Good News! Venezuelan Annual Inflation Slows To … 1,195% (2 Yr Sovereign Yield At 68%, Up From 8.5% in 2014)

While the US Federal Reserve remains puzzled as to why US inflation is so low, President Nicholas Maduro and his Socialist compadres has managed to lower Venezuela’s annual inflation rate from a crippling 1,823% on August 4, 2017 to “only” 1,195% as of August 15, 2017.

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Meanwhile, Venezuela’s 2 year sovereign yield has jumped from around 8.5% when Maduro was first “elected” in April 2014 to almost 70% today.

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And Venezuela’s sovereign yield curve has totally flipped from upward sloping when Maduro was first elected (up to 10 years, then downward sloping) to steeply downward sloping today.

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Here is Maduro dancing over the reduction in annual inflation.

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US Housing Starts Decline 5.6% YoY In July (1 Unit Starts Back Rise To 1991 Levels, Apartment Construction Slowing)

According to the US Census Bureau, US housing construction starts declined 5.6% on a year-over-year (YoY) basis for July. You can see the declining trend since 2012.

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Apartment (5+ unit) starts fell 22% YoY.

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On a MoM basis, 1 unit starts declined only 0.47% in July while 5+ starts declined 17%.

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1 unit starts (single family starts) have finally clawed their ways back to 1991 levels, despite the near zero Fed Funds target rate since late 2008.

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You can see the slowdown in apartment construction starts (orange line) during 2017. Here is a closer look which shows the slowdown in apartment starts as The Fed merrily raises their target rate.

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Dick’s Sporting Goods Suffers Terrible Earnings Report, Joins Other Big Box Retailers In Real Estate Hell

Yes, Dick’s Sporting Goods, a big-box retailer for sporting goods, just suffered a big decline in their sales and earnings, a -3.66% downward surprise.

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A closer look at Dick’s earnings per share reveals their downward momentum.

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Big-box retailers in particular are suffering from over-building and rising vacancies.

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Like another big-box retailer Macy’s, both have suffered declining stocks prices courtesy of on-line retailers like Amazon and the overbuilding of retail space. For comparison, McDonald’s restaurants (green line) are exploding upwards in price.

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Hopefully this doesn’t mean that Americans are exercising less and chowing down on Big Macs, fries and shakes.

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Homebuilder Confidence Rises To 68 in August As Rental Vacancies Remain Near Mid-1980s Lows

The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 68 in August, up from 64 in July. Any number above 50 indicates that more builders view sales conditions as good than poor.

The HMI is near mid 2000 levels before the bottom dropped out of the housing market.  The difference is that the HMI was rising as home prices rose, but rental vacancies were also rising. This time around, home prices are rising (again), but rental vacancies are down around mid 1980s levels.

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Rental vacancies have been rising since June 2016, however. Housing starts are due out 8:30am tomorrow, so I am guessing that they will be good.

18 European Countries Have Negative 2Y Sovereign Yields As Negative-yielding Bonds Hit $8.6 Trillion

The market value of the world’s negative-yielding bonds has jumped almost 25 percent over the past month to $8.6 trillion amid slower-than-forecast inflation data and as investors piled into the safest securities as perceptions of geopolitical risk increased. That’s happened even after Federal Reserve officials started raising benchmark borrowing costs and said they would begin running off their $4.5 trillion balance sheet “relatively soon.”

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And Europe dominates the negative sovereign bond yield market with 18 countries in negative 2Y territory.

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Good luck to the European Central Bank in lowering rates in the next crisis when their Main Refinancing rate is already at 0%.

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JC Penney Becomes a Penny Stock On Poor Earnings (Poor Retail Sales and Overbuilding)

Retail anchor tenant JC Penney reported poor earnings last week, sending their stock price below $5. JC Penney is now a penny stock.

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But JC Penney is not alone. Other mall anchor tenants such as Sears and Macy’s have plummeted over the past two years as Amazon’s on-line grip takes further hold. I included car rental giant Hertz (blue line) for comparison. They are all a pale image of their former selves in terms of earnings and stock price.

