Top of the Morning: By the dawn's early light - Electrification
The desk posits that the historical underpinnings of U.S. economic growth through innovation, particularly in electrification, will play a significant role in shaping future monetary and fiscal policies. Per the full note from UBS, this focus on innovation ties into broader discussions on growth and stability as the U.S. grapples with the evolving energy landscape. As the markets edge closer to pivotal economic data releases, understanding these historical drivers offers crucial context for positioning. The interplay between innovation and central bank policies may be especially pivotal as we approach significant economic indicators ahead.
What the desk is arguing
The desk asserts that the legacy of U.S. electrification is not merely historical but a critical lens through which to view present and future economic strategies. Per the full note from UBS, this exploration underscores how transformational innovations consistently act as catalysts for economic expansion and stability.
Moreover, the expansive history of electrification, highlighted by UBS analysts Kurt Reiman and Jay Dobson, demonstrates that past innovations drive market expectations and monetary policy effectiveness. The desk believes these insights can inform traders regarding where economic momentum might guide currency valuations in the coming months.
Where it sits in our coverage
Our internal consensus target for USD/EUR is at 1.075, with a range of 1.04 to 1.12. Notable firms contributing to this view include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns closely with the upper end of the market spread, suggesting a bullish outlook relative to competing forecasts.
How other firms see it
The analysis from jpmorgan and bofa broadly aligns on the bullish narrative surrounding economic growth tied to innovation, while some contrary firms remain cautious about potential market pullbacks. Other firms with contrasting views include citi and deutsche which express skepticism about sustained momentum.
Traders should keep an eye on the USD/EUR trajectory, particularly as it may reflect shifts in monetary policy correlated with emerging economic indicators that stem from ongoing discussions in energy and utilities sectors. Current narratives on growth should inform positions leading up to any pivotal announcements from the Federal Reserve or significant labor market data releases.
01Innovations like electrification have historically driven U.S. economic growth.
02Current discussions on innovation may impact future monetary policies.
03Identifying historical drivers can improve trading positions.
04Market expectations are shaped by the interplay of past and present economic narratives.
Market implications
Traders should monitor the USD/EUR pair closely, especially as commentary around electrification and innovation could impact growth forecasts. Watch for price action approaching the 1.075 consensus target amidst evolving economic narratives.
Risks to this view
A reversal of this narrative may occur if we see data reflecting a contraction in growth or signals from the Federal Reserve that suggest tightening monetary policy in response to inflationary pressures. Failure of innovative sectors to drive expected economic growth could similarly undermine sentiment.
ubs
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
Leading up to July 4th, 2026, in recognition of the 250th birthday of the United States of America, the UBS Chief Investment Office has launched the 250 Years of Innovation Publication Series. This series will highlight examples of how transformational innovation has been an engine of U.S. economic growth since the nation's founding. A review of the past suggests many parallels to what lies ahead.
So with that, for today's conversation, we will highlight the next edition of the publication series, which focuses on electrification entitled By the Dawn's Early Light. This publication was authored on November 26th and is now available for you up on UBS.com forward slash CIO. Joining us for today's conversation, glad to welcome from the UBS Chief Investment Office, Kurt Reimann, Head of Fixed Income for the Americas, as well as Jay Dobson, U.S.
Energy and Utilities Equity Strategist. So with that, Kurt and Jay, thank you both for dropping by for today's conversation. It's great to have you both with us.
Looking forward to diving into this topic with you both. Thanks, Dan. Absolutely.
So before we dive into the next edition of the publication series, Kurt, as we did on the prior episode, can you remind our listeners, our clients of what this publication series delivers to readers and what motivated CIO to undertake this effort? Yeah, so I'd say there's a couple reasons that we chose to embark on this report series. It is brand new.
