turn in velocity in terms of rotation, but it's a trend um and I do think it's a trend that is going to fuel equity market appreciation because that rotation into equities and out of debt instruments is going

to be dramatic. Well, can I just challenge that. One measure that I look at is the earnings yield in the spire and I compare that to uh say, ten year treasury yields, and you can see that that gap the extra yield that stocks are paying above benchmark bonds has narrowed to the lowest since two tent At what point are people going to say, look, sort of looking to stocks as a as a yielding investment doesn't cut

it anymore. Maybe I'd be better off than treasure. Okay, great point, But I don't think that that's the way people look at equities. I think the way people look at equities is, hey, there's an opportunity here for price appreciation away from yield, and that expectation is what's driving this investor enthusiasm. And oftentimes enthusiasm is not a wise investment strategy, but you have to be able to identify

it to take advantage of it. I'm just looking at things like CD rates, right, I mean, you know, no one ever even talked about CD rates over the last what eight ten years one point eight eight five percent. If you want to get something from a synchrony, that's the former Capital Bank com minimum balance two thousand dollars one point eight five percent got open to account. So you're gonna see more people do that or should they just wait a little bit and see what happens. Don't

make any big decisions right now. I think it would be a mistake to make to draw line in the sand. But you are going to see you are going to see people putting money into instruments, even as short lived is one year, because frankly, they're accustomed to something that is significantly lower in yield, and it's abtractive. Even at one point one, it's very very attractive. It's a place to park money until you can guarantee it's guarantee and

its guarantee. You know. One thing that surprises me is um, Peter, you not the first person to talk about this rotation out of bonds and its stocks. I don't understand about all the cash people were talking about that was slashing around the portfolios. Why isn't it as that like are you know and and are you seeing people actually just using their cash to be more fully invested in the market. An interesting study was released by csfb UH two days ago.

In the study, it was highlighted that the average r I A is UH currently modeling fifty in equities and the balance in debt instruments UM. That is well below the historical norm exactly, and that alone speaks to a shift in the way people are looking at the opportunity in equity markets. And I think that is going to that's gonna turn over time. And it's it's not that there's no room for dead instruments in your portfolio. For heaven's sakes, you have to have them. There's a certainty there,

there's a yield there that you can bank on. But I do think that people are going to step one or two three steps outside that that what what they've perceived to be an acceptable norm for risk. Peter Kennedy just quickly, I was looking at the thirty year right now trades at three point oh five percent, the ten year trades at two point three eight. You think short term, let's say you know, next quarter, we're going to see

your back up in rates. I actually I do. I think you're right I think we will see you back up in rates. And I think that we've seen such a move in such a short period of time that you know, the reversion to the mean always plays plays a role in whether it's you're talking about debt yields, whether you're talking about equities, it's it's it's whenever you see that that kind of a move, you you've got

to see a reversion. But I want to bring in Alberto Gallo, portfolio managing manager and head of macro Strategies at Algebras Investments in London. Alberto, thank you so much for being with us. Good morning, Good morning. So first I want to I want to talk about sort of the movement that we saw yesterday in UH in German bond yields, in particular yields climbing to the highest of the year. UM. Do you think that the ECB will start tapering in the near future and do you think

that UH markets are adequately prepared for that. I do say they have discussed tapering. They will extend the maturity of quantity division from March two seventeen to September or perhaps December two thousand seventeen, and they will taper after that, so it's an extension of maturity and then tapering. They cannot talk about it. They are afraid of spook in the market. It's like fight club. You know, you can't talk about fight club, but they have to do it.

Data is better, growth is better, inflation across across the eurosone despite the fears about various selections and votes that we see. So they're getting closer to their target. And also remember Mario drugg is going to finish his mandates in January two, so there needs to be a transition from eighty billion euros purchases per month to something a lot to something lower um. I think market expectations are

very high on the e c b UM. There's a lot of investors still thinking about Queen infinity, about central banks buying ussets forever um, and everyone is long bonds, so people both bonds for capital gains and equities for for yield and it doesn't work. This trade is over and the rotation is is just starting alright, So that rotation is starting. Alberto Gallo, who's going to buy all the debt of all the banks in Europe? Where is it going to go? And how is the banking system

going to survive. Well, let's remember that we still have the liquidity assistance facility of the c B, the t L t r O in jargon, which means ec we can still lend two banks close to the deposit rate which is a very very low rat from near zero basically, I mean banks normally with banks normally with pay, but with the t L t r O they don't pay. Actually they receive some money. Um they get paid for borrowing correct from d CB. So especially if they're lending

so effectively. The liquidity across European banks is fine that there is no run on deposits. The problem, however, that we have in some regions is capital, So banking systems that need to um show up capital and consolidate and improve their profitability. Alberto, how are you positioning heading into this stretch of popular discontent? We have the Italian referendum on Sunday night, followed by the Austrian election, followed by uh what promises to be a very interesting French election,

just a lot of political uncertainty. How are you positioning? Well? I would say that after the Brexit vote and after after the US elections, which poll agency has got wrong. Every investor has been very heavily hedging for the Italian vote this Sunday and the Austrian vote as well, so it's also at the end of the year, so everyone is very long cash and very very short on on