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Correspondingly, the CMBS reference indices CMBX BBB S6 and CMBX BB S6 have experienced a bad 2017 and used to be near par back in 2015 as mall delinquencies add up.

In addition to online retailers grabbing business from mall tenants, there is also a massive amount of mall space available after two construction booms. Notice that commercial construction spending peaked after residential construction spending prior to the financial crisis and is outpacing residential construction spending after the crisis.

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Retail inventory has boomed since 2002 as vacancy rates remain above 10%.

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It’s a retail wasteland. I would say “Won’t Get Fooled Again,” but you know builders will with The Fed keeping rates near zero.

Janet Yellen testifies on Capitol Hill in Washington

Feeding The Beast: Why Trump and Congress Should Leave The Mortgage Interest Deduction Alone

President Trump and Congress are once again tinkering with the US tax code (rather than just trashing the entire thing and creating something simple like a flat-tax system). There will always be winners and losers when the tax code is altered. This time the target is middle-class homeowners.

Begin the simple premise that the Federal government wants more of your tax dollars to spend. The Federal government is already spending at almost a rate of 2x over current tax receipts.

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And with “mandatory” expenditures expected to keep rising (and discretionary spending expected to decline), the will be increased pressure to find tax revenue from somewhere (or someone) to feed the Federal goverment’s ravenous spending.

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What is in their sights? The mortgage interest deduction (MID) for qualified secured debt. There have been calls by a number of people to get rid of the MID, such as Vice President Pence’s Chief Economist Mark Calabria (formerly of the Cato Institute).

Possilities include Calabria’s call for scrapping the MID, lowering the eligibility from $1 million to $500,000 (allegedly impacting fewer than 6 percent of mortgage holders nationally—and converting the deduction into a credit, allowing an additional 15 million low and moderate income homeowners to get a “much-needed tax break”).

Low and moderate income households are often better-off renting given the standard deduction. And low and moderate income households may not fully benefit from the MID if their joint income is less than $77,714. Households earning less than $77,714 but more that $38,173 pay only 10.47% of total personal taxes paid (in 2014, according to the National Taxpayers Union Foundation). And less than $38,173 pay only 2.75% of total personal taxes paid.

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It’s the most productive members of the middle class that are forced to pay for subsidies in Obamacare and Social Security already. Removing or limiting the MID amounts to a new middle class tax on those who can’t afford to pay off their mortgage, unlike the political elite in both parties who can continue to get the full tax benefit of home ownership by eliminating mortgage debt.

And what about households that purchased a home that are part of the 6% of the population that have a mortgage balance in excess of $500,000? It will produce a major hit of their after-tax income and likely lead to reduction in home prices, particularly in the suburbs of major US cities. Congress could always grandfather in current homeowners, but the number of households trying to purchase those homes would decline.

Homeownership rates are already at early 1960s levels, back to the days of President Lyndon B. Johnson’s “Great Society” social programs. Now the Trump Administration wants to redistribute the advantages of homeownership AGAIN.

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And remember that Canada does not allow MID for homeowners, yet has had explosive home price growth, so thinking that removing the MID will slow the growth of home prices across the board is wishful thinking.

As Kevin Villani wrote in American Banker, “But the “tax loophole” is not the mortgage interest deduction, it’s the failure to tax “imputed rent” from homeownership, i.e., the value of rental services the homeowner receives — done only in Belgium, the Netherlands and Switzerland. This has never been seriously considered in the U.S. because the political, conceptual and methodological problems of taxing farmers for consuming their home grown food — as the U.S. has done — are much greater for homeowner imputed rent.”

And since owners of rental properties get to deduct mortgage interest (as well as depreciation for tax purposes), taking away the MID for households is flat out unfair.

But as I mentioned earlier, Washington DC has to feed “the beast” and its ever-growing expenditures. The simple solution would be to cut Federal spending.

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