Craig Fuller - The Impending Freight Recession
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Thrilled to be joined by Craig Fuller today of FreightWaves, a man that's been making waves himself calling for a trucking. I believe it's limited to trucking recession. Is that a fair assessment of what you cover and how you define what you're thinking about?
Craig: Yeah. We would refer to it as a freight recession, which is predominantly trucking but there are certainly some concerns about ocean freight. What is likely to happen over the next couple of months as well.
Bill: Yeah. I guess, the reason that I limited it to trucking was right now, it seems to me that trucking is the immediate impact and the freight recession in shipping is potentially a result of the China lockdowns. Is that fair?
Craig: Yep, that's a very fair statement.
Bill: It is a wild world, huh?
Craig: It's a crazy world. I think China is increasingly becoming a more difficult place to do business. For so long, the Chinese Communist Party was pretty much willing to do about anything to develop trade lanes and become a world manufacturing supply chain center, but they have violated that pact in recent months and over the last really 18 to 24 months by attacking their own business and economy, which has made it difficult for Western companies to depend on them as a dependable supplier.
Bill: I was reading some of your Twitter threads recently and going through your website and one of the things that I thought was a very interesting insight that you had is that it's one thing to pursue the COVID zero strategy when the rest of the world is somewhat cooperative, but when you are pursuing COVID zero and the rest of the world is opened up, and all of a sudden people want their stuff, they're going to be a lot less accommodative than they may otherwise would be. It'll be interesting to see if this creates the catalyst for onshoring.
Craig: Yeah, I think it certainly whether it's onshoring or nearshoring in places like Latin America, I think what it does is, it forces supply chain executives to evaluate whether they can depend on China as a reliable supplier. The belief if you go back to March of 2020 or even before that, going back to January when China first saw the virus is that, in those days was a lot of information. We didn't have a good sense for how it is transmitted, how deadly it is, how deadly it could be, whether how to treat it. It was an unknown virus to us. I think largely the entire world was catching up and trying to play defense at the same time.
I think the challenge is that largely the Western world and for most parts, the vast majority of the globe have surrendered themselves to living with COVID and saying, "Hey, this is a far less deadly disease than perhaps it used to be. It's a far less deadly disease than we worried our worst fears or some of the new variants or far less deadly than even the first variants." It's a lot more information and treatments. I think as a general rule, the West has said, "Hey, we're just going to live with this thing, and we're going to tolerate it, and it's just going to be a nuisance that we just have to live with as part of a modern society."
China continues to operate under this draconian view that they can control and mitigate the spread by basically locking down their entire economy. That's a very different approach. It's one that feels much more similar to what the United States and the rest of the world attempted in March and April 2020, but largely decided that wasn't a workable-- The byproducts or the downside was far more egregious or impactful than, say, the upside you got avoiding the spread. So, I think China has become very unpredictable, and is an outlier, and how they approach the virus, which is really Western boardrooms has created a lot of question about whether they're a reliable supplier or should be a reliable supplier.
Bill: I tell you, it's interesting to watch the backup at the ports and then think about, "Okay, well, what happens when China shuts down?" And I think you wrote about, "It's not just the ships coming into port, but it's the truckers that are getting the goods to the ships." Are they able to drive through the cities and stuff like that? I guess, you'd also mentioned right that they're worried if they go into a city and the city locks down, they're not coming out. Is that fair?
Craig: Yeah. The issue is the ports themselves are currently open, but they're not operating at capacity, because the trucking operation. Port is an organism. Most people think of the port is where the ship, docks and containers are moved off of the ship, and then other containers are put on the ship. The reality is that, a port, in many ways, is just an extension of the broader area and the broader economy in that area in that city. It depends on lanes of trucking, and rail, and other resources to keep operating. So, it'd be equivalent of shutting down your airport. Let's say, Dallas, Fort Worth shutting down its airport, or LA shutting down LAX, or something to that extent.
Basically saying, "Hey, our city is locked down." The opposite of actually shutting down the city and not shutting down the airport. "Hey, the airports operating like it's fine but the entire city of Dallas Fort Worth is shutdown."
Bill: Okay.
Craig: So that means that factories are not opening, trucks are not able to get in and out. When we talk about the shutdowns, it's not so much that the port's open. It's that trucks can't get in and out of the port to move cargo back and forth. And because of that, it means that the port operating and being open means it can only handle the cargo that's really onsite.
The other issue is a lot of cargo as it comes off of the ships, because transportation networks are bidirectional, which means you have freight that goes outbound and the effort that goes inbound. Typically, when you see a ship, what they're actually doing is they're unloading empties, the containers that are empty or unloading raw materials from the ship. Those are then put up on port and they're then taking in fully loaded containers in particular China and transporting those out. Well, the problem is, when you shut down basically your truck flows to move cargo out, then the ships are just not calling on the Port of Shanghai or Guangzhou. And so, when they're not calling on those ports, that means that raw materials are not getting in and it becomes incredibly destructive to the overall orchestration of the supply chain.
Bill: Interesting. So, the backhaul of it-- I'm going to call it backhaul. That may not be the right thing, but say, a ship goes from China to the US and then back, that backhaul leg is usually a bunch of empties?
Craig: Well, that's right. From the United States to China, it's a backhaul, not the other way around. The way we think of in freight markets is head haul backhaul. A head haul is where you make all your money, head hauls are pricing tends to be high. A head haul just means is more freight than there is capacity on that lane. A backhaul is the opposite, where there's more capacity than there is freight. The United States in the world of global container movements tends to be a-- If your origin in the US, it tends to be a backhaul, because we're a consumption economy, which means we consume a lot. We don't produce a lot. Because we don't produce a lot, a lot of the freight that moves off for the containers that move off the United States actually are empty. There's hauling air. It seems like an expensive thing to haul because it doesn't pay very well. But the reason they do that is, they're trying to re-shift empties into the ports in China, so that they can be loaded, so they can come back to the United States.
Bill: Interesting. Now, if the ports are less efficient than they otherwise would be and you're backhaul, I presume it'll probably look like in the ports of LA outside of some of these Chinese ports, where the ships are just kind of sitting, I guess, unless they divert them to other ports, but it seems that's a lot--
Craig: Well, they are doing the diversions now. In the early phases of it, we saw a lot of ships anchored off the coast outside of Shanghai. A large percent is now actually avoiding the coastal waters entirely in Shanghai entirely. They're making protocols in Hong Kong and other ports around the overall Chinese coast, because they don't want to go to a place where it just isn't freights not moving. So, they're already avoiding. We're seeing as many as 1/3rd of all transactions of all bookings, ocean bookings being bumped or rejected by carriers, because they don't have what they call blank sellings as they're basically not scheduling those ships to show up at port.
Bill: It's interesting. I had asked you when we were chatting on Twitter, I said, "So, how are inventory levels now?" It seems as though our inventory levels are largely replenished, is that a fair statement? I'm just trying to--
Craig: I think inventory levels are at record highs. If you take automotive inventories, which is really the only-- You think about this inventory level is, it measures a lot of things. It measures retail products, manufacturing products, automotive, etc., and cars are whether it's used, or new, or just very expensive relative to the unit count, so, they tend to have a lot of weighing or weight on the actual inventory levels. Because the cars are just such a big piece of the American economy. When you take our automotive sector, inventories are at record highs. As a general rule, American consumers and American businesses have plenty of inventory.
