Odd Lots - We're In the Midst of Trucking Bloodbath 2.0

Episode Date: May 19, 2023

A couple of years ago, it was an amazing time to have a truck or be a trucker. The goods economy was absolutely booming. Prices were booming. Supply chains were broken. Everyone wanted access to more freight. Fast forward to spring 2023 and the situation couldn't be more different. Prices have collapsed and the environment is now as bad for carriers as it was during 2019, which was a horrible year for the industry. In fact, conditions now might even be as bad as they were during the Great Recession. On this episode of the podcast, we speak with Craig Fuller, the founder and CEO of FreightWaves, and Rachel Premack, editorial director for FreightWaves, about the state of trucking, what the market says about the broader economy, and what it will take to turn the industry around.See omnystudio.com/listener for privacy information.

Thanks for listening to OddLots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast, OddLots on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big line. It's a lot. It's a firm. a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Hello and welcome to another episode of the odd-lopped podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. 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, then 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 this 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 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 is in freight costs.

Yeah. 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. Yeah. 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 a Rachel Premax editorial director of freight waves who recently wrote a piece declaring trucking bloodbath 2.0. Thank you both for joining us. Rachel, wait, what was trucking bloodbath 1.0? 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 U.S. 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. 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, you know, freight 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, if you look at what's happened in the truck industry, and this also happened in 2019, so not only did you see a slowdown in volume related to sort of the industrial economy, but you also saw an overbuild of capacity.

So there was an ELD 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 bill 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, you know, an owner operator. they 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 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 in a 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 and the fleet 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. applying 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 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 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 low. 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, 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 is an incredibly hot market in, at the end of 2020 through 2021, you know, 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, you know, make a quick buck. 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. So you mentioned this 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 joked, 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 entry. So you think about, so a truck today probably costs, you know, brand new trucks, 200,000. A used truck can be anywhere from, you know, 50,000 to, you know, and we're talking a relatively low mile truck, you know, three to five years to $100,000.

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-be-owner operators to go out and start their own 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 require, 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 $4 a mile, we're talking about somebody

making approximately $350 to $400,000 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 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 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. They 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 $140,000 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 vial rate staying 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 later 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, 21, 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, you know, 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 2020. these large fleets on the other hand grew 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 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 shaping 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 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 sort of 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, they were losing a lot of drivers to the owner-operated market. So a driver saying, hey, I'm making, you know, 50, 60, 70,000 a years and over there a truck driver says, hey, why am I not making the $200,000 or $400,000? 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, $4 a mile? What do we? What's the latest freight wave stat on this? Yeah, so if you take out, $4 a mile, by the way, includes fuel.

If you take out of that equation, it's 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. It's just like your own income is a lot of 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, you know, the lowest rate ever painted in our data was a dollar.

And this is net of fuel, a dollar 47. We're to buck 56 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 the operating cost for trucking company is increased by 30 cents a mile. So if you look at the net increase, or the net decrease is 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 a very low rate environment, which means it's pretty dire for a lot of these truck companies. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard.

At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing in subject to risk Vanguard Marketing Corporation distributor. Eating well shouldn't be complicated, but somehow it turns into recipes,

prep, cleanup, and half your Sunday gone. Factors solves all that. These are fresh, ready-to-eat Meals designed by dieticians, delivered to your door, and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste like something you get in a restaurant, but they come out of your microwave in two minutes flat.

If time, cost, or effort have been holding you back from eating better, Factor just took those off the table. Right now, get 11 meals, free shipping, and free sides for life. Hurry, this offer won't last long. Go to factormeels.ca and use code fit. That's 11 meals, free shipping and free size for life, but only with the code fit at factormeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. 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 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. So demand is approximately 2019 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, it reflects on the sort of conditions of the goods economy. But if you sort of think about the fact that we're back to 2019 levels, that would suggest in 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 2019 levels in terms of volume, combined with a real surge in the, capacity, you know, as I mentioned, you're up 28% from where we were just in 2018. 2018 was actually a slightly better market by about 3% of 2019 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 2019. 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 on the free recession on March 31st. You got a lot of pushback on that, didn't you? A lot of visual. A lot of visual. 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 refreshes every day. And it looks at the demand real transactional data from shippers to carriers is one of the core data sets. Well, that data is way upstream. So it leads the broader sort of government data to traditional models. by about six months, you can actually look at it. So 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. And it was really throughout the summer of 20, people were, there was a lot of vitriol 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-freferferfer. and see 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. I'm not talking about broader

