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Hello and welcome to another episode of the oddlocked podcast.
I'm Joe Wiesenthal.
And I'm Tracy Alaway.
Tracy, you know, we've been talking about supply chain and logistics questions for years.
And it's nice because we're now starting, you know, we talked about the bullwhip effect,
big-time theme, but we're actually starting to see like the opposite sides of these cycles
in pretty extreme degrees than the last than the first time we started covering them.
Yeah. Well, for those who don't remember one of our favorite things ever,
the bullwhip effect is this idea where you have these small changes or sometimes large changes
in customer demand. And that sort of ripples through the rest of the supply chain.
So all the way through to retailers and suppliers and manufacturers.
And it feels like we are seeing, as you said, Joe, the reverse of some of the first ripples
that we saw. So if you think back to the pandemic, there was an expectation that people weren't going
to buy anything. And so we had a lot of retailers and manufacturers who cut back.
But in actuality, people who were stuck at home did end up buying quite a lot.
And so everyone had to scramble to get things to them. So to produce the goods that people
actually wanted at that time, we saw inventories start to build up. And now there's the question
of whether we're seeing all of us go into reverse. Yeah. And, you know, we're recording this on
May 2nd. And I was last week, I was spending a lot of, both of us were spending a lot of time
reading through earnings calls. And a lot of my interests were sort of like on the inflation
consumer pricing standpoint. But basically every company I saw said, like the one area where they're
definitely seeing easing is in freight costs. Yeah. They all said that.
Although, you mentioned pricing and this is something that we've been covering for, you know,
that we've been interested in for a while now, but this idea of price over volume. And if companies
are sacrificing volume in order to jack up prices or making that up with price increases,
then it suggests there are fewer goods moving around, right? That's a really good point.
You would think would be bad for the companies that actually move and ship those goods.
I think it definitely has been. And I think if you look at the lines of any sort of truck or
freight pricing index and also ocean freight, it's pretty far down. So we're going to dive into
what's going on. We know the lines are down for freight pricing, but the question is like,
how much of this is a trucking or freight specific story over supply leading to under supply leading
to over supply of capacity versus something that says something about the broader economy?
We have two guests are friends from freight waves. We have Craig Fuller, founder and CEO of Freight
Waves, who we first talked to, I think, two years ago, and Rachel Premack, editorial director of
Freight Waves, who recently wrote a piece declaring trucking bloodbath 2.0. Thank you both for joining
us. Rachel Lee, what was trucking bloodbath 1.0?
Rachel Lee Yeah, so in 2019, the trucking industry went into a recession,
really as a result of a lot of these Trump tariffs, a lot of manufacturing in the US started to
really slow down. And as a result, that caused this slowdown more broadly in trucking. This
bloodbath we're seeing right now is more on the, I would say more on the consumer side rather than
strictly on the manufacturing side. But yeah, just generally when we see these big drawbacks in
various industries that results in drawbacks in the trucking industry as well.
Rachel Lee Yeah, so this is a notoriously cyclical
industry. And I'm glad we started out with trucking bloodbath 1.0 because that kind of encapsulates
the idea. But what are we seeing in terms of the data now? Because there are all these different
cool charts that Freightwaves, especially puts together all these different things you can look at like
the outbound tender rejection index, things like the contract load accepted volume index. Walk us
through what you're seeing in terms of the numbers.
Rachel Lee Yeah, if you look at what's happened in the trucking industry, and this also happened in
2019, so not only did you see a slowdown in volume related just for the industrial economy,
but you also saw an overbuilt of capacity. So there was an ELD mandate which really regulated
the longs, how many hours the driver in the monitoring of those hours the drivers could have in the
truck. And because everyone expected a massive capacity crunch, the opposite happened. The market
corrected and actually a large capacity build happened in the industry. This also happened during
COVID is that there was a massive shortage of capacity. And everyone sort of thought, hey,
I can start a trucking company. I can become a owner operator. I go out and buy a truck and they
just flooded the market full of capacity. And what we have is a situation where
really over the last, since 2018, we've seen 28% increase of the dispatchable capacities. We've
seen a massive surge in trucking capacity over the last just year. There's been an increase as much
as 8% of the dispatchable capacity in the market. So the situation where it's completely flooded,
there's so much capacity out there. And because trucking is a capacity constrained market,
the market, the providers of trucking, the trucking companies in the fleet of operators
are always trying to add trucks to sort of match that demand. What happened is the market just
overcorrected. Classic commodity of boom cycle that has now played out. The tender rejection index
that you mentioned measures the percent of freight that is rejected. And the reason that's
important is it helps us measure the balance of supply and demand. So looking at volume
is only one aspect of it, but you also have to look at capacity to understand
really the metrics of the industry. And so we look at the tender rejection index because what it tells
us is how many loads are getting rejected. So think about an airline. You have an airplane
and there's a finite number of seats. Well, everybody who's ever been on an airplane knows that the
airlines want to overbook that aircraft. That's the goal. Anybody that runs a hotel wants to
overbook the rooms. And they're going to intentionally bump some players in that market.