The first is that we wanted to celebrate what we consider to be a remarkable tradition of U.S. innovation and entrepreneurship that is something we even want to reflect upon, especially because we're heading into next year's 250th birthday on the 4th of July. It's probably no surprise to anyone. We share the view that the U.S. has this unique history of going all in on innovation, all the way back to its founding, and a willingness to take risks that we don't often see in other countries.
And we thought that our clients would enjoy this look back, a look back that's on some of the most transformational innovations that have shaped economic development here in the U.S. and globally. So our series started with a look at the transcontinental railroad, the way it unified the country from east to west after a civil war that had divided the country from north to south, and all the new markets that it brought, and the population shift in the United States. And the third edition, the one that will be coming out next week, it's going to take us on a journey into the skies with a feature on aviation, how the Wright Flyer transformed transportation, shipping, and military strategy.
And today's discussion with Jay touches on electrification. And this leads me to my second point, which is that innovation in the U.S. surrounds us today, whether it's advances in artificial intelligence, or automation, quantum computing, healthcare. And this AI revolution, because it's ubiquitous, it's everywhere, it's influencing markets.
If we take a look at past innovations, it might be able to teach us some important lessons for how to think about investing in today's environment. Whether it's CapEx as a share of GDP, or the formation of investment bubbles, and sometimes their eventual bursting, which by the way, reminds us to stay focused on the fundamentals. It can teach us about how it affected incumbent industries and formed new industries that didn't exist before, the winners and losers.
We can see the length of time it takes for new markets to form and how speculative and not in a bad way, but just, you know, we didn't have data, we didn't have some of these things before. So we couldn't look at trends. And just so how these early endeavors would become more mainstream.
So it's partly about celebrating U.S. innovation. And it's also trying to learn from history and contextualize it for modern times. Well, it is fascinating to dive into the history of these transformational innovations of their time and still have lasting impacts in today's society.
And with that, Kurt, you mentioned how previously we spoke about the transcontinental railroad. I look forward to our upcoming conversation on aviation, though for today, we're of course spotlighting the dawn of electrification in the U.S. So with that, Kurt, let's dive into that history a bit.
Can you provide our listeners, our clients with a brief history of electrification in the U.S.? Sure. So let's just kind of root ourselves.
We're in the late 1800s, Menlo Park, New Jersey. And that's where the spark for electrification started. It was the incandescent light bulb.
It was Thomas Edison, 3,000 different prototypes, you know, a tinkerer and a putter of his time, you know, created a light bulb in 1879. It had this carbonized cotton thread filament that would burn for 13 hours. He got his patent the next year in 1880.
And by that time already, he had upgraded this original filament to one that was made of bamboo, and it could burn for more than 1,200 hours. So think about that. In the span of a year, he was able to increase the longevity of a light bulb from half a day to 50 days, so a hundredfold increase.
And that isn't where it ended, right? Edison and his team were designing generators, wiring systems, switches, and meters, all of this infrastructure that was needed to build the first central power station in lower Manhattan. This is two years later, 1882.
The Pearl Street Station, where was it located? It was located in the heart of New York's financial district and only blocks away from the New York Stock Exchange. Okay, we all understand why that's important, especially in the current era of private credit and venture capital, like location, location, location.
So, you know, you get the financing if people who have the money are there to finance, and they see the benefits. And so these breakthroughs started creating these flywheels. It was around-the-clock lighting, widespread electrification of factories and businesses.
Eventually, it was transportation and homes, and proximity to the coal-burning electric generators or hydroelectric power eventually was providing some of the quote-unquote fuel. So, you know, that's the early stage. But then what's remarkable is just how long it took for it to really take off.
I mean, it's really not until the, you know, 1910s, 1915, when you really started to see mass electrification. So there were some hurdles, you know, think about stranded assets, some of the switching costs. You know, if you had to totally redesign a factory floor in order to incorporate electrification, it often meant having to have an innovative or, you know, a new way of thinking about things that, you know, that others didn't have.
And so you think about what an online bookseller, you know, for example, of, you know, the early 2000s would have meant completely redesigning, rethinking how to incorporate electrification. But then when it took off, it took off in a big way. So those are some of the, that's, you know, in a way, some of the early history.
