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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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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Likelihood Of Fed Rate Increase Falls With Falling Inflation (Not Until June ’18)

Today’s CPI report revealed that inflation remains ellusive for the US economy at 1.7% YoY, still below The Fed’s target rate of 2%.

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According to Fed Funds futures data, the implied probability of a Fed rate hike doesn’t exceed 50% until June 2018 and after.

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The most likely path of The Fed Funds target rate remains looking like a Carnival Cruise ship.

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Inflation Mirage: Core Inflation Declines To 1.7% YoY, Real Average Hourly Earnings Decline To 0.7% YoY

Inflation must seem like a mirage to Janet Yellen and The Federal Reserve. And no, it isn’t an oasis either. The US economy can’t seem to find inflation or wage growth despite near full employment (according to the Federal government, that is).

Core CPI YoY less food and energy fell to 1.7%, but it is still higher than core PCE growth YoY of 1.505% (The Fed’s preferred inflation measure).

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CPI for shelter YoY fell to 3.26% in July, still 2x core inflation. And 5x hourly wage growth.

US Real Average Hourly Earnings 1982-1984 USD YoY also declined to 0.7% YoY.

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Now, if the Federal government included home prices in their inflation calculation, problem solved! Case-Shiller home prices are growing at a steady 5.7% YoY, considerably higher than wage growth.

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Here is a breakdown of the headline CPI numbers.

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And here is a chart explaining why The Fed keeps saying inflation is around the corner, but never seems to get there.

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With emphasis on hot air.

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More Cowbell? Producer Prices Falls For the First Time In 11 Months (Now 1.8% YoY)

Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e. prices received by domestic producers for their outputs either on the domestic or foreign market). PPI for July just fell MoM for the first time in 11 months.

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And PPI Final Demand (less foods and energy) just fell to 1.8% YoY in July.

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Is the only prescription more cowbell?

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