Unadorned Notes: February 2-4, 2025
U.S. Construction Spending Rises in December; Climate Change Threatens U.S. Home Values; Wall Street Banks Bullish on Dollar; Trump Orders U.S. Sovereign Wealth Fund; Panama to Exit China’s BRI
Economics, Finance, and Business
U.S. Construction Spending Rises in December: U.S. construction spending increased 0.5% in December 2024, surpassing expectations, following an upwardly revised 0.2% gain in November 2024. Private construction investment rose 0.9%, driven by a 1.5% increase in residential spending, including a 1.0% rise in single-family homebuilding. However, higher mortgage rates, influenced by rising Treasury yields and inflation concerns, may dampen future growth. Public construction spending declined 0.5%, with both state and local, as well as federal, outlays decreasing. The Federal Reserve paused rate cuts in January 2025 after lowering rates by 100 basis points since September 2024, while new tariffs on Canadian lumber could further impact housing affordability.1
Climate Change Threatens U.S. Home Values: A report by First Street Foundation projects that climate change will reduce U.S. home values by $1.47 trillion by 2055, while increasing other property values by $244 billion. Rising insurance costs, expected to surge by 29.4% nationwide, will make housing less affordable, particularly in major cities. Climate-driven migration could see 55 million Americans relocate over the next 30 years, with more than 5 million moving in 2025 alone. California, Florida, and Texas, which have borne over 40% of U.S. natural disaster costs since 1980, face some of the steepest property devaluations. Certain counties in these states may see declines of 10% to 40%, with Miami’s insurance premiums projected to increase more than fourfold.2
State Farm Seeks 22% Rate Hike: State Farm General has requested a 22% increase in homeowners insurance rates in California, citing over $1 billion in wildfire-related claims and growing financial risks. The company also proposed a 15% hike for renters and condo owners and up to 38% for rental properties. Consumer groups have opposed the request, arguing that policyholders should not bear the burden when State Farm’s parent company holds $135 billion in reserves. The California Department of Insurance is reviewing the proposal, expressing concerns over its justification and potential impact on homeowners. Other insurers, including Allstate and Farmers, have also sought substantial rate increases or scaled back coverage in the state due to escalating wildfire losses.3
Wall Street Banks Bullish on Dollar: Goldman Sachs and JPMorgan predict further U.S. dollar strength, with Goldman expecting parity against the euro and JPMorgan forecasting 1.50 Canadian dollars per U.S. dollar. The dollar surged after President Donald Trump announced tariffs on Canada, China, and Mexico, weakening the Canadian dollar, euro, and Mexican peso. Analysts attribute the dollar’s gains to its safe-haven status and expectations that trade tensions will support U.S. inflation and interest rates while harming foreign economies. JPMorgan and Goldman Sachs recommend long dollar positions, anticipating further declines in the yuan, peso, and euro if tariffs escalate. Some strategists, including those at Citigroup, warn that prolonged trade disputes could eventually weaken the U.S. economy and reverse the dollar’s gains.4
Palantir Surges on Strong Earnings: Palantir Technologies reported fourth-quarter earnings of $0.14 per share, a 75% increase year-over-year, surpassing Wall Street estimates. Revenue grew 36% to $828 million, driven by a 64% rise in U.S. commercial revenue and a 45% increase in U.S. government sales. The company projected full-year 2025 revenue between $3.74 billion and $3.75 billion, exceeding analyst expectations. Palantir’s stock surged nearly 22% following the report, with analysts highlighting its strong positioning in artificial intelligence and data analytics. Some analysts cautioned against the stock’s high valuation, despite its growth, as it trades at 56 times projected 2026 revenue.5
Chinese EV Sales Surge in January: NIO, XPeng, and Li Auto delivered over 74,000 electric vehicles in January 2025, a 50% year-over-year increase despite seasonal sales declines. XPeng led with 30,350 deliveries, up 268%, while NIO reported 13,863, a 38% rise; Li Auto saw a slight 4% decline with 29,927 vehicles. Analysts project 9 million EV sales in China for 2025, up from 7.8 million in 2024, benefiting both domestic manufacturers and Tesla. China remains a key market for Tesla, which sold just under 1.8 million cars in 2024, slightly below 2023 levels. Year-to-date, XPeng shares have risen 29%, while Li Auto and NIO stocks have declined 2% and 1%, respectively.6
U.S. Politics, Policies, and Geopolitics
Trump Moves to Merge USAID: The Trump administration plans to merge the U.S. Agency for International Development (USAID) with the State Department, with Secretary of State Marco Rubio assuming leadership. President Donald Trump and adviser Elon Musk have criticized USAID, alleging fraud, while Musk’s cost-cutting group, the Department of Government Efficiency (DOGE), has pushed for its shutdown. The move has led to aid disruptions in countries like Afghanistan and Syria, where USAID funds critical humanitarian services. Democratic lawmakers have called the merger illegal, warning it could weaken U.S. global influence and benefit adversaries like China and Russia. Several top USAID officials have resigned or been placed on leave following clashes with DOGE, while Musk, recently named a “special government employee”, has defended the agency’s downsizing.7
