Hello, and welcome to another episode of The Odd Loved Podcast. Time Joe whysan.
Thal and I'm Tracy Alloway.
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 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 revers.
Yeah, and you know, we're recording this on May second, 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 interest was 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 isn't freight costs. Yeah, they all they all said.
That, although you know, 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, which 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 undersupply leading to oversupply 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 out Rachel Kremac, editorial director of Freight Waves, who recently wrote a piece declaring trucking blood bath two point zh. Thank you both for joining us. Rachel, wait, what was trucking blood bath?
One point zero?
Yeah?
So in twenty nineteen, the trucking industry, when we're 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 slow down more broadly in trucking. This blood bath 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.
Yeah, so this is a notoriously cyclical industry. And I'm glad we started out with trucking bloodbath one point, oh, 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 you know, for waves especially, it 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.
Yeah, you know, if you look at what's happened in the trucking industry, and this also happened in twenty nineteen, So not only did you see a slow down in volume related to for the industrial economy, but you also saw an overbuild of capacity. So there was an ELED mandate which really regulated the logs or how many hours the driver and 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, you know, thought, hey, I can start a trucking company, I can become a you know, an 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 you know, since twenty eighteen, we've seen twenty eight percent 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 eight percent of the dispatchable capacity of the market. So this 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 operators are always trying to add trucks to sort of match that demand. Well, what happened is the market just over corrected.
Classic commodity a 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 supplying 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. 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 over commit, to 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 thirty percent, So that meant thirty percent of all truckloads in the market in the contract market are
being turned down. That rejection rate right now is about two point seven percent, 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 twenty eighteen 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 you know, new players, new employees of these trucking firms, started to flood the market. And you know, as soon as that capacity really started to ramp up, of course that demand for trucking services also declines.
The same thing is sort of happening this time.
There was an incredibly hot market in at the end of twenty twenty through twenty twenty one, you know, even beginning of twenty twenty two. And yeah, basically, 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 you know, make a quick box. I should you know, really profit off of this? Too many folks get in, and pretty soon after that, you know, what goes up must go down.
I 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 bears to entry. So you think about so a truck today probably cost you know, brand new trucks two hundred thousand, and used truck can be anywhere from you know, fifty to sixty thousand to you know, we're talking to relatively low mile truck you know, three to
five years to one hundred thousand dollars. And so it's a situation where you know, the banks are happy to lend the trucking companies because they have this perception that trucking is always needed and because they believe that there's a perpetual driver shortage, they increasingly provide capital for would beyond our operators to go out and start the down trucking company. And because of the ration 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 of years, you know, really during COVID, during the code 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 four dollars a mile, and to put that in perspective, a truck will do approximately two thousand miles a week. So on four dollars a mile, we're talking about somebody making approximately
three fifty to four hundred thousand dollars a year. Wow, 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 the downcycle. And that's what we're seeing right now is a situation where a lot of people are 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 precycle could have been forty thousand dollars at
the peak of the cycle. Those same trucks that were five years old at forty thousand pre COVID, we're going for one hundred and forty one hundred and fifty thousand. They were actually going for more that we're 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 four dollars a vial rate staying perpetual and we're not prepared for the downturn which we're facing right now.
Well, so, just on this point, I mean, it is true that we have seen a lot of the smaller players, the independent owner op operators, start to get out and take capacity out, as evidence by the truck prices that you just mentioned, and I guess people giving up their licenses. I think it's called revocations 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 twenty twenty twenty one, early twenty two, most of twenty two. Really that usually these large fleets prefer to buy new trucks, they don't usually prefer to buy use trucks.
Obviously, through the.
Early twenty twenties there was no manufacturing capacity. So these large trucking fleets, you know, these large public companies, they were not able to span capacity. Now, on the one to five truck fleet side, we saw that portion of the market really start to boom in the early twenty twenties. Large fleets on the other hand, group by maybe their capacity at 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 nine thousand 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 shaped. Is shaking up right now.
And it's not just a 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 the larger cares 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 dry rivers 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 shoult of look at the COVID cycle is you know, from two thousand, late twenty twenty to really twenty two, they could not get new could not get truck drivers were they were losing a lot of drivers to the
owner our operating market. So a driver saying, hey, I'm making you know, fifty sixty seventy thousand dollars years and over the road truck driver says, hey, why am I not making the two hundred or four hundred thousand dollars. So they went out and started their own trucking company. And those trucking companies dealt with what we call unseated trucks, whereas 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. So before we move on and I forget to ask, at the peak, it was an average what four dollars a mile? What do we what's the latest freight wave stat on this?
