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“Unlike some governments which fear change and fear the future, China is beginning to reach out toward new horizons, and we salute your courage.” -Ronald Reagan 4/27/1984

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Times have really changed in the last 39 years. In 1984, when President Reagan became the third US President, after Nixon and Ford, to visit China, it was a much smaller player on the global economic stage. According to the World Bank, Chinese GDP per capita was $250.7 in 1984, compared to $17,121.2 in the US. Through 2021 (the latest available data), GDP per capita in the US has increased by over 300% to $70,248, which sounds impressive at face value. However, in China, the same figure has grown by 4,900% to $12,556 per capita. US GDP per capita is still much larger than it is in China, but the gap has narrowed immensely, and China is on a much more equal footing with the US than it was then.

What’s also changed in the last 39 years is the relationship between the US and China. Reagan’s visit was a major diplomatic event where he was greeted with a 21-gun salute in Tiananmen Square. Today, it’s hard to imagine a US President even considering a visit to China, as diplomatic relations between the two countries have mostly frozen over. If there’s one bipartisan issue in Washington right now, it’s that China is an enemy rather than a friend.

One thing that hasn’t changed between now and 1984 is the issue of Taiwan’s independence, one of the primary reasons for the now icy relationship. During President Reagan’s visit in 1984, Chinese Premier Zhao noted in a news conference with reporters that “The question of Taiwan remains the major obstacle to stable, sustained development of Sino-U.S. relations”. The more things change…

Moving on to the markets this morning, futures are trading modestly higher as concerns over First Republic (FRC) get pushed back, and positive earnings from several companies, most notably Microsoft (MSFT), drive positive sentiment. Given the concerns over the banking sector and the debt limit, Treasuries are at the short end of the curve. Speaking of how the more things change, the more they stay the same, just as MSFT is trading at 52-week highs, the company finds itself in regulatory crosshairs on antitrust concerns.  This time it’s the proposed acquisition of Activision (ATVI) which the UK CMA has blocked citing risks to innovation in cloud gaming. Is this the 2020s or the late 1990s?

Looking ahead, as the FOMC appears almost certain to hike rates another 25 basis points (bps) next week, even as risks of a recession increase, the spread between short and long-term US Treasuries yields continues to widen. As of yesterday’s close, the 10-year vs. 3-month yield curve, the Federal Reserve’s preferred measure of the yield curve as an indicator of a recession, was inverted by 164 bps, which is the most extreme reading since the early 1980s. Every other time in the last 60 years that it inverted by as much or more, the economy was either right on the cusp of or already in a recession.

Even more extreme than the actual level of the yield curve is the pace at which it has flattened/inverted over the last year. As shown in the chart below, the 367 bps pace at which the yield curve has flattened over the last year is the most extreme since just before the onset of the second dip of the double-dip recession in May 1981. Besides that, the only other time that the curve flattened by as much was in 1973, just months before the onset of a recession lasting nearly a year and a half.

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