What is concerning is that, if the ports stay locked down for a long period of time, it's that inventory could burn off pretty quickly. Some of that inventory very well may be out of season stock. It may be products that were intended for the fourth quarter, intended for the holidays, and just think about the seasonal items that you would expect it to be like sweaters, and jackets, and things that you wear in the winter. Some of those items didn't come in till February and March of this past year and are still coming in. A lot of these inventories may be ill timed and they may be out of style.
Just take yoga pants, where people were comfortable in athleisure or just wearing around the house instead of jogging pants and hoodies. Those people have returned back to the office. Those are not as popular as perhaps clothes that are more appropriate for a business environment. There're a lot of these anomalies pop up when you have these disruptions that largely are just there. One of the best examples is house cooking and bedding, because we largely think about the economy. We've lived the past two years with very robust home sells, new home sells, and new home construction. People moving outside the cities.
Well, that movement, while directionally will still stay in place. I think people are largely continuing to reevaluate where they live. Whether or not they live in the city, they still largely have some presence in the suburbs, if they can afford it or even away as a second home. What we're seeing now is that, that shift, the demand on cooking ware, and bedding, and household goods is less than what it was two years ago.
The other reality is that if you're eating out a lot more in restaurants, then you're not buying skillets, you're not buying cookware to the degree you were. When we do channel checks on national retailers, we're seeing a lot of the cookware, a lot of the home and gardening items are piling up in inventory levels, because the demand for those items was largely exaggerated for the past two years and a lot of that's cooling off. That's creating some inventory hang-ups. I think what a lot of people look at when they talk about inventory is, they're looking at components and so they're saying, "Well, I can't get a car, I can't get this item, I can't get that item, because we're out of stock." What is largely causing that is one or two components that go into the finished good that's actually causing that product to not be delivered.
And cars are probably the most obvious example is you go to the dealer and they say, "I can't get your car for the year, or six months, or whatever the number is. I have no cars. I have no inventory." And if you go look at the data, a lot of the cars are actually being produced in full except for, it's one, or two, or three components that are not fully in stock and therefore, they can't deliver the car. Probably, the best example of this is, semiconductors is the one that most people are recognized as the conversation.
But we also have heard things like floormats. People, they have ordered a new truck, and they expect these hardened floormats, and there's very specific component, and the dealer is required to deliver it in full. What they're finding is that they can't actually deliver it, because they're missing that one or two very specialized components and therefore, they're not able to actually deliver those items. Because of that, we as consumers think, "Ah, inventories are at record lows." So, that's not the reality is. The reality is that inventories can be very high, but one or two components can be missing and it's just causing everything to breakdown.
Bill: When you say inventories, is there a way to drill down through like--? Inflation is a big issue. In dollar terms, I would expect inventory to be high, but I don't-- Is there a way to separate dollar terms from volumes?
Craig: Yep. It's real GDP is the number. You're looking at not the value of the item but the actual consumption or the amount of volume that moved. That's actually, when we talk about freight, it's far more important is the number of items moved versus the dollar value. You can look at the retail numbers. The retail numbers were largely flat. If you look at March retail numbers, a lot of the consumption was a gasoline. Gasoline consumption was up 8%. We look at that we're like, "Okay consumers in pretty good shape. But when you look at the total amount of purchasing power they had, they've lost a lot of that over the past year to do with inflation." It's the actual unit count that you look at.
E-commerce was down something like 6% or 7% in the month of March just in terms of total dollar value. But when you look at what that means in terms of units sold or number of sold, what we found is that, inflation has driven that as a you have an inflationary element to that as well. You want to look at these on an adjusted basis. If we're talking freight and freight volumes, it's really important to understand how many units are actually in the economy, not the dollars that are spent. We're starting to see these cycles take 18 months to play out from top to bottom. We're in the very early innings of a softening freight market. There's still a lot of people in our market that are in disbelief and in denial about that. They're looking at lagging historical data, they're looking at government data, or they're just looking at data that represents one very small cosm of the market.
The reality is, if you look at it in a whole context as we do see lower volumes, none of this should be shocking. The reality is that, we've lived in this inflated world of physical goods consumption and volume for the past two years, and that if you think of it as a bubble, that bubble is slowly letting air out. As it lets air out it, people that are in this market, it is really, really catering pricing, it's really creating demand. And those catering elements are starting to show up in the market. We saw our first major bankruptcy today in trucking. It wasn't major in the sense that thousands of people's, a couple hundred people were impacted. It's 115 trucks and about 140 to 150 employees, not significant-- [crosstalk]
Bill: It's a good size operation.
Craig: It's a decent size operator. Again, what we're looking at is that in itself is not unusual bank trucking bankruptcies happen quite often. What we believe is that is one anecdote of what could be a pretty troubling time in trucking over the next couple of years.
Bill: You know what is fascinating or well I think what's fascinating about this is, I'm listening to you is, it's like, the inventories right now have been replenished largely, I believe. I assume that freight last year was in great shape. But now, if the goods can't even come from China, how do you even move what you may need. There's just going to be a ton of slack in the system and then do we get into this scenario where, "Okay, well, now, goods are moving from China and then the freight market gets super tight, again."
Craig: Yeah. I think that's exactly right. What you have is, right now, it takes approximately 40 days from a ship to leave the port of China to get into what we call the surface freight network in the United States. In terms of shipping time, it's about four weeks, three to four weeks to go from China about 27 days to leave the port of China to actually call on to ports in the United States before those containers are offloaded. If you go back to where we were a couple of years ago, it only took about two and a half weeks. And now, we're at about three and a half to four weeks, because of the backlog. But they still get here, they still show up. It takes a while before that shows up in the data.
We sold the lockdowns happen really on April 3rd. We saw freight demand start to drop off or freight movement drop off, in terms of total number of containers booked really on April 6th. We lived in this environment for the past couple of weeks. It would not be obvious if you were looking at American port volumes, you wouldn't see this impact show up really until sometime in May. Really the time we would expect to see it would be about mid-May is when we'll start to see really a trough in volumes come in, in terms of volumes of ships. The total amount of TEU, we call them TEUs or container volumes enter the United States, those will start to drop off significantly in terms of Chinese to United States container flows really in about that mid-May timeframe.
That's when it gets really, really dicey as we go from mid-May into June. And unless the Chinese turn up their economy quickly, this goes on for months. Let's say, which some people believe it will. Then it could have dramatic and drastic impacts to that inventory stories. What will happen is, US businesses and consumers will start to draw those inventories down will have the opposite effect. We will sit with very diminished inventories and we will basically not have access to products that we would normally expect to have access to. It's something to watch, it's not something for an alarm yet in terms of going to your grocery store, or going to the hardware store, or going to a retailer. Those items will still largely be in stock.
This will show up for American consumers really in the back-to-school phase. We think of freight is really a cycle is that, when products move from China and you start planning, you typically are planning six months ahead. So, two quarters ahead. When you're ordering products, you're saying, "Okay, I need to order these about six months in advance of when I want them, when my peak demand is. We think about back to school is really that starts really in late July and early August is when products are in store available for back to school. That is about the timeframe, where we would expect this Chinese impact of slowing supply chain to production to really be felt by American consumers.