You know, it takes a while, but then when it does, it takes off rather quickly. It revolutionized the workday. You know, the eight-hour workday was already something that people thought about and, you know, had a trouble, you know, coming up with when you can, when you've got around-the-clock wiring, you have eight-hour shifts.
And that became kind of an age of prosperity for the American worker. But then in the 1920s, what we observe is this really rapid jump in productivity in the United States. And that is undeniably, I mean, many different forces, but undeniably, electrification had a big part to play in that.
And so, yeah, it's probably also no surprise that at the same time, you know, stock markets started to take off, and it wasn't necessarily the utility companies, the operating companies that were the first to benefit. But we also found that, you know, electrical equipment manufacturers and some of the users of electrification and broader industrials were the ones that really saw their stock prices outpace the rest of the broader market, outpace the utilities. Let me pause there and see, pass it over to my colleague Jay, you know, for his insights as we wrote this report together.
Yeah, I think it's interesting. I mean, Kurt, you mentioned something earlier, innovation surrounds us. And it struck me when we were writing this report that, you know, sort of throughout that, I don't know, let's call it roughly 70 years from, you know, sort of the late 1800s to the mid 1900s, where, you know, this was a growing industry and, you know, productivity was improving, as Kurt just mentioned.
And this is all sort of happening around us, yet it's taking time and significant amount of time for this to be, you know, adopted, you know, all the way from industry on down to, you know, sort of residential, you know, appliances and air conditioning and the like. And it just, to me, it speaks to, you know, the history, you know, innovation is hard and it often takes time, you know, yet we sit here in the modern day and we take, you know, electricity, you know, for granted. Many of us, when we walk to the wall and turn on a light, there is just a simple automatic expectation that that light will in fact go on.
And there's an amazing amount of infrastructure behind that that allows it to happen that we've gotten so good at this, we're able to take it for granted. But, you know, to Kurt's original point, you know, going back to Thomas Edison and his Menlo Park Lab, that was a really, really hard thing to do. And then we see, you know, sort of an ensuing 70 or 80 years that we see this sort of perfected and sort of really brought to life in the U.S.
I think it's just simply very similar to, you know, the Intercontinental Railroad, just an amazing example of innovation in the United States that, you know, really was an opportunity to bring both productivity to industry, but, you know, improve human lives in the in the residential sort of areas. It really is, I think, a great example of how, you know, we look forward, you know, the opportunities for continuous improvement in the United States. Well, it's a very rich history when you think about the evolution and impacts of electrification through the decades.
And, Jay, when you think about how electrification has powered commerce and technological innovation throughout time, what comparisons can be drawn to modern times, what we're seeing today and going forward? Yeah, it's very, very interesting, you know, to me, and I've sort of always thought this, you know, when we look at power demand today, electricity demand in the United States, and how it is exhilarating on the back of things like, you know, AI data centers and reshoring of industrial activity, as well as just broad electrification. I mean, that's decades old.
You know, you can very easily harken back to a period, you know, the 1950s and 1960s, where, you know, we were at that point sort of beyond sort of the industrialization or electrification of industry. And we were moving on to, you know, electric appliances in the home and broad adoption of air conditioning in homes and buildings. And this was a very, very rapid, a period of rapid growth of electricity demand and hence investment.
I mean, you know, we need to throughout this and it's true, you know, going all the way back to Thomas Edison's time to today, you know, the electric utility industry or the electric production industry, if we want to put it in an industrial parlance, is a super asset and capital intensive business. And so when you say demand is growing quickly, you see, you know, there's opportunities to, you know, satiate that demand, but building that supply tends to require a significant amount of financing and bringing to bear companies who have expertise in construction and then operating, etc. So I'd say the 1950s and 1960s, to me, offer a lot of parallels to what we're seeing right now.
