Assessing economic risk through the Biden-Xi meeting lens

The markets took a risk-on tone in the wake of a softer-than-expected CPI report, followed by a tame PPI report and strong retail sales print. Even before these reports, Mohamed El-Erian issued a warning about the goldilocks scenario of lower oil prices and falling bond yields.


Is market psychology in a “bad news is good news” mode that’s discounting weakness ahead? To answer that question, one useful way of seeing the world is through the lens of last week’s meeting between Joe Biden and Xi Jinping on the sidelines of the APEC Summit in San Francisco. The U.S. and China met to stabilize their relationship, but each is coming to the table with deep wounds, which are useful in evaluating potential weakness that could affect the global economy. The actual progress made at the meeting was modest, but it’s less important inasmuch as what it revealed about the vulnerabilities of each economy to the growth risks highlighted by El-Erian.


A wounded America

Biden goes into the meeting with a wounded America. Moody’s put the U.S. on credit watch for a possible downgrade, citing large fiscal deficits, fiscal paralysis and the headwinds from higher rates affecting debt service ability. Moreover, consumer confidence has been weakening.


While Congress managed to cobble together a Continuing Resolution that avoids a government shutdown, the legislation did not include any aid for Israel or Ukraine, which is an indication of the Biden administration’s foreign policy weakness.


Biden faces an election battle against Trump in a year, and he is trailing in a number of polls. New Deal democrat (NDD) unpacked some of the economic reasons. Notwithstanding the ideological differences, the electoral choice is between Candidate A, the incumbent, and Candidate B, the past President. NDD observed that people fared better under Trump:
Real wages for non-supervisory workers, increased 3.3% between January 2017 and the end of 2019. Meanwhile the unemployment rate fell from 4.7% to 3.5%.


And that wasn’t just something ho-hum. In the case of real wages, they were the highest since the end of the 1970s. The unemployment rate was the lowest since the end of the 1960s.



By contrast, here is the current snapshot of Biden’s economic record:
The unemployment rate has varied between 3.4% and 3.9% in the past year, about even with Trump’s best year – but not better. More importantly, while real wages for non-supervisory workers are up 2.2% since right before the pandemic hit, measured from when Biden came into office they are actually down -1.5%.
NDD went on to highlight the difficulty that households are experiencing under Biden, by comparing average hourly earnings (nominal, not real) for non-supervisory workers (in red) to house prices (dark blue) and mortgage payments (light blue). All of these values are set to 100 as of January 2021, so you can see what has happened during Biden’s administration.”



NDD observed, “Is it any wonder younger workers who would like to buy their first home, or upgrade to a bigger home, would be upset?”



A wounded China

Xi Jinping arrived in the San Francisco APEC summit while heading an economy that’s also wounded, albeit in a different fashion.


Foreign Direct Investment (FDI) has collapsed. To be sure, the negative FDI print isn’t as bad as it sounds. It’s attributable to foreign companies repatriating profits overseas instead of re-investing the funds into their Chinese operation. Nevertheless, it does reflect a growing lack of confidence by foreigners.



The Chinese property sector is a disaster. Not only that, but also consumer confidence is sluggish, indicating household sector weakness.



The latest trade figures indicate exports weakness across the board and generalized import weakness.




The verdict on U.S. growth