And the same thing happens in trucking is the trucking companies will overcommit to
capacity versus what they can actually handle knowing that at times they're going to have to
reject some freight. So back in the peak cycle, a year ago, we saw rejection rates as high as 30%.
So that meant 30% of all truckloads in the market in the contract market are being turned down.
That rejection rate right now is about 2.7%, which is the lowest it's ever been outside the
COVID extremes. And it just means the market is completely flooded with capacity.
And Craig mentions an interesting point, which is that in 2018, there wasn't enough trucking
capacity. It was a really hot time in the trucking industry. And that followed. And as a result,
a lot of new players, new employees of these trucking firms started to flood the market.
And as soon as that capacity really started to ramp up, of course, that demand for trucking
services also declines. The same thing is happening this time. There was an incredibly hot market in
at the end of 2020 through 2021, even beginning of 2022. And yeah, basically, these really hot
times follow these incredibly slow times. And a lot of this does relate to sort of how we talk
about the trucking industry. There's a lot of talk of a truck driver shortage. And when you
keep hearing, oh, there's a shortage in this industry, I should jump in. I should make a quick
buck. I should really profit off of this too many folks get in and pretty soon after that,
what goes up must go down. So you mentioned the sort of like analogy to airlines, but I think
like the key thing there and sort of why we get these cycles that are sometimes like
economic cycles magnified is that you can't just add new airline capacity trivially. Whereas I
think the first time we did a trucking episode like we joke, should we start a trucking company?
Should Tracy start a trucking company? And the lesson is like, it really is that simple to get
into the space. There's no bearish to entry. So you think about, so a truck today probably cost
brand new trucks 200,000 a used truck can be anywhere from 50, 60,000 to relatively low mile
truck of three to five years to $100,000. And so it's a situation where the banks are happy to
lend a trucking company because they have this perception that truckings always needed. And
because they believe that there's a perpetual driver shortage, they increasingly provide capital
for would be on our operators to go out and stretch on trucking company.
And because of the proliferation of load boards and digital matching apps, it's never been easier
to actually access freight and access the brokerage market. And so what happens is that you have
new entrepreneurs that look at it and say, hey, there's no real, I don't have to be that sophisticated
to run a business. This isn't required. It's not a very complex job. And it's incredibly easy to
get started. And so when they see the fundamentals of the market really heat up like it was over
the last couple years, you know, really during COVID, during the COVID peak cycle,
they get very attracted to those markets. And they're thinking, you know, you think about the fact that
we're talking at the peak $4 a mile and to put that in perspective, a truck will do approximately
2,000 miles a week. So on four dollars a mile, we're talking about somebody making approximately
$3,000 to $3,000 to $400,000 a year. And without any kind of formal education required. And so
it attracts a lot of folks that look at it and say, hey, I can make a lot of money. I can do very
well for my family. There isn't any sort of requirements of tenure to get into this industry.
It's a, you know, it is a trade. And it doesn't require a lot of sort of understanding of how
the market is constructed. So it tended to attract a lot of folks that really weren't cut out or are
not cut out for us with the down cycle. And that's what we're seeing right now is a situation where a
lot of people were attracted to the peak of the market that went out and bought the expensive trucks.
You know, those trucks I talked about that were that are used where sort of pre-cycle could have been
$40,000 at the peak of the cycle, those same trucks that were five years old at 40,000 pre-COVID
were going for 140 to 150,000. They were actually going for more that were five years old than what
you would have bought a new truck pre-COVID. And so they bought at the top of the market
and they anticipated that $4 a mile rate staying in perpetual. And we're not prepared for the
downturn, which we're facing right now. Wow. So just on this point, I mean, it is true that we have
seen a lot of the smaller players, the independent owner operators start to get out and take capacity
out as evidenced by the truck prices that you just mentioned. And I guess people giving up their
licenses, I think it's called Revocations and Trucking Authority. And you'll have to take me
through the latest numbers on those. But at the same time, it's true that we've seen some of the
really big players add capacity. What's going on there? Is this just like a market share grab or
are people really scarred from the previous couple of years where there was so much demand that they
were kind of struggling to catch up with? Yeah, the problem was through 2020, 2021, early 22,
most of 22 really, that usually these large fleets prefer to buy new trucks. They don't usually
prefer to buy used trucks. Obviously through the early 2020s, there was no manufacturing capacity.
So these large trucking fleets, these large public companies, they were not able to expand
capacity. Now on the one to five truck fleet size, we saw that portion of the market really start to,
you know, boom, in the early 2020s, large fleets on the other hand grew by maybe their capacity.