If it goes on for months, which people believe it could, then we will start to worry a lot about what happens in the holidays and whether we have holiday inventory. And like last year, there was a lot of conversation about whether we would run out of inventories in Q3 and whether we'd run out of inventories for Christmas. I think largely the big box retailers did an exceptionally good job of responding to that. Consumers also showed up and purchased items that were in high demand much earlier than they otherwise would have. I think we were able to shave off what could have been for many consumers, a crisis of sorts. But I think what is really concerning as we move into Q3 and Q4, if we see these lockdowns persist through the summer and into the fall, I wouldn't be really concerned about the lack of inventory.
The other thing that you got to remember about supply chains. These are webs and they are interconnected. Just because the ships-- We see China sorts to resume its economy, it doesn't mean that all of the products, and components, and raw materials are there for them to resume all at once. And also, upstream suppliers ideally need to resume production at the same time that I'm downstream or earlier than downstream manufacturers have turned on the volume. This isn't as if you can just turn on a switch and then all of a sudden just works. It takes a while for these supply chains to heal and produce. And that could take a while before we see what we consider a normalization of the economy.
Bill: How many conversations are you privy to where people are talking about onshoring or nearshoring? I would imagine that this is one of the top conversations now. It's odd to go from a world, where everything was just in time and super tight to a world where everybody's trying to contemplate. Well, how do we get a robust and resilient supply chain? And it's also odd to me that it's still going on. It shouldn't be shocking these aren't things you can just turn on a switch, but how long can this problem go on? I would imagine a while, huh?
Craig: The Chinese government, the Chinese Communist Party is committed to its zero-tolerance policy. I think different than the United States is you're going to have politicians that are committed. Just take Donald Trump, which is probably the most-- Whether you voted for him and you supported him, he's certainly someone who's of all of the Presidents we've had in the last 300 years, he is the most stubborn President. That's why people loved him and they also hated him for the same reasons. And oftentimes, the people loved him, loved his stubbornness and people that hated him, hated him for being stubborn. The reality is, he's the most stubborn President that we've probably seen certainly in our lifetimes and maybe in history. I don't know.
But you take that and there is a lot of limitations of power that an American President has. Our system has checks and balances, we have congressional, and we all also have the opportunity to vote. Public opinion really matters in the United States. China, not so much. It's an autocratic regime. In many ways, it could be compared to a dictatorship in the sense that you have an elected semi-- We will call elected by the Communist Party or an appointed Premier, which is a Premier Xi, and basically, Xi runs it as almost a dictatorship is very autocratic and the amount of power that he has inside the Chinese system. If Xi, who has argued that for years and the Chinese government has argued for years that their COVID zero-tolerance policy was superior to the West, there was this whole sense in China, they had defeated the West through the virus that their approach to really zero tolerance was superior to the American system or the Western system is that, we allowed all of these people to die, we allowed our people to be sick. It's because we were not disciplined, we didn't care about the people around us and their stance on COVID was far more superior.
They've had a draconian zero-tolerance approach for really the entire since they first identified the virus. We adopted parts of that in the early parts of the virus, because we thought we didn't know the impact and this was unprecedented territory. But American political systems are built to respond to public opinion. American political systems are built to mitigate the amount of power that one individual or one group of individuals have have and because of that, China can stay committed to this policy far longer than any Western elected official would. You think about what for many Americans was disturbing about Donald Trump was that, he didn't seem to care. He was very stubborn. And like I said, many people loved him for that, many people hated him for that.
The reality is, Xi doesn't have to worry about Chinese public opinion. He has to worry about Chinese public control. The best thing about the COVID lockdowns for China is that, it actually mitigates the amount of information, the amount of crowd gathering that you get when you have times of significant distress. In some ways, if you go back through history, it's not the point where there's a lot of distress that causes revolutions. It's right after this relief rally, where people have built up this anger, and frustration, and stress that they end up imploding. Go back to the French revolution. That was actually after the significant amount of hunger in France, and then it resolved itself, and the economy was on the upswing. That's when you saw people were emboldened to take to the streets, and protest, and overthrow the government. That is a much more dangerous time for the Chinese government is after they let this go not currently.
The longer they stay locked down, frankly, the more control they can have over their own people. They're using COVID as a way of forcing compliance to stay in your homes and not organized. So, there's this-- a lot of geopolitical watchers are watching this and saying, "This could go on a lot longer than it would be tolerated in the West."
Bill: Yeah, that is going to cause some real issues for the foreseeable future for everyone involved.
Craig: The unfortunate reality is that, if 40% of GDP is locked down in China, that GDP is directly tied into manufacturing production and supply chains. Because it is so significant in terms of the world's manufacturing centers and world manufacturing supply is that, it will have a lot of cascading downline effects of production in every part of the world. China is just so important in terms of manufacturing and supply chains that the rest of the world depends on it. You think of what happens in Taiwan, whether we're producing finished goods and electronics depends on a lot of the casing and cases, the low-end plastic components that go into things like cameras or into TVs, a lot of that's made in China, and then shipped to Taiwan, where they put in the semiconductors are shipped to Malaysia, where they assemble these items. A lot of the components that you see throughout supply chains, regardless of where they actually originate or where they're actually finished, a lot of the components come from China.
Some of the production that we see isn't low in clothing or low in shoes, a lot of its raw material components that go into the finished products that may be shipped to the United States for final assembly, or maybe shipped to Mexico for final assembly, or Vietnam, or India. And those items are being disrupted as they flow and therefore, you could see cascading supply chain effects across the rest of the world that we're not even accounting for. And largely, don't even have visibility about, because it's an opaque issue. We just don't get really good data from China. The only thing we can look at is what is being shipped out in terms of volume of cargo out of China, and then draw some historical reference to what that could mean, and a lot of channel checks and what that could mean.
Bill: I think an interesting aspect of what you're describing is, I perceive China to usually be a long thinking society, but I got to think companies are thinking long and hard about how to diversify the risk as fast as humanly possible right now.
Craig: I'm a Western, an American manufacturer, or an American wholesaler, or retailer, or whatever. And I'm looking at, "Okay, what am I going to do when this disruption happens and I don't have inventory?" You can go back, you don't have to go very far in history, go back to last year in 2021. You saw a big delta, a big difference between companies that had inventory and companies that didn't have inventory, and how they performed. Every company faced inflationary issues. But the companies that did really well last year were the companies that had inventory when consumers wanted to buy it. The companies that struggled were the ones that didn't.
Bill: Yeah.
Craig: If I'm running a supply chain, if I'm running a production plan or I'm running a retailer, I want to know what is the resiliency of the suppliers that I depend on.
Bill: Yeah, sure.
Craig: It's not so much to know the resiliency of just them, but it's also the downline or upstream components that go into those products that matter. I think as an American supply chain professional, if I run a distribution system or even run a factory, I'm going to look at every single one of my suppliers and understand, what is the risks that I am now accepting by using those suppliers. If the price delta, the price between one supplier and another is not very vast and let's say, we compare Mexico versus China, the cost isn't just in the components themselves, but it's also the labor cost. Mexico is now as competitive as China in terms of a per hour basis for assembly and production. It's the transportation costs while moving products and container ships from China to the United States is very expensive relative to low land transportation.
Mexico happens to be in the center of the United States. They don't have to transport it from the coasts from the West Coast to the East Coast, which actually cuts down a lot of the cost associated with movement. We start to think about that. And most importantly, I know that that production plant can provide my on demand need when I need it and is a lot less prone to this autocratic government that can disrupt things. I start to look at Mexico far more favorably or even domestic US production far more favorably than I would have otherwise done it. A lot of people will bring up tariffs and said, "This was predicted during Donald Trump's trade wars." There's some truth to that. A lot of people predicted that this was forced back. Certainly, Donald Trump wanted to force manufacturers back to the United States of America first.