Yeah, so if you take out four dollars a mile, by the way, it includes fuel. If you take out fuel out of that equations is about three dollars and twenty cents a mile at the peak. But if you look at it from sort of net of fuel, you're around a dollar fifty six 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. It's just like your own income is a lot of the The rate per mile only tells you what the revenue is,
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 blood bath, the freight recession that happened in twenty nineteen. You know, the lowest rate ever painted and in our data was a dollar and this is net a fuel a dollar forty seven. We're to buck fifty six today.
So you think about a nine cent increase. That sounds on the surface, okay, until you realize that the operating cost of trucking companies and I'm netting out fuel, I'm not including fuel in this equation, but operating costs for
trucking companies increased by thirty 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 twenty nineteen by twenty one cents a mile for every mile they run. And that's just when they can get freed. A lot of the other sort of thing that hasn'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 a low rate environment, which means it's pretty dire for a lot of these truck comments.
So 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, you know, the trucking bloodbath two point zero. 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.
So demand is approximately twenty nineteen levels right now, So you know, 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, So you know, when trucking does well or the economy does well, trucking will do well, and when trucking's not doing well reflects on the sort of conditions of the
goods economy. But if you sort of think about the fact that we're back to twenty nineteen levels that would suggest and a normal economy forget that COVID happened, that we've basically lost four years of growth or three years of growth, and so we're in a situation where twenty eighteen levels in terms of volume combined with a real surge incity. You know, as I mentioned, you're up twenty eight percent from where we were just in twenty eighteen.
Twenty eighteen was actually a slightly better market by about three percent of twenty nineteen levels. And so 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 twenty nineteen. So we're in a situation where there just isn't enough freight, and that I think really warns us. You know, trucking will lead the broader economy by as much as six months. And you
saw this last year. We reported in the free Recession on March thirty first.
You got a lot of pushback on that lot of I think you remember, Yeah.
A ton of it. And the reason is that a lot of the data that people look at through traditional models and trucking are based on lagging data. So we use what we call high frequency data, which refetches every day, and 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, so it leads the broader sort of government data, traditional models by 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 twenty twenty, 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 shape recovery. And it was really throughout the summer of twenty people were there was a lot of vitral directed at us because we were very bullish, and people couldn't understand how you could be so bullish when all
the economic data was actually very soft. But the reality is that the data we look at, the high frequency data, leads those indicators. So when you think about it from the perspective, what does this mean for the goods economy? And I'm only talking to goods economy, and I'm talking about broader GDP, the approximate forty percent economy that's reliant upon trucking services to move their products. It does suggest that the US goods economy has continuing to slow and
it doesn't bode well for really the indicators. And we saw that last year we called the freight recession, and you know the end of the first quarter, it was, you know, 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, Like is it those who were most affected by the bullwhip effect you know in twenty twenty and twenty twenty one, is that where demand is really slumping.
It's anything really related to consumer outside of auto. So auto just because of the lack of being able to get access to new cars because it can produce them, because of shortages of products. The auto has actually been quite resilient even today in terms of freight demand data. But if you look at anything exposed to consumer, that's where you're seeing particularly weakness. Consumer packaged goods. You know, Rachel's written about the cardboard box industry actually having.
We've never done a cardboard box other types.
Of boxes, so we just, yeah, we should do it. We should. So we actually brought on an analyst used to be at a bank, because an analysts studied the packaging cardboard industry. He's now part of the Right Ways team and he's it's interesting how tightly quardal cardboard shouldn't shock anybody. It sort of looks at the economy, but how tightly correlated the packaging and cardboard industry is to
trucking cycles and how much they matched. 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 sort of the bottom of it. The cardboard box the packaging industry saw the very same thing happened 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 a recover. Well, they saw the same thing in January, and then in February it got worse, and in March it hours. 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, and that that is an unusual development. Usually January is one of the worst months year and it's just not happening this year. And I'm talking specifically volume we have. You know, 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 recently song 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 you know, 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 set
back a few weeks. All these sorts of things are just kind of thrown into chaos, and a lot of truck drivers view it's called you know one hundred days of summer. That's really the hot time in the trucking industry, especially for or refer carriers that haul these refrigerated goods.
So 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.
Wait, Rachel, can I back up or actually move ninety degrees for a quick question? Did I see something recently speaking of floods? Oh, that the barge crisis is back, except this time there's too much water.
New barge crisis.
So what's going on with the new barge crisis?
Where?
Because like we did that last Summer's like, oh, there's no water. What's happening now?
Basically Mississippi River levels are incredibly high and this also screws up the baringem marg 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 you know, that's kind of peak harvest season for the Midwest. You're trying to get all that weed out, especially to or in markets. So it's not quite as bad as last year because the
timing was so bad last year. But yeah, I don't know what's going on with this river.