We had like one to four percent, I believe was the number. So yeah, basically what's going on now
is there are too many of these small players in the first quarter of this year alone. We saw
9,000 trucking fleets have their authorities revoked at the same time. These large fleets are
pretty rapidly expanding, pretty rapidly hiring. That's kind of how the market is
shaking up right now. And it's not just access to trucks. So trucks is one thing, but it's also
the driver. The driver population is really the capacity constraint. So, you know, truck
manufacturers can continue to produce trucks. And if ultimately if the larger carriers felt like
they had demand, they could bid up the new trucks and sort of they have a lot of power over that.
The problem is that if they can't get drivers to populate those trucks, they're not going to go
out and buy new trucks. And that's what really over the last couple of years, if you should look at
the COVID cycle is, you know, from 2000 late 2020 to really 22, they could not get new, could not get
truck drivers. They were losing a lot of drivers to the owner of a rental market. So a driver
saying, Hey, I'm making 50, 60, 70,000 hours a year. And over the truck driver says, Hey, why am I
not making the 200 or $400,000? So they went out and started their own trucking company. And
those trucking companies dealt with what we call unseated trucks was there isn't a driver.
So they had their own sort of driver shortage inside their operation. And because of that,
really what we end up with is a situation where they did not grow in the early part of the cycle.
And now because of the conditions in the market, a lot of those would be or had become
owner operators or would be operators are now joining fleets. And that's enabling the larger
companies to grow market share. Just real quickly, before we move on, and I forget to ask, at the peak,
it was an average, what $4 a mile? What do we, what's the latest freight wave stat on this?
Yeah. So if you take out that four dollars a mile, by the way, includes fuel, if you take out fuel,
add that equations is about $3.20 a mile at the peak. But if you look at it from sort of net of fuel,
you're around $1.56 a mile. So we're talking about rates going down more than half of what they were.
And there's a really important factor in this, just like your own income is a lot of the,
the rate per mile only tells you what the revenue is. It doesn't tell you a lot about the cost
components. And so one of the things to look at is the cost components. And we go back to that
last quote unquote bloodbath, the freight recession that happened in 2019, the lowest rate ever
painted in our data was a dollar. And this is net of fuel, a dollar 47, we're at a buck 56 today.
So you think about a nine cent increase. That sounds on the surface. Okay. And so you realize
that the operating cost of trucking companies, and I'm netting out fuel, not including fuel in this
equation, but the operating cost of a trucking company is increased by 30 cents a mile. So if you
look at the net increase or the net decreases, we're talking about a situation where fleets are
actually in a worse situation than the lowest paint in 2019 by 21 cents a mile for every mile they run.
And that's just when they can get freight, a lot of the other sort of thing that isn't
factored into the rate, because there is a point where carriers will just not take a load if it's
below their operating cost. There's just not enough loads out there. So there's a combination of not
enough demand combined with very low rate environment, which means it's pretty dire for a lot of these trucking companies.
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We've been talking a lot about the idiosyncrasies of the actual trucking industry. What are we
seeing in terms of demand? Just to go back to our original framing of this episode, which is
the trucking bloodbath 2.0, how much of that is about the general economy and maybe demand for goods
actually finally going down or companies needing to run down their inventories versus these industry
specific issues that we've been discussing? Demand is approximately 2019 levels right now.
It depends on your perspective. If you look at four years of, if we went through an economy
where it didn't grow for four years, because remember, trucking is directly correlated to the
goods consumption of the economy. When trucking does well, or the economy does well, trucking
will do well. When trucking is not doing well, it reflects on the conditions of the goods economy.
But if you think about the fact that we're back to 2019 levels, that would suggest a normal
economy for the COVID happened that we've basically lost three years of growth.
We're in a situation where 2019 levels in terms of volume combined with a real surge in capacity.
As I mentioned, you're up 28% from where we were just in 2018. 2018 was actually a slightly
better market by about 3% above 2019 levels. We're in a situation where now we've had so
much capacity added, so much cost added, and volumes are basically back to where they were
in 2019. We're in a situation where there just isn't enough rate. I think really warns us that
trucking will lead the broader economy by as much as six months. You saw this last year. We
reported in the free recession on March 31st. You got a lot of pushback on that, didn't you?
A lot of digital. I seem to remember. A ton of it. The reason is that a lot of the data
that people look at through traditional models and trucking are based on lagging data. We use
what we call height frequency data, which refreshes every day. It looks at the demand
real transactional data from shippers to carriers as one of the core data sets.
Well, that data is way upstream. It leads the broader government data to traditional models by
about six months. You can actually look at it. We called the very early part of the cycle in COVID
as early as mid-April of 2020. At the point, somebody on Bloomberg TV actually called me the most
bullish guy in America at one point because we were incredibly bullish about the V-shaped recovery.
It was really throughout the summer of 2020. There was a lot of vitriol directed at us because
we were very bullish. People couldn't understand how you could be so bullish when all the economic
data was actually very soft. The reality is that the data we look at, the height frequency data,
leads those indicators. When you think about it from the perspective, what does this mean for
the goods economy? I'm only talking to the goods economy. I'm not talking about broader GDP.