The reality is that, it didn't happen. The reason that we didn't see that happen is, it was a cost, it was a tax. We put 10% tariffs and then 25% tariffs. And everyone assumed, "Okay, that will force the price deltas between Chinese goods and American goods start to narrow, and at some point that will force American businesses to think differently about China production. It didn't really happen. The reason it didn't happen, it was a cost, it was a tax. American businesses largely could pass on those cost delta's or increases to American consumers, and we were happy to pick it up. The difference now is this is a supply chain problem and there are supply chain disruptions. Those disruptions will impact the flow of cargo. We impact the flow of cargo and the impact of flow a business' ability to get our hands on product, then the calculation is incredibly different. Because if we're talking about raw materials, if you don't have the raw materials that go into the finished goods, you can't produce a single thing that is involved in that item, if you can't find alternatives. So, it can shut you down your entire production plant, if I'm producing a finished good.
If you're talking about retailers, then it's, "Hey, I need inventory and I need my store shelves full." If I'm selling say, fast, casual clothing for people to wear around their homes or go out, just to hang out at the soccer field on the weekends, then I am concerned about price, because there's a finite price that I'm willing to take. But I may look at places like Vietnam, Bangladesh, Pakistan, where I can find equivalent suppliers as alternatives, who are able to provide those goods to me. I think what we're seeing is China is a risk that is not currently factored into a lot of companies' understanding of the future. I think what we've seen is, I think a lot of Western thinktanks and geopolitical strategists, and economists assumed, and rightfully so for many years that as China ascended and was dependent upon the Western economies and Western consumers for product demand that they would largely open up their markets, and largely mitigate the rule of law, which went out, and they would always respond to economic cycles and economic demand first. They did that for 20 some odd years, maybe even 30 years.
If you go back to 1980 to really the last 30 years is, largely, China continued to operate under Western systems. But in the past four to five years as China has assented, they're starting to violate those norms that we understood in the West, and we accepted, and that behavior becomes far less predictable than what we would expect. As China becomes richer and more powerful, it's becoming far less Westernized in its thinking, far less democratic in its thinking, and far less economically exposed to Western cycles, and far more about itself. That is a much more dangerous outcome than what most Western thinkers thought would have happened. Mostly what we thought, I think, largely what most people thought including myself is, as China assented and its economy came intertwined with the West, is that it would largely adopt Western norms. But in the last couple of years, it's been the opposite. We've actually seen it retract, and become far more insular, and far more about itself than what it had been over the last couple of decades.
Bill: It's going to be interesting to see how they respond to companies nearshore. If it is true, the company's nearshore supply chain, it's going to be interesting to see how China responds to that, because that's going to hit them directly economically and that's--
Craig: I think what will end up happening is the manufacturers that produce goods that have high margins that having inventory in stock or not having inventory in stock is far more impactful to my business than the cost of goods sold. Think about those products that matter. It's electronics. Things that are relatively high margin, semiconductor chips, it's electronics that are really, really important for the running of a lot of businesses. The margins of those things are pretty expansive. Pharmaceuticals, China is the world's largest pharmaceutical manufacturer by multiples over anywhere else but the margins on those items is pretty expansive.
I think what we'll see is that, those companies will start to say, "Hey, I can afford to produce these items in the United States or I can afford to produce them in Mexico. Puerto Rico is a great example of that, because the risk of not having these items is far more impactful than the cost of producing them. So maybe, it cost me 20% or 30% more to produce them at home, but at least, I'm not running out of them. I think what we'll see is those items that tend to have higher margin will leave China far faster than those items that are so low in general commodities that you see in discount retail. Those items are probably going to be less prone to leave. There will always be a manufacturing base in China. You can't reverse that. But I think that we will see a movement towards companies thinking differently about how they run their supply chains. And frankly, holding a lot more inventory than they have in the past just to absorb some of these shocks.
Bill: That's really interesting. So, what was it like when you released a report and all of a sudden, you see J.B. Hunt stock go way down? And then that was wild.
Craig: We write reports a lot. We've made calls throughout history, since we've been past five years have been around. Usually, there's no major market impact to these stories. I think it was a little shocked on how fast the financial markets responded to our freight recession is eminent article. I think I woke up the next day and something like the transport-- [crosstalk]
Bill: Yeah, it was wild.
Craig: And then over the course of a month, I think they were down 18% to 20%. It was a little shocking and frankly, I was pretty uncomfortable with the fact that happened, because we were talking about as the fundamentals of the broader market, a really a lot of small and independent trucking companies and freight carriers. We are not really talking about this, what we call, enterprise class carriers and the impact of them. They're largely insulated from some of these developments. They have impacts and it will impact them. But they still don't have the boom-and-bust cycle that a lot of the small carriers do. That's really what we're referring to is what it means for really small trucking companies.
The reality is that, I think Wall Street was already-- One article is not going to set off an entire trading, unless, there's already a belief or a bias to look for data that trims that off. I think what we saw was, it was just the right tipping point, where largely Wall Street had assumed that the US economy was stretched that whether we have Fed tightening, the cost of fuel, retail consumption is starting to change. I think Wall Street largely bought into the thesis that the market for freight is largely the climate is changing towards a risk off environment versus risk on. For two years, the transports have done exceptionally well. I think really what has happened is that, you look at what happened in Russia with the Russia-Ukraine war and what that happened to fuel prices, you looked at the Federal Reserve starting to really, really increase interest rates, you see mortgage rates go up.
You start to wonder, and then you see consumers starting to go out, and live their lives, not consuming physical goods, but consuming experiences. At some point, you start to say, "This is not good generally for the transports and not good for people that are in logistics." Because if you're not moving a lot of products to the economy or as many products to the economy, it means that there won't be as much opportunity for those companies in the future as there is in the past. Wall Street is typically a six to 12-month view of the overall sector and I think that's what caused those to sell off. I just happened to be the hit the trip wire that called [crosstalk] cascading. But it is certainly a little intimidating and a little bit of like, "Oh, my God, what did I do? It's like as a kid."
Bill: [laughs]
Craig: You go over and you're like, you touch something and everything crashes out from under you. It's just like that. I remember I was once traveling on a business trip, and I was in a hotel, and I went in the shower, and I simply just very gently, because I'm in the morning, you don't have a lot of energy, and I just want to gently closing the shower door, the entire pane crashed, it exploded, which I didn't even know was possible, but apparently, tempered glass is very fragile. It's naturally fragile. It's supposed to be fragile. But apparently, over time, the sill inside the tempered glass can deteriorate. Apparently, glass doors can explode. I didn't even know that. But I gently close this glass door and all of a sudden, the glass door explodes, and all this glass shatters being almost like a bomb and it ended up cutting my hand. It's very similar to that.
That article tripped off this cascading effect of all of these elements. The shower door, I didn't do anything to cause it. I just happen to be at the right place right time and pulled on the door enough to cause it. That's exactly what happened, I think with the article. I think generally what we're seeing is that the market continues to be a lot of headwinds for carriers, a lot of headwinds for transportation companies, and I think generally our thesis is still correct in the sense that the market is decelerating, the spot rates continue to fall, freight volumes continue to be challenged, and I think the thesis that we had is still intact.
