It’s to do with the graphics driver being gl instead of sdl2 as required. The retroarch script uses the settings above. It won’t work as expected, unless you manually recompile retroarch from scratch. The script covers that.
I just tried it myself, updating to 1.7.8. There is one small problem. It installs the retroarch directory to cpi/retroarch instead of cpi/.config/retroarch. The home screen shortcut and all references expect retroarch to be here. If you’re having trouble running retroarch after following the instructions, try moving the directory to the correct place. Either that, or you can change every single reference to retroarch in every file to the changes directory. This is tiresome and I wouldn’t recommend it.
That said, from memory; at least on the raspberry pi, the latest build had some composite output problems. Not that we even use composite output, but with the trouble people are having with aspect ratios etc with the current clock work OS 0.4, I’d be careful about updating to 1.7.8.
As for your input problems, I posted a solution to this thread here. Check it out. I’ve also gone through how to get D pad input working on Mame, one post above the link.
This seems to be resolved however in 1.7.8, even using X input. Likewise, it doesn’t send you to a login screen if you choose to use the gl graphics driver. This is possibly due to recompiling with all the features that were disabled on the stock installation. Better still, you can escape the dreaded search box window without restating your Gameshell!