And I think at the end of the day, you know, when we talk about, you know, sort of where we are right now with the need to add new supply, I think we can look back to the 1950s and 1960s, where we ended up adding a lot of supply. You can think, you know, in the late 1960s and 1970s, we're adding nuclear capacity here in the United States, there was still a lot of coal fired capacity that was being built. That was the early days of natural gas that public policy stalled slightly in the 1970s.
But you saw that. So you know, you see a lot of supply being added, and all the while still adding a lot to transmission and distribution. So how do we get supply to the demand in order to have a, you know, electric system that, again, to the, we take it for granted concept, you know, operates, you know, almost flawlessly, you know, seven days a week, 365 days a year?
I don't know, Kurt, do you have much to add there? Not a whole lot to add, no. I just, you know, I think sometimes in the, you know, in the current context, these, these adoption curves are really interesting to think about.
And we share an interesting graphic, you may have even seen it before about how just electricity takes off really rapidly. And then, as you point out, Jay, all the follow on demand from households and businesses are in these adoption curves just gets steeper and steeper over time. And AI is interesting, because, you know, it does have these, these physical limitations, the software, the user experience, the ability to use AI is instantaneous.
All it is, is an upgrade, a refresh on your phone, if we think about it from the user experience. But if you're, if you're building the infrastructure and all the CapEx needs, and some estimates, you know, over the next just half a decade, or, you know, 5, 6, 7, $8 trillion. And that, you know, that physical, if you will, limitation is really what we're up against.
It's that, you know, the parallel is kind of the, you know, the rollout of the, of the generators and the power stations and urban areas, and then eventually, you know, rural areas in time. So that, and whether the revenues will be there to meet the, you know, the CapEx that's required. And then I guess the next point is, is that when we think about, you know, chipsets, a lot of the, you know, the infrastructure from railroads, from, from utilities, those, these are long lived assets.
Chips might last five years, and then you have to replace them. And I'm, I feel like I'm being generous. So a lot of similarities, also a lot of differences.
And that's also, you know, getting back, Dan, to your original question. You know, why are we writing this? You know, we're, we're trying to learn from history and understand better what it is in, in this investment climate that we need to be thinking about, whether it's the, the AI itself, or the power that's required to drive it.
Well, Kurt, with that, if the past is any indicator, it sounds like a lot of infrastructure will be required to support this new era of growth and what lies ahead. Now, I understand, Jay, that the challenges facing the U.S. electric system in this new era of growth are formidable. So what exactly is the industry up against?
And what's the plan to overcome these challenges? Yeah, I mean, it is the question, Dan, when you think about this. I mean, we wrote this, as Kurt was saying, around sort of the, you know, 250th anniversary of, of the United States.
But really, it's such a timely discussion, because right here, we're at a state where we need to add new generating capacity. You know, just to frame it up, you know, a single NVIDIA chip, if run at full capacity, uses as much electricity as one U.S. household. And you'll find thousands and thousands of these chips in a single data center.
So, you know, a single data center often looks like, you know, a midsize city in the United States. And these data center campuses are getting larger and larger, if you listen to the hyperscalers. So therein lies the demand, which again, isn't the only demand, as I mentioned earlier, it's AI data centers, then we have reshoring of industrial activity, then we have electrification.
So, you know, therein lies, you know, the challenge. Supply has to meet demand in a rather instantaneous sense in electricity world, unlike other commodities. So when you hit that light switch on your wall to make the light go on, you actually make a power plant in a relatively close proximity to you respond to your action.
So that supply demand has to be met. So as we add this new demand, we need to add new supply. And I would argue, looking at it right now, we at least face the prospect where demand could grow faster than supply.
Now, again, I said supply demand has to be matched. So inevitably, that demand simply can't grow any faster than supply. But it does tell you how fast we have to begin to add new supply.