Trump Seeks to Weaken Education Department: President Donald Trump is preparing an executive order to downsize the Department of Education, aiming to shift its functions to other federal agencies. While only Congress can fully eliminate the department, the administration has already placed employees on leave and pressured staff to resign. Elon Musk’s Department of Government Efficiency (DOGE) has deployed personnel inside the agency, gaining access to internal systems and financial aid data. Critics argue the move is unconstitutional and could disrupt federal education programs, including student loans and civil rights enforcement. Legal challenges are expected, as Democrats and advocacy groups warn of widespread chaos and potential violations of federal law.8
Trump Orders U.S. Sovereign Wealth Fund: President Donald Trump signed an executive order directing officials to develop a plan for a U.S. sovereign wealth fund, aiming to invest government-owned assets for long-term growth. Treasury Secretary Scott Bessent and Commerce Secretary-designate Howard Lutnick have three months to draft the proposal, with plans to establish the fund within a year. Trump suggested assets like TikTok could be included, though specifics remain unclear. While sovereign wealth funds are common in resource-rich nations like Norway and Saudi Arabia, experts question the feasibility of such a fund given the U.S. national debt of $36 trillion. Critics warn of potential risks, citing past scandals like Malaysia’s 1MDB, which saw billions misappropriated.9
U.S. Sends Migrants to Guantánamo: President Donald Trump has ordered the detention of illegal migrants at Guantánamo Bay, with the first flights transferring detainees already underway. The administration has begun constructing a facility to hold up to 30,000 people, staffed by U.S. Marines and Defense Department personnel. Officials claim the site will house “the worst criminal illegal aliens”, though critics argue it isolates detainees from legal support and raises human rights concerns. Deportations have increased despite a sharp decline in illegal border crossings, with some countries refusing to accept U.S. deportation flights. The administration has not disclosed the cost or long-term plan for detaining migrants at the facility.10
Trump Pauses Canada, Mexico Tariffs: President Donald Trump agreed to a 30-day pause on tariffs against Canada and Mexico after both nations pledged stronger efforts to combat drug trafficking and border security issues. Canadian Prime Minister Justin Trudeau announced measures including a fentanyl czar and a joint U.S.-Canada strike force, while Mexican President Claudia Sheinbaum reinforced the border with 10,000 National Guard troops. Despite the temporary reprieve, Trump maintained his plans for a 10% tariff on Chinese imports and hinted at future tariffs on the European Union. Financial markets reacted with uncertainty, with the Canadian dollar falling to its weakest level since 2003. Trump defended his tariff strategy as a powerful economic tool, framing the dispute as a “drug war” rather than a trade war.11
China Retaliates Against U.S. Tariffs: China imposed 15% tariffs on U.S. coal, liquefied natural gas, and agricultural machinery, along with export restrictions on key minerals and an antitrust probe into Google. The measures followed the U.S. increasing tariffs on Chinese goods by 10 percentage points, though China delayed implementation until February 10, 2025, to allow for negotiations. Experts suggest Beijing is seeking leverage while avoiding escalation, as its economy faces challenges from a property downturn. This trade dispute echoes Trump’s first-term tariffs, which led to a “phase one” deal that China did not fully honor. Analysts note that Trump’s broader tariff threats, including those against Mexico and Canada, may weaken U.S. global influence while allowing China to position itself as a stable economic leader.12
Panama to Exit China’s BRI: Panama will allow its participation in China’s Belt and Road Initiative to expire, a move welcomed by U.S. Secretary of State Marco Rubio as strengthening U.S.-Panama ties. The decision follows U.S. concerns over Chinese influence near the Panama Canal, including Hong Kong-based CK Hutchison Holdings’ operation of two entrance ports. President Jose Raul Mulino signaled a review of the 25-year port concession, which U.S. officials claim violates a neutrality treaty. China criticized Panama’s decision and rejected U.S. allegations of interference in canal operations. Rubio, visiting Latin America, called Panama a strong U.S. ally and said the move could open opportunities for American or European companies.13
Trump Proposes U.S. Control of Gaza: President Donald Trump stated that the United States would “take over” the Gaza Strip, suggesting long-term American ownership and redevelopment of the area. He proposed relocating Palestinians to other Middle Eastern countries, asserting that Gaza is uninhabitable and should not remain their home. Standing alongside Israeli Prime Minister Benjamin Netanyahu, Trump did not rule out deploying U.S. troops to maintain security in Gaza. Netanyahu welcomed Trump’s support, as Israel seeks continued U.S. military aid and arms sales amid regional tensions. The visit also included discussions on broader Middle East diplomacy, including potential normalization agreements with Arab states and concerns over Iran’s nuclear ambitions.14