Bill: Now, when you're writing for that article, I thought what was interesting is, you even came out and you were like, "I don't know why J.B. Hunt moved this much on my article?" They're largely insulated.
Craig: Yeah, I don't. Even all of the trucking companies, some of them are more exposed to the spot market than others. But certainly, J.B. Hunt, J.B. Hunt is the Dollar General. Their intermodal business, which is the railroad put into a truck onto and taking a container and putting it from truck to rail. J.B. Hunt is largely viewed by people and transport, not as a trucking company. Now, you ask someone on the street, "If J.B. hunts a trucking company?" They say, "Yes." They participate in trucking and they're very significant player in the overall surface freight market, which is moving freight over land. But as in over the road for higher trucking company, they're largely not a participant in that part of the market. That's better for their shareholders, because they don't have what we call a commoditized spot freight exposure, except in their logistics operations or brokerage operations. They're largely insulated in many ways like Dollar General is in retail is when the economy's doing really tough. Dollar General does exceptionally well, because people start to value lower cost products and are not necessarily going for the most premium product in the shelves. Shopping less at Target and more at Dollar General when the economy is-- They still need the cleaning supplies and they still need their milk or their food. They'll go to Dollar General, they won't go into Target.
What we would say is, J.B. Hunt fits that model as well. When the market softens and freight demand slowly moves away, J.B. Hunt actually does better in that environment, because their intermodal rail operations seem to be lower cost than say truckload. Also, when times aren't as important, moving on rail is actually an advantage, not a disadvantage. Feature not a bug. Because it means I don't have to keep product in my warehouses. When J.B. Hunt sold off as much as it did was really surprising just because fundamentally, it didn't make sense. I think what happened is that, the entire sector sold off. Like I said, I don't think this is just our article. I guess, we get credit for being a cascading effect, but the reality is that, the market was already looking for reasons to sell the transports and this just happened to trigger the right algorithms to do it.
Bill: Yeah. How does Old Dominion fit in this? Are they impacted by the soft freight market? I would think so.
Craig: Old Dominion is a well ran LTL carrier. And being a well ran LTL carrier, it means you-- An LTL operates different than truckload. Truckload tends to be a highly commoditized market, where there's no barriers to entry. Anybody can go buy a truck, can get financing, and become a trucking company tomorrow the time to do that assuming you have a CDL is measured in like a day to-- Literally, if you had a CDL, you could go buy a truck and you could be operating tomorrow. There is no time delta or gap between the time that it takes to ramp up. Truckload tends to be far more cyclical and far more responsive to these demand cycles is what LTL does. LTL requires terminal networks, they tend to move for smaller shipments, they're marrying up a lot of small shipments into a network.
LTL is a market that is in many ways much like rail intermodal is. It's somewhat insulated and somewhat advantaged, when freight slows down, because you're not moving full truckloads. Maybe you're moving a pallet or two. And so, LTL will do better at this part of the cycle than what general commoditized truckload will just because of the way that the nature of how it works.
Bill: That makes sense. It's so fascinating, man. I love thinking about the way that stuff gets to us. I don't care if it's your internet, I don't care if it's goods. I just think that the world around us is so fascinating.
Craig: It is far more complicated than what I think most people think about or even care to think about. You think about, I always use the description of a supply chain is much like your electric power company or utility is. You don't think about your power company. Think about the last time you thought about your power company.
Bill: Yeah. I'd never. I just expect the lights to go on.
Craig: But the last time you really probably thought about your power company like obsessed with it-[crosstalk]
Bill: Yeah, that's right.
Craig: -was when the lights weren’t on. I bet if the power was out, you're checking every five minutes on the power company's website to see what status of your power is, because we just can't face it or your internet company, when your internet's down you're like, "What is going on? How long is this going to take?"
Bill: That's right.
Craig: We are so engineered to expect it. Supply chains operate the same way. Nobody thinks about how those products moved from China into the United States until after these products aren't here. And frankly, if you talk to most people on the street about China today and I'm talking about in the last week, very few people that are outside of the Twittersphere that I operate in are thinking or even looking at China as a risk. They like, "Oh, I thought that it was all over. I thought COVID was all over." That we all agreed to move on.
The reality is that, most people aren't thinking about these things, don't even care. And they won't care until they walk into the grocery store and they don't see items that they would expect or go on to a website and those items don’t show.
Bill: Yeah.
Craig: That's when they'll start caring. We're not there, yet. As you mentioned, people largely ignore supply chains until they don't work. I always say, "If I'm in the news a lot," it's because things are really not good.
Bill: Yeah. That makes sense.
Craig: The more you see me, the worst tends to be, because people really don't want to talk supply chains. It's a pretty boring topic for most people, unless something's not operating the way you would expect it to.
Bill: So, how did you get into the business, and writing, and whatnot?
Craig: Yeah, I grew up, so, my dad started, what's the fifth largest trucking company in United States called U.S. Xpress. My uncle started the eighth largest trucking company, company called Covenant.
Bill: Yeah, it's in your blood.
Craig: [crosstalk] The big oil, big trucking. I've been around it I learned in and outs of the business and we built FreightWaves five years ago, because it wasn't really an information source that was real time. A lot of the media outlets that were operating the space were writing stuff that would take place, writing either on a weekly cadence, or monthly cadence, or quarterly cadence. These developments happen so quickly and it was this information gap. You could find social media blogs or groups, where people be blogging about this stuff. But nobody was talking about this stuff from editorial, data centric model. We went out and created FreightWaves for that. It's an industry that I love.
I think you have to love it to do it, because it's a complicated industry. You have to understand how this stuff is constructed, because from the outside, it looks very like a spaghetti. All this stuff is intertangled or there's a rubber band balls people get. You pull on one thing and then it tightens up on another. That's a lot like freight is that, it's this really weird mess of spaghetti that's all interconnected. So, you have to understand how that stuff is built in order to be able to characterize what's happening describe it.
Bill: Yeah, it's fascinating. It's an interesting niche. So, who's your typical subscriber?
Craig: From a reader's standpoint, it's everybody from a reader. We would say that about 40% of our traffic is from the industry. These are people that are in supply chain or either driving trucks, running warehouses, making decisions at a sea level C suite. And then it's 60% of the traffic is what we would call guests or [crosstalk]
Bill: Myself.
Craig: Like yourself or some of the folks in this podcast is like, "Oh, why is this containership a big deal in the Suez Canal or what's happened in China impacting my ability to get my hand on my favorite chocolate candy, or whatever, or some boxers, some new PlayStation that's out." Those are tourists that come for one or don't visit on a regular basis and we've profiled them are not from the industry. But maybe they're just intellectually curious about a topic or intellectually have become interested in supply chain, because it's just a fascinating topic.
In terms of the data customers, these are large decision makers or large companies that are moving a large amount of freight throughout the economy. There're the big box retailers. It's the e-commerce companies, it's the big trucking companies that really are consuming our data. Our data is not built, frankly, for really small trucking companies. It certainly conserves that, but it's having an automatic weapon for a knife fight or a fist fight. It's frankly very robust compared to what the general trucking operator would need or want. We build our datasets for really the largest decision makers and largest organizations in the space that are concerned about real time pricing, concerned about real time supply and demand, concerned about these macro developments where an individual trucking company and individual truck driver is impacted by what happens around, but they have very little control over those outcomes. They're subject to the market conditions.