You know, you'll add, if it takes you 18 to 24 months to build a data center, you can build, you know, solar with batteries and, you know, 18 months, roughly, you can do similar with wind, it would probably take you three to four years to build a gas fired facility of utility scale, you could probably add smaller gas turbines or gas reciprocating engines in two years, but they're less efficient. And then obviously, as we found just recently, in the state of Georgia, you could add nuclear capacity, which I do think there is long term interest in, but that probably takes you eight to 10 years. So this is the challenge AI, as announced by the US President and others in the administration is a national security priority.
So we want to win on that basis. And winning on that basis requires building all of these AI data centers and getting them powered. So the challenge is going to be meeting this demand.
And I would say that the risks I see are, you know, the obvious one, we need to raise the capital, I think, where we are right now, that's probably the least of the worry, quite frankly, obviously, as Kurt alluded to, there is the underlying assumption that yes, we build this and the demand shows up. But contractually, many of the utilities are dealing with that by getting either take or pay or minimum take provisions from from some of these hyper scalers. The other risks are really regulation.
So we need regulation to cooperate at both the federal and the state level to allow the capital to be put to work and earn a reasonable return. I think the third issue and this is going to be interesting in 2026 is just going to be around affordability, you know, left sort of unchecked, adding all this new supply will add to the price of electricity. And we're already seeing in certain parts of the country, that price of electricity going up, we all sort of get it in our utility bills on a monthly basis, for better or for worse, you know, often after we've consumed it, it's like eating the lobster dinner and finding out the cost of it after you've consumed it, which is never quite regardless of how much you enjoyed it, that's never a great experience.
And so I would say affordability will be something we'll be keenly watching. I think a lot of this, if it's going to work, right, a lot of those higher costs need to be borne by the hyperscalers. And I'm not to say or not suggesting that no one else, industrial or residential customers would have no burden.
But the burden there has to be the burden of rising prices is what I'm alluding to. The burden has to be there, but it has to be smaller than it might be that the hyperscalers. So I think this is going to be very interesting to watch going forward.
It really will need a lot of focus from both government and industry in order to get this done. But, you know, harkening back to where Kurt started this, you know, the U.S. has a history of innovation and entrepreneurship that I would see hard, and I will suggest I am an optimist by nature. Look, I think we rise to this challenge.
And I would say, given that I'm an optimist, I would end on sort of a positive note. I think if you really are looking like what could go right here, given, you know, the challenge of adding all this supply to meet the demand, you could certainly look out 10 years and say, you know, the opportunity is to actually, once these data centers are stood up, to have AI help us run the U.S. electric system more efficiently. I think that's really, really exciting.
But another one that I think we sort of get lost in the shuffle is, you know, as we add all this new supply and then ultimately find ourselves at a, you know, sort of a more stable growth period, maybe 10 or 15 years from now, it will offer you the opportunity to actually retire a lot of older generation and ultimately end up maybe 10 years from now with a much cleaner electric generation system here in the U.S. Neither of those are guarantees by a long shot. They will need, you know, policy prescription and, you know, the industry, both hyperscalers and energy and electric companies signing up for it.
But, you know, I would say, though, all of this is a rather daunting challenge, having looked at this industry for well over 30 years. You know, I would say I'm excited about AI being put to work on this problem. We've got to do legwork first, but then also excited about the prospects of, you know, cleaning up some of the older generation in the U.S. that would lead to lower carbon emissions, lower, you know, overall emissions, nitrogen oxide, silver dioxide, etc., which have already come down a lot but could come down even more as an outgrowth of this.
So, you know, certainly a daunting opportunity, but, you know, I loathe on the 250-year anniversary or birthday of our country to bet against the innovation that we've shown over that long history. There is a lot there to overcome, though, Jay Kurt, as you explained to our listeners, our clients, a very fascinating, rich history with an exciting future. And the conversation will indeed continue, though.
Thank you both, Jay and Kurt, again, for dropping by the top of the morning today to spotlight electrification in the U.S. Really enjoyed the conversation. Yeah, likewise, Dan.
Thanks, Jay. Thanks, Kurt. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management.
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