And anyone who says supply chain is boring has not been listened to the odd last podcast, But these you guys have featured how incredibly volatile and sensitive these noices?
I don't know.
Yeah, who would say that fly chains are endlessly fascinating? Okay, so folks 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 twenty eighteen twenty nineteen? 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 projecting data is going to be the first indicator because that is actually highly sensitive. To remember, it's 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 so or two days from pickups, so they will get you a big Bucks retail off Walmart sends over a transaction to a small trucking company or a big drug company in the contract market, electronically that tender data will see that and then look at whether or not the trucking company accept it 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 a capacity was starting to tighten, we're not seeing any indications of that. There's zero even as volume has we've seen it in the last week. We've actually seen volume increase. We've seen some really sort of strange 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, guardian equipment construction, all of that sort of drives beverages sort of drive freight demand. So we've seen some level of season out 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 you know, 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, Elon 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 articles you did a week ago
shows bravocations. If you look at the chart of the peak cycle sort of peaked during the covide cycle, how much higher those increases of fleets in terms of you know, eight to nine dollars and new fleets entered the trucking market a month. We're only talking about two to three thousand a month right now that have left. And that went on for as much as fourteen to eighteen, fourteen to sixteen months, so 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 US 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 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 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 and volume in the second half.
And going back your question on how bad this could be, we saw during the last earnings call, the first quarter earning Shelley Simpson, the president of JB. Hunt, you know, one of the largest trucking companies in the US, she said, you know, this market is reminding us of two thousand and nine, and that's certainly not something that I've ever heard. I've never heard a two thousand and eight two thousand and nine 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 sixteen years of being in the industry. He also kind of agreed that, you know, this could be a two thousand and eight two thousand and nine 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 concerned.
Yeah, I was actually just gonna ask you. So it's like, obviously for the market to come into balance, there has to be reduction in capacity and people have to tap out and say, like, yeah, the economics are 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, et cetera, 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 is 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 mid size 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 its 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 that has sort of flown through.
And this is like that other thirty percent. So when you talk about like, okay, why is just even setting aside gasoline, operating of operating trucks just thirty percent more costly than it was at the bottom in twenty nineteen to these are the difference, that's right.
So maintenance is a big increase. You know, parts are one side of it, but also just the fact that you can't 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 ninety seven is 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 when you'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 size carriers are going out in mass A lot of the revocations that Rachel's 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 wash out 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 one hundred trucks at a time. I think there was at least you know, seven or eight stories of companies that had you know, more than one hundred employees that you know, just suddenly shut their doors.
We're not seeing what I call hosts sell back. In twenty nineteen, we saw as many, you know, at one time, we were doing as many as ten sizeable bankruptcies a week, with the largest culminating with a company called Seldon, which is publicly traded, had four thousand trucks and file bankruptcy. And so we're not yet seeing a situation where there's been a wholesale wash out. In my opinion, and until we see that, I think this is going to is
going to continue to exacerbate. I will sort of point now, you know, not only has Shelley Simpson talked about the comparisons of two thousand and nine, I've heard people across the industry, both small and big, have said this matches there what they experienced in two thousand and nine and one of the things that did not happen two thousand and nine is not only the inflation, but the freight brokerage industry, the sort of cottage industry. It was a
cottage industry back in two thousand and nine. It was a relatively small piece of freight. It has 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 twenty percent when we were in Arkansas last year. I don't know if that's still true. But what's going on there.
Well, there's 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 a capital of Indians street, 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.
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 commodity because it'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 ninety cents a mile. It's the widest
it's ever been. In a normal cycle. It should be about thirty five to fifty cents a mile, but it's ninety cents right now, which means the spot rate's going to continue to pull down that contract rate. But as long as 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 that there isn't any of a volume for them.
And when you look at what shippers, shippers being the custom of these trucking companies, the customers of freight brokers you know, big box retailers, manufacturers, et cetera. 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 broker it out to somebody who's going to steal the cargo or you can't find the cargo. So what's happened is now with shipperds is they're saying I want to work with the asset
based carriers. So a lot of that access volume, that overflow that went from the large carriers into the spot market and brokers sort of handled it, is starting to dry out 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, it was he was more of a dispatcher than a broker, but he has his broker license, so 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.
Broker's bien you know, I'll bit take it for a thousand, I'll take it for nine hundred, I'll take it for eight hundred and ninety nine, and I'll take it for eight hundred ninety eight. Lowest bidder wins. That broker then says, Okay, I'm going to make eight hundred and fifty dollars on this. They post on the load board saying who can take this load for five hundred and fifty dollars? And then a truck driver is looking through the load board trying to figure out their next job.
They see this for five point fifty.