Proxima, 40 percent economy that's reliant upon trucking services to move their products.
It does suggest that the US goods economy is continuing to slow and it doesn't bode well for
really the indicators. When we saw that last year, we called the freight recession and the
first quarter. It was six weeks later when all of the big retailers came out and said they had
too much inventory. Yeah, I wanted to ask just on this point, when it comes to the goods economy,
are you seeing specific areas of weakness? Is it those who were most affected by the bullwhip effect
in 2020 and 2021? Is that where demand is really slumping? It's anything really related to consumer
outside of auto. Auto, just because of the lack of being able to get access to new cars,
because they couldn't produce them, because of shortages of products. The auto has actually
been quite resilient even today in terms of freight demand data. If you look at anything
exposed to consumer, that's where you're seeing particularly weakness. Consumer package goods,
Rachel's written about the cardboard box industry actually having...
We've never done a cardboard box. We should do that. We should do that. Other types of boxes.
So we just... Yeah, we should do a... So we actually brought on an analyst who used to be at a bank
who's an analyst that studied the packaging and cardboard industry. He's now part of the
Great Waste team and he's... It's interesting how tightly correlated carbon... It shouldn't shock
anybody. It looks at the economy, but how tightly correlated the packaging and cardboard industry
is to trucking cycles and how much they match. So one of the things that was really interesting
is back in January of this year, we actually thought that the freight economy was starting to
recover, because it looked like some green shoots in January. We injured the first quarter thinking,
hey, maybe the freight recession is over with and the fourth quarter was the bottom of it.
The cardboard box, the packaging industry, saw the very same thing happen in January where they...
All of a sudden said, wait a second, maybe the softness that we saw is actually over with and
maybe we're starting to see it recover. Well, they saw the same thing in January and then in
February, it got worse and in March ago, it was in April, it was so bad. It's so bad for trucking.
So what's really interesting is that January thus far has been the best month in trucking and in
the packaging industry. That is an unusual development. Usually January is one of the worst months of
the year, and it's just not happening this year. I'm talking specifically volume. We talk a lot
about capacity. It's an important part of our industry. But as you mentioned, Tracy, it doesn't
really tell you a ton about the broader economy. But what we do know is that volumes are basically
perverted back to where they were pre-COVID, largely because retailers have so much inventory.
Another thing that's definitely challenging or confusing volumes right now is these massive
floods we're seeing re-reasonally saw in California. That's throwing off the harvest season typically,
I think it was late March, early April, that's typically when we start picking lettuce, strawberries,
these other sorts of ground crops. But those fields were so flooded that people couldn't even get into
the fields to pick those crops. That sets everything back a few weeks. Planting a setback a few weeks,
all these sorts of things are just thrown into chaos. A lot of truck drivers view
it's called 100 days of summer. That's really the hot time in the trucking industry, especially for
reefer carriers that haul these refrigerated goods. Drivers who are really hoping for this hot
period, basically right now, are finding that things are just thrown into chaos and that kind of
dependable volume is not happening. Rachel, can I back up or actually move 90 degrees for
a quick question? Did I see something recently, speaking of floods that the barge crisis is back
except this time there's too much water? New barge crisis. What's going on with the new barge
crisis? We did that last summer, it's like, oh, there's no water. What's happening now?
Basically, Mississippi river levels are incredibly high and this also screws up the
barge and the martian shipping. It's not quite as drastic as it was in the fall because the fall
is when all of those crops are moved out and all of those crops are peak harvest season for the
midwest. You're trying to get all that weed out, especially to foreign markets. It's not quite as
bad as last year because the timing was so bad last year. I don't know what's going on with this
river. Anyone who says supply chain is boring has not been listened to the odd last podcast.
Thank you guys. It featured how incredibly volatile and sensitive these
notices. I don't know how. Yeah, you would say that. Supply chains are endlessly fascinating.
Okay. So just crazy people say that. Okay. So just going back to the trucking bloodbath idea,
I guess two interrelated questions, but do we have any ideas of how extreme this cycle could be?
Would we expect it to be worse than 2018-2019? And then secondly, how will we know when it's over?
You talk about high frequency indicators. What should we be looking at? Yeah, the tender
rejection data is going to be the first indicator because that is actually highly sensitive to,
remember, it's basically orders that come from large retailers, large manufacturers are sending
these transactions electronically to trucking companies and they're going to either accept
or reject those loads and it happens within two days or two days from pickup. So they will get a,
big bucks. We tell them Walmart sends over a transaction to a small trucking company or a
big trucking company in the contract market electronically that tender data will see that
and then look at whether or not the trucking company accepted or rejected it. So you'll start
to see the tender rejection data will start to basically turn around and you'll see it accelerate
if there was a situation in the market that suggested that capacity was starting to tighten.