GDP, the approximate 40% of the economy that's reliant upon trucking services to move their products. It does suggest that the U.S. goods economy is continuing to slow, and it doesn't bode well for really the indicators. And we saw that last year. We called the freight recession in the end of 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? Like, is it those who are most affected by the bullwip effect, you know, in 2020 and 2021? 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 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. But if you look at anything exposed to consumer, that's where you're seeing particularly weakness. So consumer package goods, you know, Rachel's have written about the cardboard box industry. Oh. Actually having. We've never done a cardboard box. We should do that.

There's other types of boxes. So we just. Yeah, we should do a, we should. So we actually brought on an analyst. He used to be at a bank as an analyst that studied the packaging and cardboard industry. He's now part of the Freightways team. And it's interesting how tightly correlated carbon, 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 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 entered the first quarter thinking, hey, maybe. 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 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 it got worse.

And April, it's 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, you know, that is an unusual development. Usually January is one of the worst months in the 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 reverted 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 we recently 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 step 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, 100 days of summer. That's really the hot time in the trucking industry, especially for reefer 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 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? Yep. New barge crisis. So what's going on with the new barge crisis? Because like 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 barge shipping. It's not quite as drastic as it was. 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 foreign 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 listening to the odd loss podcast. Thanks, you guys have featured how incredibly volatile and sensitive these markets are.

No one has says that. I don't know how, yeah, who would say that? Who would say such a thing? Supply chains are endlessly fascinating. Okay, so. Some folks say that. 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 or 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 box retailer. 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. It could be seasonality. We didn't see it at all in April. As Rachel mentions, as things heat up, gardening 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, 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 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, nine thousand 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 14 to 18, 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 and 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, Shelly Simpson, the president of J.B. Hunt, 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, 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 concerned. 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 it working. 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? Are there 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 is 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-sized fleets, they're seeing their contracts either get pulled back or contract rates, you know, significantly lower. So it's both on the spot market that 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, you know, the big reason. It's basically rates are too low to run to optimist. 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 30 percent. So when you talk about like, okay, why is just even setting aside gasoline operating of operating trucks is 30 percent more costly than it was at the bottom in 2019. These are the different factors. 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 in 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 at this industry is, Even if you sort of average the operating ratio, which operating ratio reflects on the profitability.

So it's an inverse of sort of operating profitability for a trucking company. So an operating ratio right now, or on average, it's typically a 97 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 where 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 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. It 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, you know, seven or eight stories of companies that had, you know, more than 100 employees that, you know, just suddenly shut doors. We're not seeing what I call wholesale. Back in 2019, we saw as many, you know, at one time, we were doing as many as 10 sizable bankruptcies a week with the largest culminating with the company called Celadon, which is publicly traded, had 4,000 trucks and filed 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 what they experienced in 2009. And one of the things that did not happen in 2009 is not only the inflation, but the freight brokerage industry, the 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? 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 the capital of any 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, 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 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 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'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 there isn't any volume for them. And when you look at what shippers, shippers being the customers of these trucking companies, the customers of freight brokers, you know, 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 happened is now with shippers is they're saying, I want to work with the asset-based 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's 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 bet take it for $1,000. I'll take it for $900. I'll take it for $899.08. Lowest bidder 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, what is it, $250 in profit. So that's what it looks like on the ground floor, I guess, of what this all looks like. Yeah, I remember when we were at the, when we were at your all's conference, last year and we interviewed Matt Piot that arrives CEO.

And then a few months later, I went to Arrive's offices in Austin. It really is like a trading floor. What is it called the Chicago model of? It's the Chicago model. Of having the shipper side in one side of the room and the carrier side and another side of the room. And they like sort of, you know, a wall between. So one of them, you know, one of them books the freight. Yeah, right.

And then one of them buys the capacity. So one is sort of long in the market. Yeah. And essentially a lot of the brokers, the reason Chicago has probably, 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 of Trade and the CME used to do is they would go higher 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 trading goods.