They called the broker maybe they ask, hey, can I take this for six fifty? The broker says, how about you know, six hundred, and that's what they decide on.
That's what the driver drives for.
But that broker is taking that was it two hundred and fifty dollars in profit?
So that's what it looks like on the on the ground floor. I guess of what this all looks like yeah.
I remember when we were at the when we were at y'all's conference last year and we interviewed Matt Pyett that arrived here, and then a few months later I got to I went to Arrive's offices in Austin, and it really is like a trade of what is it called the Chicago model of Uh, it's the Chicago model having the shippers 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 down.
Well, 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 it 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 to Trade and the CEME
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 when 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 bits. They started recruiting the same types of folks to go onto
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, twelve to eighteen percent and almost cycle depends on sort of what part of the cycle we are. Some of those are as high as twenty twenty plus percentage.
That's why Joe and I went from joking about starting a trucking company to starting a freight broker.
But you know that would be better, I know.
But you know, then I got the impression from athlet It was like a lot of like X big ten athletes.
All that, Oh yeah, that's hard.
Yeah.
So it's like that's not me either.
Unfortunately.
I also feel like the median freight broker is like twenty five.
It's a very bro bros. 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 are become massively big businesses.
Yeah, they didn't exist just you know, a few decades ago.
It was illegal to broker freight. Saint Robinson was actually now the largest freight broker, was actually a produce broker that fought to allow after trucking deregular lated in nineteen eighty They really fought to allow for brokers to exist in the market, and that really didn't happen in nineteen eighty five.
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 in trucking and how AI is going to amplify it, and I'm sure, like you know, this is the start of many things.
Before say, we should just start a new segment every All Thoughts episode. We should just ask how is AI.
King to make this worse?
But real quickly, can you just explain your concern here? And you know one day there will be a separate episode. But what's going on.
So loadboard fraud is a real problem in the industry, and what's happening is that the brokers, because of the proliferation of broke 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, you know, drivers 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 loadboard. So really, much like Craiglist, it's posting and you sort of you know, you may get a legitimate trucking company and you may get a
illegitimate trucking company. Well, there's been this proliferation of illegitimate trucking companies that you have basically have gone out and registered information that's fake 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 the 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.
So that's one form of fraud. One of the emerging forms of fraud in double brokering is that some so the broker, the fake broker, will then broke it out to another broker and what they'll do is a truck will pick up and basically, no, 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 right now.
There's no oversight, you know, and if there's already no oversight, that makes me worried for the future.
The load boards 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 it's 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 trace you just have to live outside a lot of Eastern European And I think it's also like a lot of the folks that are proliferating and actually used to be in trucking, there's been this emergence of offshore dispatch operations and offer terior.
Yeah, so 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 realize, hey, this is a really lucrative way to make money. And I'm not going to get prosecuted because frankly, it's an fbis.
It's the FBI's domain to sort of investigate these crimes that are overseas, and the crimes are a missed so misunderstood, and anyone who can actually understand how all the 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 the how different things work in the industry. So it's hard for the regular 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, and tell 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 blood bath two point zero, But on the other hand, maybe it's a good thing that, you know, 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 industry 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.
Actually, I 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 stop financing new carriers to get in the industry, that will
restrict capacity. But let's just be you know, let's 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, like all transportation, was regulated, pricing was regulated. Amazon's business model JIT freight, e commerce would not be possible without deregulation.
I remember, Rachel, we had you on to talk about this exact point.
Yeah.
So it is a situation where unless we were to see a reregulation, which nobody wants, it's just going to be a boom and bus cycle. We're just all, you know, we're 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, fascinating time I hadnot I mean, it's one thing to hear twenty nineteen, it's another thing to hear two thousand and eight. Two thousand and nine, which I was not expecting. Rachel and Craig, thank you so much to both of you for coming back on upline.
Thanks for having us.
Tracy always like talking trucking. I think one thing that you know, in addition to that sort of megacyclicality, the sort of the persistent inflation in the space, and so the fact that like, okay, we're back to twenty nineteen levels and some measures, but twenty nineteen nominally, you know, is like, yeah, parts mechanics, et cetera. 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 two thousand and eight, two thousand and nine, 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 and there are issues with demand. It's just that it's so it feels so magnified the fact that.
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, whereas past 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 Bots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me on Twitter at The Stalwart. Follow Craig Fuller on Twitter at Freight Alli, and Rachel Premac on Twitter at Our RPR. Follow our producers Carmen Rodriguez at Carmen Arman and Dashel Bennett at dashbot and find all of the Bloomberg podcasts under the handle podcasts. And for more Oddlots content, go to Bloomberg dot com slash odd Lots, where we blog, we have a transcript, a newsletter that goes out every Friday, and
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