We're not seeing any indications of that. There's zero even as volume has, we've seen in the last
week we've actually seen volume increase. We've seen some really sort of strange, I call many
surges that look like there may be a directional change. Could be seasonality, we didn't see it at
all in April as Rachel mentions as things heat up, garden equipment, construction, all of that
sort of drives, beverages, sort of drive freight demand. So we've seen some level of seasonality
in the last week which sort of has broken that down cycle but we've not seen anything in tender
rejection data which actually suggests that we're still in it for a while. And I think Tracy,
this is going to be, I think if you listen to some of the larger carriers they'll tell you it's
probably going to get better in six months. The second half will be better. I don't buy it. I
think this is a situation where it's going to take a while to get rid of all the excess capacity.
And one of the things that's really hard to sort of identify is how much capacity has been added
in the market because the government data while it's accurate, it's very lagged as ever, you know,
you on Musk would say the government data that the Fed's looking at is all lagged. And it's right.
And the same thing exists in trucking is it's not the cleanest data. So it takes a while to sort of
figure out how much capacity has been added and how fast it evaporates. But one of the things that
Rachel did in an article she did a week ago, it shows revocations. If you look at the chart of
the peak cycle, sort of peak during the COVID cycle, how much higher those increases of fleets in
terms of, you know, eight to nine thousand new fleets entered the trucking market a month,
we're only talking about two to three thousand a month right now that I've left. And that went on
for as much as 14 to 18, you know, 14 to 16 months of sort of peak increases. So we have a while
to sort of get rid of this capacity that's added. And that's assuming that the U.S. economy sort of
stays at this level and doesn't take another downward leg. One thing that I'm looking at and
really concerned about is what happens when those college loans and student financial aid payments
resume? Because one of the real sensitivities of trucking and freight, particularly in the
consumer side of the economy is consumption. And the people that are consuming products
tend to be those folks that in terms of just the impact on the market tend to be those folks that
will live, you know, that are younger and sort of live paycheck to paycheck. And so the sensitivities
of that will really impact the freight market. And so we could see another downward leg in
volume in the second half. And going back to your question on how bad this could be,
we saw during the last earnings call, the first quarter earnings, Shelley Simpson,
the president of JB Hunt, you know, one of the largest trucking companies in the U.S.
She said, you know, this market is reminding us of 2009. And that's certainly not something that
I've ever heard. I've never heard a 2008, 2009 comparison in the six years or so that I've been
covering the trucking industry. So to me, that's a pretty scary sign. I spoke to, you know, on the
other side of the coin, I spoke to a truck driver last week who shut down his authority after 16
years of being in the industry. He also kind of agreed that, you know, this could be a 2008,
2009 type situation, or even worse, simply because parts are so expensive and so
difficult to access even now. So yeah, just with that cost being incredibly high,
that's certainly something that's concerning.
Yeah, I was actually just going to ask you. So it's like, obviously, for the market to come
into balance, there has to be a reduction in capacity. And people have to tap out and say,
like, yeah, the economics is working for me. In the people that you speak to about why they're
leaving the market, whether it's drivers, whether it's smaller fleets, etc. What are some of the
reasons that they're saying or like, what are other commonalities? And they're like, yeah, I'm out of
this. Well, diesel and fuel certainly more affordable than it was last year. So that's, you know, a
positive tailwind for these folks. But the parts is definitely an issue increasing regulations as a
frustration. The fact that rates have greatly decreased. That's a big issue. A few of these
companies, especially kind of like the midsize fleets, they're seeing their contracts either,
you know, get pulled back or contract rates, you know, significantly lower. So it's both on the
spot market that is tends to be more dominated by these smaller players, as well as the contract
market, which tends to be dominated by larger, more established companies. So rates on both sides
of the equation are certainly lowering. And that seems to be the, you know, the big reason is
it's basically rates are too low to run. It's all cash flow at the end of the day. I mean,
ultimately, we can talk about insurance increases. We can talk about maintenance expenses. We can
talk about higher driver salaries, you know, think about just the cost of mechanics to hire
those and how much more of that sort of flown through. And this is like that other 30%. So when
you talk about like, okay, why is just even setting aside gasoline, operating trucks is 30% more
costly than it was at the bottom in 2019. These are the different. So maintenance is a big
increase, you know, parts are one side of it, but also just the fact that you can get access to
mechanics. There's a mechanic shortage across the country that can handle diesel and work on
diesel trucks. That's a big problem. You look at the cost of capital. One of the things that
remember is the trucking is an industry. It's a capital intensive industry. It actually has one
of the lowest returns on capital of any industry on the planet, but it requires a lot of capital.
A lot of these trucking companies finance their working capital and they finance their trucks.