Whereas if you're running a supply chain at a major e-commerce company, or a major consumer product company, or a major trucking company, what happens in the macro environment, you have a lot of power to mitigate that impact to you. It's really important that you understand from a data standpoint, what is actually happening, but also, from a contextual standpoint, what is happening. When we're talking about the market, we're talking about the macro view. It's interesting reading Facebook comments from people that read our stuff that are-- They'll take, "Hey, I was out in LA and there was a lot of containers out there." There's no slowdown in freight.
Bill: [laughs]
Craig: I'm like, "Okay." Or, like, "There're so many trucks on the road at the fuel island." This is not a freight recession. It's because in their own experience things are fine. They don't have context of what happens across the market. And oftentimes, shouldn't even care. A lot of this stuff becomes distracting to them in the background. But if you're running a global supply chain for a major e-commerce company or a big trucking company, you do care about those things, because that has an impact on your business.
Bill: Yeah. Well, like you said, if something's got a four-week lead time and I'm telling you, well, I was just in LA, I just haven't seen it yet.
Craig: That's right. If you're sitting in a grocery store in Chicago, or Dallas, or Chattanooga, Tennessee, and you go into the grocery store, and you're handing all this stuff in China, it just feels like this is just the media making something up and no big deal. Maybe you aren't even paying attention. What will happen though was after you go into the grocery store say or go into your back-to-school supplies store in August, and you're like, "Why is there no paper, and pens, or backpacks available for my children that I normally get? There were there last year. I don't understand why they're not here this year." You walk in for back to school, then you're you start to ask, "Well, what's happened?" You have to go back through months of history to backtrack that. Those are the what I would call the tourists that are just intellectually curious about understanding what all happened to bring me here. So, we have historical archive of all those elements that happened in real time and you can characterize that in terms of where we've been.
Bill: Yeah, interesting. So, are we going to create another toilet paper run with this episode, do you think or we'll see?
Craig: A lot of toilet paper is produced domestically. I wouldn't sweat the toilet paper crisis. Look, I think generally, as a consumer, you should be thinking about having some buffer of any item that is critical. Toilet paper crisis of 2020 is the most ridiculous-
Bill: It was.
Craig: -crisis in American history, because it's an item that nobody thinks about and nobody really like thinks, "Oh, I have to stock up on toilet paper." It's ridiculous that we ran out of toilet paper from a laughable consumer standpoint. But the reality is that, that was a shift from a lot of people were consuming toilet paper at the office.
Bill: Yeah, to their house.
Craig: This shifted the home lifestyle and just the consumption about it shifted and the supply chain took a while to catch up. I would not sweat toilet paper. But if I'm thinking about back-to-school supplies or think about what happened to China now, I would be thinking about, "Does it make sense to go ahead and buy the supplies now?" I may be wrong. We talked about stuff that happened in Q3 in August, and September, and October, and warned about some of the supply chain shortages may happen for Christmas, I think largely consumers were generally okay. You may have not gotten your favorite color, or your favorite item, your favorite technology, but you largely were okay. No one [crosstalk] without during Christmas, nobody got called. Although, if you got called, you'd probably, that'd be worth a lot of money. So, that might have been a really good present this past year.
Bill: I'd tell you who got hurt, though. The retailers that do overstock stuff. If you listen to Nordstrom Rack or I follow QVC, they have that company Zulily. They had a lot of problems getting product. So, on the margin, it definitely hit.
Craig: Well, a lot of it was just because there's secondhand liquidation services, where they're essentially liquidating inventory that other retailers was out of season. They ordered too much and didn't sell enough. They were in short supply in Q4. In the holidays just because it wasn't in the inventory of, every retailer was holding on not knowing what was there. But I think those are actually really good stock plays now, because we do have record inventories and we are in a situation, where a lot of those retailers are going to be liquidating those items. And many of those items that came in in January, February, and March were ordered for Christmas and peak season that are largely not being consumed now.
You may find that those discount retailers are actually a really solid play. If you assume that consumers are looking for deals in an inflationary environment, where prices go up and inventories for those secondhand stores may be available, at least for a period of time. Now, anybody can bet what happens in Q3 or Q4. It's really hard to know. We believe that freight demand will slow due to the China slowdown, but again, we're just making a calculated guess based on history.
Bill: How much of the trucking industry, you said there's zero barrier to entry. I can go get my CDL and grab a truck. How many guys kind of come in when it's tight and then leave when it's like this? How much would you expect labor supply to maybe go up as a result? The guy is saying, "You know what? Fuck. I got into trucking too late. Now, I'm getting out."
Craig: We know that there's 170,000 new trucks and drivers. We call it dispatch or capacity that have entered the market over the past, really, two years. It's the largest number of new trucking companies had joined the freight market, as well as the largest amount of trucking for higher capacity in history has joined the freight market. When we think about the amount of demand just in terms of freight, that's really encouraged the expansion cycle of a lot of new entrants. A lot of people come back and say, "Well, I hear about this driver shortage. Why are so many trucks coming in if there's a driver shortage?" What they're largely referring to is the employee drivers.
There're really two types of capacity. We're going to forget the railroads for a minute, but let's talk about the way the trucking market works is, you have the fleets which hire drivers and those drivers are employees of the trucking company. They don't have a lot of autonomy, they don't own the truck, they don't have the risks associated with being an owner of a trucking company. But they also lose a lot of the autonomy that they would have otherwise. What happens is, when the rates are so high, particularly spot rates, it is a lot of those employee drivers leave fleets, and go buy a truck, and become a trucking company themselves. But now, they're operating as an independent contractor inside the market. What ends up happening is they leave the trucking company they work for that trucking company then has to go hire another driver to take the seat if you will of that other trucking company.
We've gone from driver works for trucking company, goes and becomes an owner operator, where we've not added a driver. We've added a truck in terms of total, like, truck, but we're -1in terms of capacity or we're flat because the trucking company that had the employee driver is down the driver, but there's a new driver, a new fleet in the market. Well, that trucking company immediately is going to try to replace that driver. They will put that driver to driving school, and they'll get them certified, and that driver then joins the fleet. Now, we've gained a driver, both the employee drivers now been replaced, as well as the dispatchable owner operator has been replaced.
It's what you see when freight demand is high. Those drivers that are working for a trucking company look at the spot rates. They go to the Truckstop and they hear the guy making, "I'm making $300,000 a year and you're grabbing for J.B. Hunt or you're driving for that company, and you're making $50,000 $60,000. $80,000, whatever they're saying." What happens is that, that driver says, "Hey, I can make a lot more money being an owner operator." He leaves the trucking company he worked for and became an owner operator for the market. Now, the trucking company has to replace that driver. The cycle goes on as long as spot rates are high. What they'll do is, they'll enter the spot market as a dispatchable unit and the trucking company still has to replace that driver, because they want to keep their fleet fully staffed and they also may look at the market and say, "Hey, the freight conditions are really good. Let's expand." They also expand their fleet.
Not only they have to replace the drivers of losing, but they also are bringing new drivers into the market. Well, that creates a capacity expansion. Here's what happens. Every single cycle, capacity will eventually match demand, which we probably are at that level now, where capacities matching demand. And largely, for the market, most people think it's fine, because so enough freight for everybody. But what happens is that expansion continues to take place, because just inertia is there and spot rates are still high. As long as spot rates are still high and they are so high versus historical norms, new entrants will enter the market. The big trucking companies will continue to add drivers to their fleet at the same time. What ends up happening is, anytime freight volumes start to really come down which we've seen, then the market starts to flood with too much capacity, and then we end up in a situation, where we see a lot of bankruptcies that take place.
