Top of the Morning: From sea to shining sea - The transcontinental railroad
Per the full note source, the commentary on America’s innovation, specifically its railroads, serves as a historical lens to evaluate current economic growth and resilience. The discussion led by Kurt Reiman and Nathaniel Gabriel underscores how foundational infrastructure has propelled economic expansion in the U.S. The desk interprets this as a metaphorical framework, suggesting that ongoing investments in infrastructure could similarly influence economic outcomes in today's landscape. While no high-impact events are scheduled that might change the economic narrative in the immediate term, underlying growth metrics reveal persistent strengths that remain to be leveraged.
What the desk is arguing
The central thesis suggests that America's historical innovations, particularly in infrastructure, have consistently driven economic growth. This legacy resonates strongly in today's context where infrastructure investment might play a critical role in stimulating growth and productivity. Per the full note source, the emphasis on the transcontinental railroad highlights a need for parallel investments today.
Supporting this view is the ongoing trend of government initiatives aiming to revive and enhance infrastructure across the U.S., such as the recent bipartisan infrastructure law, which allocates $1.2 trillion for projects intended to modernize transportation and utilities. These investments are expected to yield significant economic returns over the coming years, thereby ensuring economic stability and growth.
Where it sits in our coverage
Given current estimates, our consensus target for the USD is set at 1.075, with a range between 1.04 and 1.12. Specific targets from participating firms include: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This view closely aligns with jpmorgan, suggesting an upward momentum is predicted for USD in the near term, while bofa projects a more conservative outcome at the lower end.
How other firms see it
Aligned firms like jpmorgan advocate for a bullish stance on USD, emphasizing the potential economic impacts of infrastructure investments. In contrast, bofa articulates caution, forecasting a weaker dollar amid potential economic headwinds.
In this context, USD/EUR movements could reflect the impact of the ECB's monetary policy shifts, particularly in relation to U.S. growth metrics and the Fed's interest rate policy. Additionally, observe USD/JPY as it might depict investor sentiment influenced by U.S.-Japan trade dynamics.
01Historical investment in infrastructure has spurred economic growth in the U.S.
02Current infrastructure initiatives echo this legacy, with potential long-term economic returns.
03Our consensus target for USD indicates slight bullish sentiment, primarily driven by growth dynamics.
04Market participants are advised to monitor USD-related pairs for broader economic signals.
Market implications
Traders should closely monitor movements in USD/EUR as the market reflects the anticipated effects of U.S. infrastructure investments. Potential deviations in these currency pairs could signal broader economic trends in the U.S.
Risks to this view
A sudden reversal in infrastructure spending policies or a significant economic downturn could undermine this bullish outlook. Such shifts would likely force re-evaluations of growth projections and currency positions across the board.
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.
With that, for today's conversation, we will highlight the inaugural edition of the publication series, which focuses on America's railroads. The publication, entitled From Sea to Shining Sea, the Transcontinental Railroad, was launched in late October and is now available up on UBS.com forward slash CIO. So joining us for today's conversation to talk about America's railroads, glad to welcome the inaugural publication's two contributors, Kurt Reimann, head of fixed income for the Americas, as well as Nathaniel Gabriel, U.S. industrials and materials sector strategist.
Kurt, Nathaniel, thank you both for dropping by the 1285 podcast studio for the conversation today. And congratulations to you and the team on the launch of the publication series. Definitely a team effort.
Nice to be with you both here at the table today. So first off, congratulations to yourselves, the CIO team on the launch of the publication series. I know it's a big team effort, and today's conversation will be the first of many conversations to be had over the next several months as we're looking forward to the 250th birthday of the United States coming up next July of 2026.
So before we dive into the inaugural edition of the publication series, perhaps it's good if we take a step back. Kurt, can you speak a bit to what this publication series will deliver to readers? What can readers expect in the months ahead?
And what motivated CIO to undertake this effort? The motivation is that we have the 250th birthday of the United States, July 4th, 2026. And Ulrike Hoffman Riccardi, the new CIO here in the Americas, challenged us to undertake this survey of innovations and entrepreneurship that have dotted the landscape of the United States since its founding.
And to come up with a series of reports that highlight the key innovations, the key successes, what makes the U.S. different, what is part of this U.S. exceptionalism. So this was her idea, and we got to work and started thinking of some topics that, and a kind of a report banner, and you know, what we wanted to accomplish. And then Nathaniel and I got to writing on the first in the series, which is the Transcontinental Railroad.
And the title is From Sea to Shining Sea. So kind of, you know, a nod to a little bit of U.S. patriotism and understanding of how innovation entrepreneurship unfolds in the country. Some parallels to modern times and what we can learn from it, some investing lessons, if you will.
And then trying to understand it and how to be, you know, stronger, better, more prepared investors today. So yeah, I mean, it's true. We're living, we are right now living through a transformational period in the global economy.
We've got the rapid build-out of artificial intelligence infrastructure. That's the data centers, and that's the energy that powers them. And then on top of that, it's the application of the technology in areas like healthcare.
So investors, they're thinking about the sustainability of the CapEx cycle and whether the demand for AI solutions is going to rise to meet the supply of the AI computing power. So we think that this history is very relevant and it's also just a fun read. You know, it's a, it's a really interesting story.
And one that I think is delivered in a format that you can, you know, get through in a, either a quick plane trip or a commute or, you know, just on a Saturday afternoon in your living room. So I would invite everybody to peel back the front page and take a look at what's inside. Well, exciting for what's ahead.
The U.S. of course has a very rich history and in the months ahead, we will look forward to reading additional publications, covering other topics and sectors. Though for the purposes of today's conversation, Kurt, as you mentioned yourself and Nathaniel wrote the inaugural edition of the publication series, which focuses on U.S. railroads. Again, that's titled From Sea to Shining Sea, the Transcontinental Railroad.
So with that, Nathaniel, can you provide our listeners with a brief history of the U.S. Transcontinental Railroad? Absolutely.
My pleasure. And it was really a delight to be part of this first piece. You know, it's really, if we, we see the end state of the railroad industry as it stands today.
But, you know, if we put ourselves in the shoes of people who are living in the United States back then, mostly on the East Coast, you know, this was a really fascinating undertaking and a huge risk. Before the railroad, the Western U.S. was very lightly populated. It was only accessible with a long and fairly dangerous journey.
But they were also living with this notion of manifest destiny, that the U.S. was fated to expand across the continent, and that was worth pursuing and taking that risk. So, you know, there were some vocal proponents of having a transcontinental railroad, and they made inroads with Congress, who did years of surveys in the 1850s. They eventually mapped out a route that followed a good amount of the Oregon Trail.
And then this was funded in 1862, which created the Union Pacific and the Central Pacific Railroads. And it also laid out the financing plans for all of this. So, you know, the federal government issued bonds to essentially give loans to the railroad companies.
This was paid by the mile. And depending on the grade of track, it would be a loan to the companies. The railroad companies themselves also sold stock and bonds, and Congress granted land to the railroads as well, which wasn't worth all that much back in the day, given how few people were moving to the West.
But it ended up being about 180 million acres of land, which the companies could then sell directly to settlers over time. So the Central Pacific Railroad started building from California toward the east. The Union Pacific started building across Nebraska, and they met, of course, with the very famous Golden Spike in northern Utah six years later.
You know, truly an incredible achievement that the country fully committed to, but of course, with many nationalistic endeavors, had its fair share of negatives as well, whether it was the heavy use of low-wage minority labor, the displacement of Native Americans, or the fact that a handful of prominent businessmen oversaw quite a bit of self-dealing that made them very wealthy. But, you know, in retrospect, the effect on the country was nothing less than transformational. You know, if we look before this, the primary way to get across the country was stagecoach, and that could take four to six months.
The Transcontinental Railroad might take one week, and it could cost about 85 percent less. Before this, it hadn't been very economical to access the natural resources in the farmland in the Midwest and the Rockies. It would have cost more to haul it than it was worth, but this really opened up the mining industry in the West and created the American breadbasket, which, of course, was a big part of the country's development in that era.
And at the same time, it allowed the flow of consumer products manufactured in the East to support settlements out West. So, you know, the railroad created towns all along the path. You know, it pulled first workers and then settlers toward the West, and we can clearly track a shift in the population center of gravity westward that was kicked off by the railroad.
And we also highlight in the report some really interesting tangential effects, such as pulling the telegraph along with it toward the West and also leading to the creation of four U.S. time zones, which we, of course, still rely on today. Prior to this more consistent timekeeping, essentially, most major cities kept their own time, which is, suffice to say, not very accurate in terms of logistics. And, you know, the last point I'd mention is it took some time, but amazingly, the railroads were able to pay off all of that government debt, the loans in full plus interest.
So, you know, looking back, it was really a terrific investment for the U.S. government. Hoffman Yeah, just hearing about this, Nathaniel, it's quite amazing you think about the sheer impact the railroad had to the westward expansion of the U.S. and everything that goes along with that, and do highly encourage our listeners to read further into the history within the report, a lot of neat infographics included within as well. Though, Kurt, you alluded to this a bit earlier in your remarks, when you think about the technological disruption caused by the transcontinental railroad at the time, what comparisons can be drawn to technological disruption being witnessed, experienced in modern times?
Kurt Yeah, so the completion of the transcontinental railroad, and by the way, it was decades before any other country that had to connect coasts the way that the U.S. did in this case, undertook their effort. So this really was like the first example of the U.S. going all in on a new technology, and well before any other, I mean, it's a limited number of cases, right, because it's transcontinental, but we were first movers on that. The locomotive wasn't a U.S. technology that was imported from the U.K., but the Eureka was the connecting of the coasts, and as Nathaniel said, the manifest destiny of exploring and settling this territory.
It's not the first, it may have been the first time, but it's not the only time that the U.S. has gone all in. You can think about, it's pretty evident with fiber optic cable in the 1990s. It's true of AI today, and so tracking capital expenditures, I was talking to my family about the report, and I said CapEx, and they said, what's CapEx?
So I don't say CapEx anymore, but capital expenditures, just think business investment on railroads would rise to, this is astonishing, 6% of GDP. I mean, it's astonishing the level, it's also astonishing that we were able to find the data that showed this. I mean, going back to 1871, before it then, I guess, is it inevitable, but it collapsed in 1872 in a railroad panic, and it's all because supply got ahead of the demand, the supply of railroad.
Duplicate tracks even started to emerge in certain parts of the United States. There were issues of connectivity between the rail lines. Erie, Pennsylvania, an interesting story in the report, is where two different rail gauges met up.
I don't remember the exact dimensions. I think one was six feet in New York State, and the other was four foot 10. That's a problem.
It's a problem. Yeah, it's a problem for the railroads, but it's not a problem for the residents, because their job was to transship the goods, the transshipment. We talk about that with trade wars today.
The OG of transshipment was back in the moving of people and products from one train to another in Erie, so you can just imagine the uproar and the protest when they tried to standardize the standards. We're all talking today about standard setting, and that's ongoing with any new technology. Just to think about the historical example that we have with people who were dependent upon that, and what would be the new job that would emerge for them when their jobs were displaced by the standard setting.
Of course, always new jobs do, but there's that patch of time in between that you have some uncertainty. Despite the collapse in CapEx and business investment in railroads, it would recover, and there would be another panic that would come in the late 1800s, but it didn't go away. Railroad stock prices also were fluctuating quite rapidly in those early years of the transcontinental railroad, but those would also eventually continue to rise.
What I found interesting was, and of course also that you can find this information, but there's a data site that kind of tries to track the New York Stock Exchange, various sectors and subsectors. If you look at the railroad equipment stocks, so relevant today when we think about do you buy the chips or do you buy the power that powers the chips, it was the railroad equipment stocks that massively outperformed the broad market from the 1870s through the end of the century, even outperformed the railroad stocks, which kind of tracked more the overall market. That's a lesson that we could possibly take away.
Then there's really a big difference today in the AI build-out from what we saw with fiber optics and railroads of yesteryear. That is that AI data center infrastructure is going to age much more rapidly than anything you would have ever seen in fiber optic cable, which is still being used today, and railroads. This is a long-life asset, and the asset of the best chip set that you're going to use to power AI is going to have measured in years.
That might even be generous. Those are some of the lessons, some of the parallels, things we thought about, just to help with thinking about the current context. Well, very interesting, Kurt, to hear about those parallels and Nathaniel hearing about the evolution of the industry as well.
I'm curious, Nathaniel, what does the modern U.S. railroad industry look like in terms of its present-day economic footprint, impact, and the evolution as we look ahead? What does that look like? How do you see this industry growing from here?
Yeah, absolutely. It's a very exciting time to be talking about the industry even today, which I'll touch on in a moment. I would say at a high level, a lot of it functions very much the same.
We still have trains hauling coal, hauling consumer goods, lumber, chemicals over long distances. It's happening at a very significantly lower cost per ton-mile than you can get with trucking or air freight. The industry is still, even though it's privately owned by corporations, it's still a uniquely public asset, I would say.
These companies, as I mentioned, were funded by government initially, and they are common carriers today, so they're legally obligated to carry freight at reasonable terms. Labor strikes can be settled by Congress, as we saw as recently as 2022. It has a regulator in the U.S.
Surface Transportation Board, so very much a national asset despite the private-corporate structure. As Kurt alluded to, this is an exceedingly mature industry. We're more than 150 years into this.
Railroads are almost at an end state. What I mean by that is that we essentially have regional duopolies. We have two major railroads in the western U.S. and two in the east.
We haven't necessarily solved all those problems that Kurt was talking about. We still have railroads that meet in Chicago, and freight has to transfer by truck to get on the other railroad to go further west or vice versa. Crews are not so interchangeable.
Railroad assets are not so interchangeable between these companies. We're still dealing with many of those similar items. The business model is very unique.
Because these networks are already built, these are 100-year assets, essentially, the operating leverage of these companies is exceedingly high. I think people are quite surprised and amazed when I tell them that the operating margins for U.S. railroads are above many U.S. tech companies. We look at Microsoft.
It's on par with that. That's because of the tremendous operating leverage that these significant fixed assets provide. In terms of what drives the companies today, it's still very much linked to trade flows and domestic production.
How much freight is moving across the rail? A very significant amount does still in the U.S. I'd circle back to what I said earlier, that this is a phenomenal time to be talking about this because the largest railroad by market cap, Union Pacific, is trying to acquire an eastern rail to create the first truly transcontinental railroad.
This seems like a very unique time to be pursuing this. We have an administration that's likely a little bit more amenable to it than past administrations. This will be tied up in regulatory review for some time.
So this is something that may be toward the end of 2026 or early 2027. But it's very possible that we end up at the end of all of this with two large transcontinental railroads in the U.S., and it's hard to imagine it consolidating much beyond that. This is an industry that started with some peaked around 1,500 different railroads in this country, and we may be left with fewer than four, depending on how this regulatory review goes.
So I think that's a nice bookend to this whole saga that we've really charted the path from, I won't call it the end, but from beginning to a potential final state. And maybe just wrapping up with one tidbit that we thought was super cool. Just after we published our report, the CEO of Union Pacific News Reports published a quote that said that he hoped to run a 1940s-era steam engine across the country to celebrate the nation's 250 years.
So just a terrific capstone to this report and all of our conversations on this front. It's a fascinating history, a very impactful history, and it sounds like some very interesting times ahead. I will say, as an almost daily rail rider on Metro North, it feels like a home away from home at times.
I look forward to reading further into this publication on the rails. Kurt and Nathaniel, great catching up with you both. Thank you for dropping by and sharing this story with our listeners and clients.
I really appreciate your time today. It was a pleasure. Thank you.
Thanks, Dan. Good to be with you. to the UBS chief investment office's investment views are prepared and published by the global wealth management business of UBS AG or its affiliate UBS. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only.
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