Well, we've seen a pretty dramatic increase in cost. You know, one of the sort of crazy facts
of this industry is even if you sort of average the operating ratio, which, you know, operating
ratio reflects on the profitability. So it's an inverse of sort of profit, operating profitability
for a trucking company. So an operating ratio right now or on average is typically a 97 and
sort of the average for a trucking company. That means they're generating for every dollar,
they generate three cents in profit. And that is across the industry in a normal sort of cycle.
And so we're talking about a situation where the cost of capital has gone up so much. Many
of these companies just aren't even able to basically pay the debt and service their debt on
their equipment because their cash flow is down so far. And so that is what's causing them to
basically go under. Now, one thing I would point out is the industry got really financially strong,
balance sheets got incredibly strong because of the real robust operating conditions over the
last couple of years. So we have not yet seen a situation where a large or mid-sized carriers
are going out in mass. A lot of the revocations that Rachel has reported are really single operators.
They're the ones that are most sensitive to that. But I don't think we can call a bottom or we'll
call a bottom until we start to see some of these, you know, a real washout of very large companies.
And we've seen a couple of bankruptcies started in March. We started to see some sort of increase
in bankruptcies, a couple of 100 trucks at a time. I think there was at least seven or eight stories
of companies that had more than 100 employees that just suddenly shut their doors. We're not
seeing what I would call a sale. Back in 2019, we saw as many, at one time we were doing as many as
10 sizable bankruptcies a week with the largest culminating with a company called Celadon,
which is publicly traded, had 4,000 trucks and file bankruptcy. And so we're not yet seeing
a situation where there's been a wholesale washout in my opinion. And until we see that,
I think this is going to continue to exacerbate. I will sort of point out, you know, not only
as Shelley Simpson talked about the comparisons of 2009, I've heard people across the industry,
both small and big, have said this matches their, what they experienced in 2009. And one of the
things that did not happen 2009 is not only the inflation, but the freight brokerage industry,
this sort of cottage industry, it was a cottage industry back in 2009. It was a relatively small
piece of freight. It is exploded in terms of its percent of market share. This was going to be
my next question, what's going on with the freight brokers, you know, speaking of costs. And also,
this is one of the things we learned at your supply chain conference last year, the freight
broker model, as far as I can tell, seems to be an extremely lucrative middleman industry
with profit margins. I mean, we heard whispers of like 20% when we were in Arkansas last year.
I don't know if that's still true. But what's going on there?
So it depends on what part of the market they serve. So it's really interesting because freight
brokers have one of the highest return on capital in the industry. So trucking asset has the lowest
and freight brokerage and forwarding actually has one of the highest. And because they don't
actually own anything outside of computers and maybe some real estate, they're not going to just
suddenly go bankrupt. So they can downsize their operations. Their trading floors can,
just like you would see a trading floor at the Chicago Board of Trade in the old days,
this is what a freight broker floor looks like. It looks like a trading floor of a commodity,
because that's effectively what they are. And so essentially, they depend on sort of two
KPIs are really important to freight brokers. One is, what is the spread between spot and contract?
And that is actually as much as 90 cents a mile. It's the widest it's ever been in a normal cycle.
It should be about 35 to 50 cents a mile, but it's 90 cents right now, which means
the spot rate is going to continue to hold on that contract rate. But as long as that
that variance is so high, that delta is so high, then on a per transaction basis, the freight
brokers are actually making a lot of money. The problem is there isn't any volume for them.
And when you look at what shippers, shippers being the customers of these trucking companies,
the customers are freight brokers, big box retailers, manufacturers, etc. They want to do
business with people who have assets. They want to know who is hauling their load and they want to
make sure that it's not brokered out to somebody who's going to steal the cargo. Or you can't find
the cargo. So what's happening is now with shippers is they're saying, I want to work with the asset
base carriers. So a lot of that excess volume, that overflow that went from the large carriers
into the spot market and brokers sort of handled it, is starting to dry up for a lot of the freight
brokers. So it's a volume problem for them now. The spreads are incredibly high, but the volume
of transactions is actually quite low. And just to sort of explain what the freight broker world
looks like and how they managed to take these big margins, I actually shadowed a dispatcher
slash broker last week. And so you were on the trading floor. I wasn't a trading floor. He was
more of a dispatcher than a broker, but he has his broker license. I was able to kind of look at
that side of things as well. Basically, let's say, Acme clothing company says, someone needs to move
my truck who can, my load who can take it. A bunch of brokers bid, you know, I'll
bit take it for 1000. I'll take it for 900. I'll take it for 899. I'll take it for 898.
Lois Bitter wins. That broker then says, okay, I'm going to make $850 on this. They post on the
load board saying, who can take this load for $550? And then a truck driver is looking through the
load board trying to figure out their next job. They see this for $550. They call the broker. Maybe
they ask, hey, can I take this for $650? The broker says, how about, you know, $600? And that's what
they decide on. That's what the driver drives for. But that broker is taking that was at $250 in
profit. So that's what it looks like on the on the ground floor, I guess, of what this all looks like.