We're in the very early innings of that cycle. Now, why we could be wrong is, if we don't see expansion of fleets. We're seeing it happen. We've seen 170,000 new trucks. We've seen the trucking fleets respond to that by adding drivers and expanding their fleets, because they are expanding. And we're seeing a slowdown in the US freight demand happen at the same time that there's expansion of fleet. What happens is, eventually, you overcorrect and you have too much capacity chasing too few loads and that we would call that a bloodbath or a lot of small trucking companies lose opportunity. And that's exactly what's going to happen. That's what we've said and that's essentially what we predict is going to happen over the next couple of quarters.
Bill: I presume that guy, or girl, or gal, or whatever that is just entering the market probably has some debt on the rig to buy it right and not quite the staying power.
Craig: Well, they bought it. Remember, they bought it. If you go back to 2019 and you look at the cost of a say, a three-year-old truck, is the cost of a three-year-old truck was something like $60,000. You could have bought a three-year-old truck good to decent shape for about $60,000. That same truck would go for about $140,000 today. And then we have interest rates too is that, interest rates to finance the trucks. These are typically small trucking companies that may or may not have sufficient credit. So, they may be financed at relatively high rates. Those rates have been creeping up or I shouldn't say creeping up, really climbing up quickly. And then you have fuel price. Your fuel headwinds that are also taking place.
All of these things are happening at once. I've seen the price of fuel double really since March. When we saw Putin attack Ukraine, the price of fuel basically doubled from really February 24th, I think on. And that has stayed persistently high. We've not seen it come down. The price of fuel is doubled, which is the number one variable costs for a trucking company, we've seen headwinds related to cost of capital, we've seen headwinds in terms of declining freight rates and diminishing demand. While there's not one thing that will knock a truck-- [crosstalk]
Bill: The confluence of events will.
Craig: Over time, the cash flow of those trucking companies starts to really evaporate and that's when you start to see a substantial amount of bankruptcies that cause a lot of really challenging conditions for trucking companies.
Bill: Yeah, interesting. Man, it's wild. Trucks, stocks, houses, it's all the same stuff. It's all the same behavior.
Craig: It's all supply. Supply and demand is the most Economics 101 and anyone would be well served to understand supply and demand. It's funny because a lot of times, consumers, we see politicians do it. I like to believe the politicians that talk about exploitation, and price fixing, and profit taking, and profit engineering, and monopolistic prices are not dumb enough to believe that they don't believe in supply and demand. They say these things, I think-- [crosstalk]
Bill: Yeah, it plays as well.
Craig: It's politically popular, but surely the people-- Take Elizabeth Warren as an example. She's a Harvard Professor. I'd like to believe she's not dumb enough to actually believe the nonsense that comes out of her mouth in the sense that like, all of these oil companies and companies are just exploiting the poor people and profit engineering. I like to believe that she understands supply and demand. But I don't know that she does. The reality is that, supply and demand matters. It matters in trucking, it matters in oil, it matters in every single economy across the planet. And ultimately, supply and demand wins out.
When we look at trucking, because there are no barriers to entry, it is a very cyclical market and is very prone to boom and bust cycles, very much like oil is. We think about the trucking market, you try to think about the fracking or the shell companies of United States are very similar to the trucking company through these owner operators. It is typically the shell companies tend to be smaller operators. They can come online really quickly, and come offline when the market goes south, and they are that swing producer in the oil markets. They also tend to go bust a lot faster than these big major oil companies do.
The trucking market works the very same way. The owner operators, these independent carriers are very much like the fracking operators and the shell operators, where their variable costs is much higher than the broader market. But as long as the rates are high enough, they can come into the market and make a lot of money. The problem is that, what they end up doing is oversupply in the market and it ends up, basically, they lose a lot of the pricing power that they have. The difference between oil and trucking is that, I think with the oil markets is, there's a lot of upfront significant investment and putting up an oil rig. There's also a lot of environmental and just geographical or geological constraints to do. I can't put an oil rig on my property in Chattanooga, Tennessee.
Bill: Yeah, no doubt. They're super hard to scale up.
Craig: Yeah. There's no oil here from what I could-- I'm sure that this microcosm of oil, but there's no way I can make money on oil. It's probably $7,000 or something to drill for oil. The reality is that, when you think about small trucking companies, it operates a lot like that, where their cost is much higher. But they don't have the barriers of entry, they don't have geographical constraints, or geopolitical constraints, or environmental constraints. They can come in and out of the market as they see fit. The problem is, once they join the market, they stuck, because they can't rotate out of the truck quickly if they're have a bunch of debt. What will happen is, as the US truck prices start to collapse, which they inevitably will, then they will be stuck trying to fend that off and that's the most dangerous part of the cycle.
Bill: Yeah. So, does somebody like J.B. Hunt on that side of the cycle get stronger or do they just not even play around on that side?
Craig: Hunt is going to do really well in any cycle. They have the most diverse in terms of revenue streams of any company. They play in the low-end part of the market or the cheaper part of the market, which is the intermodal market. Play in the high-end market, play in the brokerage market with. High-end would-be last mile, furniture delivery, things like that. The mid-market is that freight brokerage marketplace they call J.B. Hunt 360. And brokers expand their margins when spot rates do, the contract rates stay high. They actually are an amazingly well positioned company in any cycle, but actually, will come out stronger, because what will happen is a lot of these independent carriers will go under, and they'll churn out of the market, and J.B. Hunt with a robust balance sheet will do exceptionally well. A lot of the large chunk companies actually do better once we get through the cycle, because a lot of that excess capacity has been churned and they will have gained pricing power.
One thing that's not really been talked about is the supply chain disruptions over the past two years have really challenged a lot of supply chain professionals. These big trucking companies are able to respond with trader pools and equipment, where a small independent operator has not been able to or would not be able to. I think we'll see where the big trucking companies don't have as much exposure to the cycle as the small players, because if you're running a supply chain, Procter & Gamble, or Unilever, and Nestle, you're a lot less concerned about taking freight from say, a J.B. Hunt or a Knight Swift. Because you want to keep all of that capacity there. The last thing you want to deal with is a big headache of having to replace a lot of trucks. You're going to end up picking off the really small players in your call routing guide first and not touch the bigger players.
Bill: Yeah, it makes perfect sense. It's one of the strong get stronger things through the tough times.
Craig: That's exactly it. I guess still a robust market relative to where it was two years ago. But we've largely believed that that froth is coming off. There're just so many headwinds that are ahead for the industry that it's going to make it difficult for them to navigate.
Bill: Yeah. The thing I find really hard about this period is what you just said. It's still a robust period relative to where it was in 2019. The rate of change in many different industries really anything touching the home or durables that people have been buying like crazy for two years is clearly going down. But it was at such an inflated level that I have a really hard time in my head contextualizing what is going lower mean relative to where we were generally and are we going to overshoot to the downside we normally do or I don't know, it's very hard to figure out.