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, 12 to 18 percent in a normal cycle. Depends on sort of what part of the cycle we are. Some of those are as high as 20 plus percent right now. This is why Joe and I went from joking about starting a trucking company to starting a freight broker. But I don't start.

What were you going to say? That would be better. I know, but, you know, then I got the impression from athletic as like a lot of like ex-X Big Ten athletes. It is all. Oh, yeah. That's who they hired. Yeah. So it's like, that's not me either.

I also feel like the median freight broker is like 25. It's a freight bro. It's a very bro culture. Freight bros. It's a very bro culture. 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 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, essentially. It was illegal to broker freight. C.H. 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 to 1985. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone. Factor solves all that.

These are fresh, ready-to-eat meals designed by dietitians delivered to your diet. door and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals without the grind of doing it all yourself. Grilled chicken, roasted veggies, steak plates, postables. They taste like something you get in a restaurant, but they come out of your microwave in two minutes flat. If time costs or effort have been holding you back from eating better, Factor just took those off the table. Right now, get 11 meals. free shipping and free sides for life.

Hurry, this offer won't last long. Go to facturemeals.ca and use code fit. That's 11 meals, free shipping and free sides for life, but only with the code fit at factormeals.ca. Factor, Canada's number one ready-to-eat meal delivery service. Bell Pure Fiber Internet? It's fast, like really fast. And the offer, it's good, like really good.

Switch to Bell Pure Fiber, Canada's fastest internet awarded by Ucla, with plans starting at $60 a month with auto-paceper. credit. Whichever two-year term plan you choose, the price is guaranteed for two years. Fast internet, long ad. But it's so worth it. Visit bell.ca for more details and to check availability. Bell, connection is everything. 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. But what was that about? We should just start a new segment. Every all-Bot's

episode, we should just ask, how is AI going to make this worse? But real quickly, can you just explain your concern here? And, you know, one day this will be a separate episode, but what's going on there? 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 in 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, 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 load boards. So really, much like Craigslist, it's a 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 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 do 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 and double rogering is that some so the broker, the fake broker will then brokered 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 in the black market. So freight brokerage fraud or load board 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. Just train jet jet GPT. Exactly. Right now there's no oversight. And if there's already no oversight, that makes me worried for the future. Well, the load boards have the only part, 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 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 on the trend. So this is a new business model idea for us, Joe. Instead of freight brokerage, right-inabled fraud. It is a big booming cottage industry, Tracy. You just have to live outside the U.S.

Let's move overseas first. A lot of Eastern European. And I think it's also like a lot of the folks that are proliferating in trucking. There's been this emergence of offshore dispatch operations and offshore carriers. Oh, interesting. So they know how to like. 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. They realize, hey, this is a really lucrative way to make money, and I'm not going to get prosecuted. Because, frankly, it's the FBI's domain to sort of investigate these crimes that are overseas. And the crimes are so misunderstood. 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 different things work in the industry.

So it's hard for the authorities to sort of understand it. much less investigated, 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, 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 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 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 re-regulation, 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 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 Apple. Thanks for having us. Tracy, always like talking trucking.

I think one thing that, you know, in addition to that sort of mega cyclicality, the sort of the persistent inflation in the space. And so the fact that like, okay, we're back to 20 and. levels in some measures, but 2019 nominally, you know, 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. There are 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 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 Alldots podcast. I'm Tracy Allo. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthal. You can follow me. Twitter at the stalwart. Follow Craig Fuller on Twitter at Freight Alley and Rachel Premack on Twitter at RRPRE. Follow our producers, Carmen Rodriguez at Carmen Armin and Dashel 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, a newsletter that goes out every Friday, and hang out with other OddLot listeners in our Discord. It's really fun. We talk about all this stuff all the time.

24-7, go to Discord.g.g. slash oddlaws. Join the conversation there. Thanks for listening. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Ruffini.

We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. Lisa Mateo, watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. That on Sundays we speak with journalists, columnists, and key political figures to prepare you for the week ahead.

Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. What separates good leaders from transformational ones?

I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really, really, acknowledge where you don't and find people who can fill those gaps. Listen to leading by example executives making an impact on the IHeart radio app, Apple Podcast, or wherever you get your podcasts.