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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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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FDIC’s Hoenig: Bank Lending Weak Because of Payouts (99% Net Income Distribution)

Thomas Hoenig, the former KC Fed Chairman and current vice chairman of the Federal Deposit Insurance Corporation (FDIC) stated recently that banks are choosing to distribute their earnings to investors rather than lend.

WASHINGTON (Reuters) – Big banks say tight U.S. financial regulation forces them to sit on capital and not put money to work by making loans, but in truth they choose to distribute all of their earnings to investors instead of lending them, a long-time regulator said in a letter to two powerful senators released on Wednesday.

Using public data to analyze the 10 largest bank holding companies, Hoenig found they will distribute more than 100 percent of the current year’s earnings to investors, which could have supported to $537 billion in new loans.

On an annualized basis they will distribute 99 percent of net income, he added.

He added that if banks kept their share buybacks, totaling $83 billion, then under current capital rules they could boost commercial and consumer loans by $741.5 billion.

Here is a table from Hoenig’s letter to Senators Mike Crapo and Sherrod Brown. hoenigletter07-31-2017

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Of course, deposit rates at banks are near zero giving them almost zero cost source of funding. And bank lending (especially Commercial and Industrial loans) are slowing appreciably.

And then we have 1-4 unit mortgage debt outstanding which has a YoY growth rate of 2.7%, the lowest in history before 2008.

That would help to explain the lack of US inflation (money trapped in the Federal Reserve System) and the pitiful velocity of money (the lowest in modern history).

So, The Fed’s zero-interest rate policies have not benefitted borrowers, but benefitted owners of bank stocks. And helped create massive asset bubbles (which Greenspan denies for stocks, but admits for bonds).

Venezuela’s 1 YR CDS Hits 9,800 As M2 Money Grows At 384% YoY

Following Venezuela’s economic and monetary meltdown is like watching is like watching the burning train scene from the Tom Cruise flick “War of the Worlds.” Except that Venezuela’s horrors are a reality, not a contrived HG Wells disaster.

The IMF has already warned that Venezuela that is expected to undergo a double dip recession, a 12.5% decline in GDP.

And credit default swaps for 1 year hit 9,800. For comparison, chronic problem nation Greece only has a 1 year CDS of 504.

And their CDS curve AND sovereign yield curve are deeply inverted.

While the US is expanding M2 money at 5.5% YoY,

Venezuela’s M2 money growth is up 384 percent in the last year. And 10% in one week!

And the black market exchange rate? Venezuela’s currency is now worth less than the currency in the game World of Warcraft.

What an unbelievable mess Maduro and his compadres have made.

 

Venezuela’s 2 Year Sovereign Yield Rises 499 Basis Points To 71.6%

Venezuela’s financial crisis keeps getting worse and worse.

The 2 year sovereign yield for Maduroland rose 499 basis points to 71.6%.

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Venezuela’s 10 year yield rose 108 basis points to 31.84%. This is producing a steeply downward sloping sov yield curve.

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“But, but, Venezuela is beating Yellen and The Fed in terms of inflation.”

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Venezuela’s 2Y Sov Yield Hits 62.30% As Riots Spread During Election

Venezuela is a mess. The Guardian has this article on the sham elections in Venezuela where President Nicolas Maduro claims a victory for his policies, such as 844%.inflation and chronic shortages in this command economy.

Riots are spreading thoughout Venezuela which Maduro claims is excitement over his enlightened economic and monetary policies.

And then there is the problem that the US is weighing sanctions against Venezuela that could severely restrict the OPEC nation’s crude exports and starve its government of hard currency.

(Bloomberg) — U.S. sanctions against Venezuelan officials include a key figure in some of the oil-for-cash deals with China that are central for the survival of Petroleos de Venezuela SA.

Simon Zerpa, vice president of finance for PDVSA, is the only current official of the state-owned oil company among 13 Venezuelan nationals who were sanctioned by President Donald Trump Wednesday. A self-taught diplomat and socialist financier, he’s managing the debt of one of the most distressedborrowers in emerging markets. Zerpa, 33, also helps direct the $45 billion that Venezuela has borrowed from China to boost crude production.

The sanctions come at a time when PDVSA is struggling to make ends meet. Oil production is slumping, despite the world’s largest proved reserves. The company has an upcoming debt payment of $3.2 billion this year, most of it due in October and November. Earlier this month, Zerpa sought to improve communication with investors through invitation-only conference calls, after Goldman Sachs Group Inc. was grilled for buying Venezuelan “hunger bonds” that, according to the opposition, helped to keep president Nicolas Maduro in power.

“It’s a huge blow in terms of new financing to Venezuela,” Alejandro Grisanti, director of the Caracas-based consultancy Ecoanalitica, says by phone. “After all, Zerpa manages all the finances not just for PDVSA but also for the Venezuelan government.”

The result? Venezuela’s 2 year sovereign yield now tops 62%.

Meanwhile, the Venezuela basket (oil) remains depressed relative to neighboring Colombian oil prices.

Here is President Nicolas Maduro claiming that there is nothing to see here in the elections.