The Great Left Wing Conspiracy Against Trump continues:

Mr. Bolton got into a sharp exchange on July 10 with Gordon D. Sondland, the Trump donor turned ambassador to the European Union, who was working with Rudolph W. Giuliani, the president’s personal lawyer, to press Ukraine to investigate Democrats, according to testimony provided to the investigators.

Mr. Bolton instructed Fiona Hill, the senior director for Russian and Eurasian affairs, to notify the chief lawyer for the National Security Council that Mr. Giuliani was working with Mick Mulvaney, the acting White House chief of staff, on a rogue operation with legal implications,

“I am not part of whatever drug deal Rudy and Mulvaney are cooking up,” Mr. Bolton, a Yale-trained lawyer, told Ms. Hill to tell White House lawyers, according to the testimony.

Nothing to investigate here; it’s just Nancy Pelosi picking on poor Donald Trump.

Seriously, Bolton is an radical hawk, but at least he’s not personally corrupt.  He got out at the right time.  Is Steve Mnuchin the only grown-up left in the Trump administration?  Mnuchin is not available 24/7; they desperately need more babysitters.

Update:  Headline of the day:

I Knew John Bolton Liked Regime Change, I Just Assumed He Meant Overseas

Some people on Wall Street argue that conventional Treasury bonds are preferred to TIPS, and hence the TIPS spread underestimates actual market inflation expectations. I’m inclined to agree.

The current 5-year TIPS spread is 1.34%, which is based on CPI inflation. That suggests a PCE inflation rate that is barely above 1%, as PCE inflation tends to run at least 0.25% below CPI inflation, and indeed recently the gap has been even larger.

In contrast to this implied 1% PCE inflation forecast, the Fed expects slightly below 2% inflation over 5 years, as does the consensus of private forecasters. I also expect inflation to be only modestly below 2%, which has been the pattern over the past two years.

Of course we could all be wrong, but what if the TIPS spread is biased?
In that case, how can we derive the actual market forecast of inflation?

You could use a CPI futures market. But if this market were tiny relative to the TIPS market (and I believe it is) then arbitrage would probably force CPI futures prices to correspond to TIPS spreads, even if traders thought the actual inflation rate would be higher. (As an analogy, consider the situation if bond market and currency futures market traders disagreed about the future path of exchange rates. The interest parity condition would still hold approximately true due to arbitrage.

Now for my question. How can a less biased inflation indicator be constructed? For instance, what about creating a security that paid $1000 if the 5-year inflation rate ended up being in the 1.4% to 2.6% range, and zero otherwise. My gut instinct is that that outcome is very likely, say over 85% likely. If the market agrees, wouldn’t those contracts sell for at least $500, even if the 5-year TIPS were predicting 1.0% inflation? If so, wouldn’t that prove that inflation expectations are actually well above 1.0%?  I’d certainly pay $500 for that sort of security. Or would arbitragers force any newly created market on inflation expectations to correspond to the implied TIPS prediction, no matter how the new market is designed?

In other words, is there a market design that overcomes the “arbitrage” problem and gets us close to the truth (about people’s expectations), or is this an impossible goal?

Paging Robin Hanson.

If the US were fighting a trade war over human rights, I’d have doubts about whether it was the right way to address the issue. Nonetheless, I’d certainly root for us to succeed. But this trade war is being fought over economic issues, and thus I hope we lose.

Most of the commentary about the mini-agreement has been along these lines:

“I’m skeptical that there is anything that could be objectively called a deal,” said Scott Kennedy, an expert on the U.S.-China economic relationship at the Center for Strategic and International Studies in Washington. “It appears that the U.S. was looking to find a way to avoid raising tariffs in the next couple months and reassure financial markets, and so it was willing to accept only an oral agreement on a narrow range of issues to take this step. Xi Jinping has to be quite satisfied with this outcome.”

It will be some time before we know the details of the agreement, but China has made vague commitments in the past that haven’t ended up meaning very much.  Why should they?  The US doesn’t adhere to our trade agreements either.

Of course Trump’s got lots of other problems to deal with.  The Dems are trying to impeach him (and perhaps send another of his lawyers to jail), and the GOP is angry that he stabbed the Kurds in the back.  The last thing Trump wants right now is an escalating trade war driving the US into recession.  (Yes, a recession would technically be the Fed’s fault, but Trump would be blamed.)

So this nearly meaningless deal is actually good news, as it puts off even more damaging steps and gets us closer to the election.  Next year, Trump probably would hold off from further escalation and declare “victory”.

Some argue that a President Warren would be even tougher on China.  That’s hard to say, as the party out of power always claims to be tougher on China and then never is (until Trump.)  But even if she is, she’d likely put a bit more weight on human rights and a bit less weight on making Mark Zuckerburg even richer than he already is.

Just a year before the next election, polls show that roughly half of voters believe that Trump should be impeached and removed from office.

That should be great news for Democrats, right? Even if he survives impeachment (which seems likely), the polls show that he’s quite unpopular. Unfortunately, betting markets show that if Trump gets the nomination then he is likely to be re-elected.

This is not because Trump is popular; rather the betting markets anticipate that the Dems will pick an extremely weak candidate, someone like Elizabeth Warren. If Democratic voters had the best interest of the country at heart then they’d pick someone who would be electable. I fear they have other goals in mind.

BTW, this caught my eye:

In August, President Donald Trump’s eldest son, Donald Jr., flew to Jakarta to help kick-start sales at a pair of Trump-branded luxury resorts planned for Indonesia. He appeared at a private event with wealthy prospective buyers and joined his politically connected billionaire Indonesian business partner at a news conference.

And last year, Donald Jr. visited India to sell condos at future Trump-branded towers, appearing at an event that also featured India’s prime minister. . . .

When the Trump Organization tangled with the majority owner of a property in Panama, for example, its local lawyers at one point called on the Panamanian president for an assist.

In Indonesia, the government is helping to build a major new highway that will make a new Trump development more accessible.

Yes, Indian Prime Ministers normally show up at condo sales events. Of course we know from the Ukraine phone call that foreign leaders are not at all willing to kowtow to Trump and assist his business interests, right? So what does Donald Trump Jr. think of all this?

“At the VERY LEAST, there’s the appearance of impropriety,” Donald Trump Jr. wrote on Twitter. “A clear conflict of interest.”

Oh wait, that comment was referring to Hunter Biden’s business dealings. Sorry.

It seems that in the Trump family the apple does not fall far from the tree.

During the Great Recession, I argued that low interest rates were the new normal and that during the 21st century people would be constantly complaining about “bubbles”. But even I never envisioned rates being this low.

Ten-year bond yields are still 20 basis points above the 2016 lows, while 30-year bond yields have been hitting all-time record lows. Why the difference?

In my view, the 10-year yield is a bit more influenced by cyclical factors, and the economy was a bit weaker in 2016 than it is today. In contrast, the sharp fall in the 30-year bond yield reflects the market gradually realizing that low rates are not just a passing fad, but rather are the new normal.

I thought we’d cycle between 0% and 3% over the business cycle, now it looks more like a 0% to 2% cycle might be the new normal. This cannot be explained by inflation, which isn’t much different from what it was in the late 1990s.