Yeah, remember when we were at the when we were at your all's conference last year, and we interviewed
Matt Payette that arrived to you. And then a few months later, I got to I went to arrives offices in
Austin. And it really is like a trading floor. What is it called? The Chicago model of, uh,
it's a Chicago model. Having the having the shipper side and one side of the room and the
carrier side and another side of the room. And they like sort of, you know, a wall. So one of them,
you know, one of them books the freight. Yeah. Right. And then one of them buys the capacity. So it's
one is sort of long in the market. Yeah, short and essentially a lot of the brokers, the reason
Chicago has proliferated is a couple of reasons, sort of foundational companies that sort of started
the Chicago model. But really the reason that it has been so successful is the model is they have
followed what the Chicago Board of Trade and the CME used to do is they would go hire people who
would normally go to the CBOT or the CME and go on trading floors. And as those things went
electronic, they realized, Hey, this is the same batch of people. So they started recruiting
the same way that somebody would normally go into the sort of the trade gets. They started
recruiting the same types of folks to go on to freight brokerage floors. And that's exactly what
they do. The difference is that a freight broker, you know, Tracy, you mentioned that the margins on
it, the margins can be, you know, 12 to 18% in a normal cycle depends on sort of what part of
the cycle we are. Some of those are as high as 20, 20 plus percent. This is why Joe and I went
from joking about starting a trucking company and starting a freight broker. But I don't mean
what I, you know, the more you're going to say that would be better. I know. But you know,
then I got the impression from method is like a lot of like X, big 10 athletes. It is all. Oh,
yeah. And so yeah, so it's like, that's not me either. Unfortunately, I also feel like the median
freight broker is like 25. It's a freight, right? They're very, it's a very bro.
It's a freight bro. It's a very bro culture. And it's a, I mean, it's a very dominated by men
typically is what you'll see in these businesses. And it's a very bro culture. Freight brokers as
an industry used to be a word, you know, that that represented sort of a very small sort of cottage
industry. And these have become massively big businesses. Yeah, they didn't exist just, you know,
a few decades ago. Yeah, it was illegal to broker freight. St. Robinson was actually now the largest
freight broker was actually a produce broker that fought to allow after trucking deregulated in
1980. They really fought to allow for brokers to exist in the market. And that really didn't happen
in 1985.
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guitareconomicforum.com to learn more. All right, we have to wrap up almost, but I have one last
question and there's so many more questions I have. But last question, Craig, you tweeted
something about load, fraud, intrucking, and how AI is going to amplify it. And I'm sure like,
you know, this is the start of many things. But what was that about? I was going to say,
we should just start a new segment. Every all-bought episode, we should just ask,
how is AI going to make this worse? But real quickly, can you just explain your concern here?
And one day, this will be a separate episode. But what's going on?
So load board fraud is a real problem in the industry. And what's happening is that
the brokers, because of the proliferation of broker capacity, the load boards effectively
are these marketplaces. But they're not really exchanges. And the way you would think of them
for financial exchanges, they're more like Craigslist, where a broker will post a load
and basically put it out into the marketplace. And ultimately, a driver will call in,
because they don't even do it electronically, mostly. But they will call in or email and say,
hey, I want that load and they'll do this negotiation process on the phone. Well, they come up with
a price and they pick it up. The problem is that the brokers that use those load boards,
the load boards don't regulate who's actually on their load board. So really, much like Craigslist,
it's a posting, and you sort of, you know, you may get a legitimate tracking company,
and you may get a legitimate tracking company. Well, there's been this proliferation of
illegitimate tracking companies that you have basically have gone out and registered
information that's faked with the government and the government doesn't regulate it.
And so essentially, what happens is the person that is accepting that load has agreed to a price.
They'll ask for what they call fuel advance, which means that the broker will advance the money.
And in a market like this, fuel advances are really important because drivers need to pay for fuel,
and they don't want to deal with the cash flow collection cycle. So they get an advance. And then
basically, that broker is fake and does not exist, and we'll just take that fuel advance.
That's one form of fraud. One of the emerging forms of fraud and double-rokering is that some,
so the broker, the fake broker, will then broker it out to another broker.
And what they'll do is a truck will pick up and basically, there's no chain of custody. So nobody
knows where that load went. It will pick up and go. Or you could have a situation where the broker
is colluding with a fake trucking company to actually go and pick up the load and then
walk out with the cargo so that the load never arrives at the destination, and nobody actually
knows what happened to that commodity and it's sold on the black market. So freight brokerage
fraud or loadboard fraud is a massive problem, and it's emerging as a big issue. And AI is just
going to proliferate that because now I'm no longer dependent upon humans to sort of execute this
fraud. I can actually do it. And right now, there's no oversight. And if there's already no oversight,
that makes me worried for the future. Well, the loadboards have the only part of the government's
never going to regulate this. And the problem is the fraud we're talking about is typically
a couple hundred dollars to a thousand, unless they steal the cargo. When we're talking about
sort of traditional loadboard fraud, it's so small and they're typically offshore operators
that the government is never going to investigate these crimes. And so because it's just happening
so rampant, that really it's the small carriers that end up really sort of taking it off.
