If you're seeing smoke there, you need to replace the seal along the powervalve shaft.
That black hose you're talking about isn't a hose, it's more of a 'cover' to protect the rod to the governor from dirt and debris.
If you haven't cleaned the powervalves on this bike before it would be a good idea. They are known for eating the teeth on the gears when they have a lot of carbon build up on them due to them being aluminum and not steel.
To clean, I believe you can get away with just taking the head off, though I believe the main (middle) valve can be a bit tricky to reassemble without removing the cylinder due to its positioning on the bike. You'll need to get a new head gasket anyways, so just get a cylinder base gasket as well and remove the cylinder. It'll make your life much easier. It also allows you to inspect your piston and rod to make sure they're doing alright (never hurts).
I'm attaching a picture of the parts fiche for the top end of this bike. The seal in blue needs to be replaced if you're seeing smoke from that area. I highlighted the other two seals in the powervalve system in green that wouldn't hurt to be replaced since you're already in there. Plus one is not sealing, so there's a good chance the other two are on their way out as well.
Finally, when you go to take the governor rod (vertical from clutch case) off of the rod that actuates the power valves, remember the nut is a left hand thread. It is reversed compared to all of the other bolts. You can break the governor if you try to go the other way, so be careful!
P.S. If you want jetting help, go read this thread, it is immensely helpful for getting your jetting spot on:
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