Italy or generally on Europe. So we we have been we have been very light on on Italy until last week where we saw some headlines talking about bank failures and things that were extremely catastrophic, which we're not really painting the true picture. The true picture is lack of capital,

is some profitability issues. But actually the vote the Yes novel is very close to fifty fifty and the market is pricing a percent probability of a no. So I think here you're supposed to be a bit more optimistic because if the poll is wrong again and actually you have a yes win for the change in the constitution, this opens up the road to a lot of reforms, to a lot of change which Italian governments weren't weren't

able to do over the last thirty years. So we're cauxiously optimistic here against the market that has gone one way. Perish Caffeine Coffee International expand Shin Are you gonna are you gonna find me coffee and give me an option for international expansion? Well, if you happen to be at Starbucks, I mean you might be able to qualify. You know that they have over I think it's over four locations in China, and it's they want to expand even further

in Asia. I bet you knew that at anyway, I was going to say the reason I think you know that is because Bloomberg Gatflight Columns. Shelley Banjo is sitting right next to you, and she's here to tell us all about Starbucks, Starbucks whisper our Starbucks Whisper and Howard and Howard Schultz, who is the founder of Starbucks. He is turning over the reins the CEO rains rather to Kevin Johnson. Shelley, thanks for being with us, tell us about this, Thanks so much for having me. Yes, this

was big news yesterday. Um, you know this guy is synonymous with Starbucks. He built Starbucks and Howard. Yes, rags really almost a Rags the Richest story. It's an amazing story and and people are right to worry about what's going to happened because we've seen this story before. He left the company between two thousand and two thousand and eight, and it did not do very well. Their sales tank,

the stock tanked, everything was kind of a mess. Um went through a couple of CEOs, and during the recession, he said, I'm coming back and I'm going to write it right right these wrongs, and he did, and he turned it around and now it's doing really well. And so people are worried what's going to happen now once once he's gone, But he says that this time is different that previously he left at the beginning of the cataclysmic financial crisis UM, and that now things are different.

Let's talk about one thing that's different. Kevin Johnson, who is coming in to fill his shoes. He's a thirty three year veteran of the tech industry, joined the company last year. What are his challenges going forward and what does he bring. Kevin Johnson has a really close relationship with Howard Schultz, so they you know, they've really forged this relationship over the past couple of years, and he's been he's a tenured executive. He was at Microsoft for

a really long time. He brought a lot of the tech stuff to Starbucks that has really helped them and kind of been ahead of the curve for Starbucks. So it isn't kind of a knock on Kevin Johnson. It's just well, what's going to happen? Now? You know? Schultz has this kind of gravitas, He's he's looked upon as this genius, and so Kevin Johnson is an operator, and so do you need that kind of genius or do you need the operator at this point in Starbucks? Is

you know kind of trajectory. I just want to correct myself. I said that Johnson joined last year. He became the chief operating officer last year, but he joined the Starbucks board in two nine. Correct, Yeah, he's been drinking the coffee for a for a lot longer. Can we just I just want to offer you just a moment or two to talk a little bit about Howard Schultz and his background. Born in Brooklyn, Uh in a public housing Uh. Father, I believe it like when Howard was seven, father broke

his ankle. He was a truck driver. There was no health insurance, there was no income. And this has really infused the way Howard Schultz runs Starbucks, whether it's way age increases for employees or his commitment to social issues. Yeah, that's exactly right, and that's why there's a lot of the whole rumor's fury yesterday was oh, he must be going to government then, because he has been so active,

um with these social causes. And he even said on the on the call that they had with investors after the announcement that you know, he Shoultz is not leaving. He's still gonna be a chair on the board. He's going to focus on this UM reserve rosteries, UM. Kind of his higher end concept at Starbucks is trying to

roll out and focus on Starbucks is social agenda. And he didn't really expand on that, but he said, you know this is these are causes that are still really important to us, and we want someone working on them full time and Howard is going to be that person. UM with Kevin, what could he bring to the table, What kinds of initiatives, what could he push along that would help with Starbucks? Well, the best and most obvious thing is his tech experience, and so that is going

to continue to be important for Starbucks. They get a ton of orders, digital orders, you know, getting people through that line even faster to get their coffee. Get their fixed and UM, that's going to continue to be important. Their loyalty program is going to continue to be important. And those are two things that Kevin can really bring to Starbucks. The thing I'm most worried about with Kevin is their food. Starbucks is struggle to be able to

really serve food. They're awesome at coffee, but their food has never been really up to part. And so in order to keep growing that, um, in order to keep growing Starbucks, They're going to have to bring on good food. And I'm just not sure that Kevin Johnson has the chops to be able to do that yet, because I'll take innovation in a certain degree of creativity to correct. Yeah, definitely. Shelly Banjo, Bloomberg gad Fly columnist, Thank you so much

for joining us. Thank you, Shelly Banjo. Favorite Starbucks is, by the way, stocks down about two and UM, I like the soy misto, which is just a fancy way of saying coffee with hot, warm milk. Nice. That sounds pretty good right about now. Shelly Banjo, Bloomberg gad Fly speaking with myself, Lisa Brown Ways and Pim Fox. This is Bloomberg. Thanks for listening to the Bloomberg pien L Podcast. You can subscribe and listen to interviews at iTunes, SoundCloud,

or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio