The Next 4 Years

UP Follow up

In my last article , I highlighted the anomaly that runs counter to the story that UP’s service has been great under Vena.? I haven’t run the numbers in a while on the basic service metrics, so I decided to round out the analysis by doing those.

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In terms of the traditional AAR service metrics, UP is actually performing worse than they have the last several years.? However, if you look at the Vena metrics, such as car velocity and run-through dwell, the opposite is true.? I’ve always been skeptical of the AAR metrics and UP’s new ones make sense to me.?

Which ones are more important?? RTMs and Carloads.? If a railroad isn’t performing well, it will show up in the outputs eventually.

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Capital and Investment

You can think of a company as a money printing machine.? The goal of these machines is to feed 1 dollar in and get 2 dollars out.? Entrepreneurs like myself dream up, design, and build the machine.? We look at underserved markets and try to find more efficient ways to serve those markets.

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Some machines, like Hum, are very young with a lot of room to grow.? Some are very old, like a railroad.? Each requires a different amount of invested capital relative to the other in order to maintain and grow.? Importantly, every company can only absorb so much capital productively.

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You can also look at national economies in this way.? Young, emerging market economies are like startups while older, more established economies like the US are like blue chip stocks.? There are different ways to build the machine, different inputs that some economies can use more productively that others, but the end goal is still the same: Turn 1 dollar into 2.

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China is like a new tech stock that IPO’d relatively recently (2000’s).? Its GDP is still higher than a mature economy (typically 1-3%), but real GDP peaked in 2007 at 15% and has steadily declined to 5% today.

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The Chinese have struggled since that peak to find productive uses of capital.? The reasons for that are lengthy and outside the scope of this article, but massive housing developments (Ordos Kangbashi) featuring endless, empty apartment buildings are great targets if you have prolific steel and concrete industries looking for a home for their products.

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Which brings us to the recent presidential election.? What do Chinese domestic investment and US politics have in common?

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The 2024 Presidential Election

I’m starting to come around to the idea that US industrial policy matters very little so long as China and other trade surplus countries continue to dump their excess production into exports.? During COVID, the US woke up to its dependence on China’s manufacturing base and its own lack of one.? Despite that shock, Chinese exports have only continued to rise dramatically.

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President-elect Trump has ridden a growing wave of populist sentiment on the back of a very pro-protectionist agenda. He has repeatedly extolled the virtues of an expansive use of tariffs in an effort to stimulate the growth of the American manufacturing base.? During President Biden's administration, he signed into the law the CHIPS act to encourage domestic semiconductor manufacturing along with EV and green energy subsidies to spur on production.?

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Yet all of these measures are like putting 1 dollar into the machine and getting 50 cents out.? These are not productive investments in the light of unfettered access to US capital markets where foreign capital pushes out domestic capital.? Have you tried to buy a house recently??

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Until China and other surplus producing nations reduce their exports, and by association their capital accounts, the recent surge in US industrial policy by any administration will matter very little.

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Setting aside that undeniably important fact, let’s look at what the impact of increased tariffs would look like.? Jason Miller has done a great job showing many of the negative effects of tariffs while others like Oren Cass have offered substantive counterarguments.? I’m still undecided on their overall impact (most likely inflationary at least in the short term), but I think about it in terms of the butcher’s meat cleaver vs. the surgeon’s scalpel.

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If President Trump imposes tariffs indiscriminately (the Meat Cleaver approach), it’s likely to just shift imports from places like China to other foreign countries like Southeast Asia (Vietnam, Indonesia, etc.).? While it would be interesting to see how China responds, given they’ve just instituted another round of supply-side stimulus for their manufacturing economy, blanket tariffs would likely see little production brought back home and just lead to higher inflation.

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If President Trump imposes tariffs more selectively (the scalpel approach), such as the 100-200% tariffs on Mexican-originated automotives, that would be a significant incentive for increased domestic manufacturing investment.? The problem that the Trump administration will face if such a tariff is enacted, is, again, inflation.? A lot of it.

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Tariffs can be (and have been) a very effective tool used to grow national manufacturing production capacity.? The United States used it to fund the government up until the income tax was instituted in the early 20th century.? Especially during the railroad boom of the 2nd half of the 19th century, the US greedily soaked up European capital for domestic industrial production investment while limiting the ability for foreign imports (grain especially) to displace domestic production.? It’s hard to see the US becoming the manufacturing powerhouse it was in the first half of the 20th century without that protectionist regime.

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But we live in a different age than the time of the robber barons.? The US dollar is the world’s reserve currency, which is both a blessing (reduced borrowing costs) and a curse (running massive deficits to balance global payments).? US domestic consumption and investment are weak.? We still soak up the world’s cash, but that largely goes into assets like equities and real estate. ?

This is also why rising wealth inequality in the US is really a story of the haves (asset owners – stocks, property) and the have nots.?

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Going back to my original theme of productive investment, because the US is a mature economy it is difficult to find productive uses of capital (i.e., put 1 dollar into the machine and get 50 cents out).? Global corporations haven’t had any problems generating cash.? In fact, US companies account for two-thirds of global market value.?

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Warren Buffet has been shedding his stake in Apple to the point that Berkshire now holds $300B(!) in cash.? Add that to the cash holdings of the major tech stocks ($300B) and there is more than half a trillion dollars in cash just sitting on the sidelines.?

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As an aside, one notable benefit a pro-business Trump administration might bring is reduced regulation.? I was at the DFW lunch last week put on by the great Blake DeNoyer and a couple guys in rail construction at my table made the point that permitting is the biggest delay to their construction projects, specifically Army Corps of Engineers water and EPA air permits.? Simply reducing the time it takes for these permits to get reviewed reduces the overall investment threshold for infrastructure and production projects.? All else equal, that should see both an increase in investments and a higher realized return on the investment.

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Weak domestic consumption is the biggest problem faced by President Trump.? You can raise tariffs all you want, but the real problem is the lack of wealth retained by households, particularly the middle class which saw its real income grow only 0.2% in 2023.? In other words, wages are suppressed with businesses taking a larger share of revenue than workers.? As I wrote about in “Too Big to Suck ”, the shift in power from Main Street to Wall Street that began in the 1960’s and 1970’s has continued unabated to today.?

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To truly offset this imbalance means a significant structural (societal) reorganization between the haves and have nots.? You can look no further than last week’s election results to see that President Trump’s coalition was primarily less educated, minority, and young male voters. ?You would think that group are the bulk of the working population in manufacturing jobs.? Economic and immigration were also the two biggest issues for those who voted for President Trump indicating that things like household wages aren’t up to snuff.

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I think it goes without saying that Republicans have 4 years to make gains in that area if they expect to retain the White House in 2028.? Otherwise, expect another change at the top.

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Focus on Rail

Now let’s look at how the next 2-4 years could go for the rail industry.? A change in administration means a change at federal agencies like the FRA and STB.

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Without a doubt, current FRA administrator Amit Bose has prioritized the needs of rail labor over the railroads.? From passing the two-man crew rule to fighting with the Class 1’s on track inspections, most decisions have been in favor of rail labor.? It’s hard to see that continuing, at least to the same extent, under a new FRA administrator.

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Currently, Sam Graves, the Missouri Republican who’s the chair of the House Transportation & Infrastructure committee is the favorite to replace Pete Buttigieg as Secretary of Transportation and has already met with President Trump’s transition team.? Graves is a well-known railroad supporter, so we should expect a DOT that looks on railroads far more favorably than the current administration.? I would expect a pro-railroad FRA administration a la Ron Batory who removes roadblocks towards railroad interests like automated track inspections.

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However, President Trump has done more to cater to labor unions than any Republican president in my lifetime, even going so far as to bring the Mayor of East Palestine and the President of the Teamsters Union to the Republican National Convention.? Should more rail labor friendly policies get attention from his administration’s FRA, it is possible that Trump could pressure Graves and a new FRA administrator to acquiesce.? My guess is that it would have to be more consequential or visible than something like expanded automated track inspections, however.

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For the STB, there’s currently one empty seat open.? Here are the remaining board members with the expiration date of their terms:

Robert Primus – 2027

Karen Hedlund – 2025

Michelle Schultz – 2025

Patrick Fuchs – 2029

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That gives the Trump administration the opportunity to appoint or reappoint up to 4 members, although it’s not unlikely that Robert Primus’ seat could be vacant rolling into the next President’s administration in 2029.? That undoubtedly will give railroads a firm voice at the STB, assuming Republican appointees follow historical principles.

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Overall, this is probably a railroad friendly regulatory environment for the next few years, but that assumes that historical norms hold.? With President Trump, that is anything but the case.?

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The most important indicator for the next 4 years right now may be who the Senate majority leader is.? If John Thune wins, expect some more traditional Senate independence.? If Rick Scott wins, President Trump will largely have his way in terms of appointments and policy.

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One thing is for sure, the next 4 years are going to be eventful!