Okay. So this is a new business model idea for us, Joe, instead of freight brokerage,
freight brokerage AI enabled fraud. It is a big booming cottage industry, Tracy.
Let's have a live outside the US. Let's move overseas first. Yeah. A lot of Eastern European.
And I think it's also like a lot of the folks that are proliferating in actually used to be
intrucking. There's been this emergence of offshore dispatch operations and offshore carriers.
Interesting. They know the system. And so what's happened is the market's gotten so soft
that they can't find legitimate forms of making money. And they realized, hey, this is a really
lucrative way to make money. And I'm not going to get prosecuted because frankly, it's an FBI's
the FBI's domain to sort of investigate these crimes that are overseas. And the crimes are
a mis- so misunderstood. Anyone who can actually understand how all this stuff works has got to
be in the industry for many years. Even as much as I know, I still learn something almost every day
about how different things work in the industry. So it's hard for the
authorities to sort of understand it, much less investigate it. And the crimes are so small in
terms of the dollar value. They just don't care. And so this crime is going to proliferate until
the load boards, the parties that manage these marketplaces until they actually put real systems
in place, it's going to proliferate. Very quickly. Is there anything that could be done
to reduce the cyclicality of the trucking industry and would it be desirable to reduce
the cyclicality of the trucking industry? Because on the one hand, it sounds bad if we're talking
about trucking bloodbath 2.0. But on the other hand, maybe it's a good thing that truckers can
sort of rapidly build up capacity and then rapidly wind it down as needed.
The number one thing that I think would reduce cyclicality in this three would be making it
harder to open one's own trucking company. This is not a point that will make me very
popular among my readers. I actually think Rachel, the folks that are in it would actually really
appreciate it. This myth of a driver shortage is proliferates because you read about that and
you're like, oh, I'm going to go start my own trucking company because it's always there. But I
think to Rachel's point, you have to cut off the supply of new entrants and the only folks that
can do that are the banks. So when the banks stop lending money and start financing new carriers
to get in the industry, that will restrict capacity. But let's just be frank here.
When the market turns back around and it's lucrative, the banks will again resume
lending money. So Tracy, at one point, trucking all transportation was regulated, pricing was
regulated. Amazon's business model, JIT-FRATE e-commerce would not be possible without deregulation.
I remember Rachel, we had you on to talk about this exact point.
So it is a situation where unless we were to see a re-regulation, which nobody wants,
it's just going to be a boom and bust cycle. We're just all going to watch this from afar,
or if you're in the industry, you're going to unfortunately be exposed to it.
Well, there's so much going on and there's such a fascinating time. I had not, I mean,
it's one thing to hear 2019. It's another thing to hear 2008, 2009, which I was not expecting.
Rachel and Craig, thank you so much to both of you for coming back on up. Thanks for having us.
Yeah. Tracy, always like talking, trucking. I think one thing that in addition to that sort
of mega cyclicality, the persistent inflation in the space, and so the fact that we're back to
2019 levels in some measures, but 2019 nominally is like, yeah, parts, mechanics, etc. It seems pretty
brutal. Yeah. I was also thinking we need to put together some of the data points that they both
mentioned, get like a series of charts going and take a look at that. I do think going back to the
big question, the sort of macro versus micro, it does feel to me like there are some specific things
about trucking, including the fact that the barriers for entry are still quite low that make what's
happening, maybe not entirely indicative of what's happening in the real economy. But also, when you
hear people talk about 2008, 2009, the slowdown in volume, which Craig mentioned, I mean, that is a
real thing that is happening. Yeah. I mean, it seems like it's obviously real economy rooted in their
art issues with demand. It's just that it's so it feels so magnified. Yeah. It's like the bullwhip
effect on the bullwhip effect kind of. I think that's really, I think that's really well put. And
then, you know, to Craig's point, it's like, we have seen some departures apparently from the
industry, but they're still at the small level where it's passed cycles bottomed with like,
serious like sort of medium sized carriers, including one publicly traded company a few years
ago going bankrupt. So maybe there's more to go. Yeah, for sure. Shall we leave it there for now,
though? Let's leave it there. All right. This has been another episode of the All Blots podcast.
I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wiesont, though. You
can follow me on Twitter at the stalwart follow Craig Fuller on Twitter at Freight, Ellie and Rachel
Premack on Twitter at RRPRE. Follow our producers, Carmen Rodriguez at Carmen Arman and Dashal Bennett
at Dashbot and find all of the Bloomberg podcasts under the handle at podcasts. And
for more Odd Lots content, go to Bloomberg.com slash Odd Lots where we blog, we have a transcript,
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