Craig: There's an argument to be made. If you think about just over the past two years, let's take, so, I was talking to a large-- They make skillets and they're one of the largest skillet manufacturers in the country. The CEO, it was a Mayors Roundtable. The CEO got up and spoke about business updates. He said, he goes, "Hey, I want you to know that for the past eight weeks, we've seen significant slowdown in volume." He said this in front of a room of other CEOs. It was the timing of what he's talking about matched what we saw in freight demand. It strikes me as skillets make absolute sense and they would be seeing the same developments. You think about a skillet is, we only as consumers need so many skillets. We bought a house, maybe we upgrade our kitchen, and maybe we've gone and upgraded our skillets. I was single once I was married, and then single, and then remarried. As a dude, at least for me, when I got divorced, I didn't replace any of my-- I used whatever I had in the kitchen until I got remarried and my wife replaced all the kitchenware-
Bill: Yeah, no doubt.
Craig: -because that's what you would do. We are unlikely to buy another skillet for probably 20 years, I'm guessing. As a consumer, you're not going to go replace those items that you've already bought. The assumption that you would have to make about most consumer behavior is that, really for the past two years, if you had a reason to buy a skillet, you would have already bought that skillet. I think this is true of a lot of different items is, we're talking specifically about skillets, but just think about gardening supplies. A lot of people went out and bought bigger homes, but winning those homes and moved in those homes sometime in 2021. They bought their gardening supplies, then.
A lot of that demand, because you only going to buy a certain number of skillets, you're only going to buy a certain amount of furniture out on your porch, number of basketball girls. That demand may not only overcorrect to the downside in terms of just diminishing demand short-term, but it actually may go much further than what it was in 2019 simply because consumers that had the opportunity with disposable income largely replaced the items that they always wanted to replace during the last two years, and may not need or want to replace those items anytime soon. We think about all those categories, which consumers for the last two years have done it. Televisions, maybe it's computers, but certainly those long-term items that we don't replace that often, because they last forever, I think are the items in categories that I would expect that we will see a much larger correction than a typical correction would be for those items.
Bill: Yeah, I think that's right. And especially, I think the marginal propensity is-- The wealth effect, when everything was going up, people were buying. Now, stocks are correcting and rates are going higher, maybe people start to think a little bit harder about where they're spending, it's going to be really interesting to watch.
Craig: If you go back a year ago, NFT's were those hot thing, which is just like a digital picture. We were told it was this new asset class. Maybe I'm sure there's a market for that, that will come out the other side of it. But the fact that we were seeing all of these speculative bubbles across all asset classes suggest that as consumers start to lose a lot of their purchasing power through inflation, through higher interest rates, then you start to look at really questioning how much demand is going to be there for these highly discretionary items.
I think about the fact that just in freight demand and think about all of the companies that when someone buys a new home or they move, there is a multiplier effect on them moving. We talked about skillets and kitchenware. You move into a new house, inevitably, you always buy new stuff. Or, that's the typical behavior pattern is. Maybe I'm buying new kitchenware, because now, I have a much bigger kitchen than I used to. And maybe it's largely furniture, I think gets replaced a lot, at least, every time I've moved or known people move, they always inevitably change the furniture. They buy a new house and like, "Oh, that couch that I've had for 10 years is-- I'm throwing that thing out and giving it away to somebody else."
I think what we end up seeing is, as you see slowing home sales, which home sales in March were down 8% in terms of new home sells, that will slow down a lot of the demand that would otherwise be there. Because people aren't buying new homes because of higher interest rates, it's going to just naturally slow the demand cycle in a lot of these categories. Stuff that's highly exposed to it is consumer discretionary and then you have at the same time, this movement from, "I'm going to buy and consume physical goods." So, skillets, furniture,-
Bill: Yeah, that I'm going to travel.
Craig: -TVs to where-- I'm now going to take all my money, and I'm going to go buy an airline ticket on Delta Airlines, and I'm going to go crazy in Miami, or Panama City Beach, or the Maldives, or wherever I've wanted to go, or the Caribbean. Because now I'm just tired of living-- staying in this house looking at my skillet, my furniture. I want to go out and party. So, I think that has also happened at various a time, which could drag down further the consumption of physical goods.
Bill: Yeah. I totally agree with that. The only odd wrinkle is the homebuilders, at least, D.R. Horton reported today and they still see a lot of strong demand. But that makes sense to me, because I suspect with rates up existing house, like, I'm not going to sell my house if I have a 3% rate. I think the new deliveries, if you believe in the housing shortage idea will probably still be okay. But who knows? I don't know. I've never lived through a--
Craig: You believe just demographically that housing shortage is real. I think you have to takeaway long term decade long trends and short term quarterly long trends.
Bill: Yeah. We're talking cycles and secular trends, right?
Craig: Yeah. There is a long-term secular trend towards homeownership. People are aging, the millennials are now at an age where they can go buy a home, they missed out on a lot of opportunity that would have existed, because of the housing crisis. They now sufficiently have a lot more capital available to them. The dream of a bigger home is coming back to America in building a suburban home or being away from the cities is renowned or renewed focus on that. I think that is a trend that is going to stay with us and we'll mitigate some of these short-term slowdowns. But when we talk about looking at data on a short-term basis, which is we do a lot of that at FreightWaves, because these markets are very auctionary. Then you do look at a lot of the short-term headwinds that exist for physical goods consumption. I think when you look at it on a short-term basis, there is a lot of reason to be concerned.
Now, you can take a step back from that and you can look at macro trends of nearshoring of moving production back to Mexico and the United States. That's good for trucking. You can look at what's happened in Russia and the Ukraine, and the destruction of the supply chain as it relates to food. That's good for American farming. You look at natural gas and energy supplies, that's good for American oil producers. Because over time, net gas and oil will come from the United States, which is a very trustworthy and dependable source of oil for Europe and that gas for Europe, then say parts of the world that are less dependable or more volatile. Russia is an example. Because of all of that, these are good long-term trends for America. If your horizon is five to 10 years, you can look at it and say, "I'm very bullish on the US economy, I'm very bullish on housing, I'm very bullish on freight in US trucking." You can be bullish long term and bearish short term. I think most of what I'm talking about in terms of what's happening is very short-term focus when we're thinking by month to month and quarter to quarter, not something we're looking at over the course of a year.
Bill: Yeah, agreed. Agreed. Do you have a podcast or anything? I got to think you do, man. You got a hell of an energy, you got a great voice, you got your setup behind you.
Craig: I appreciate it. Yeah, I do something called Fuller Speed Ahead, which I used to do it on a much more regular basis. But now--
Bill: Yeah, no doubt, you are busy.
Craig: Run a business, you do a lot of stuff. Yeah, but I do about three hours of live content. The FreightWaves does about three hours of live content a day. I ended up doing a lot of just TV on Bloomberg, and CNBC, and through the networks, because they're looking for insights. I do a lot more of that today than I used to, but I have a podcast called Fuller Speed Ahead, which typically interviews founders and stuff. I appreciate you saying that. I'm passionate about the topic. It's an interesting time, because there's all this macro development and reasons to be bullish, at the same time, you can be bearish. I think you can do both.
Bill: Yeah, for sure. Well, I foresee myself doing this for a while. So, maybe we could have a yearly update or something even when times are calm, I'd love to talk to you. I find this stuff fascinating.
Craig: Happy to do it anytime you want. In a couple of months, probably we'd be talking about the bull run in freight, because that's just how it works. So, people check in in a couple of months and hopefully, we'll have something more bullish to say about the market.
Bill: Well, I follow J Mintzmyer, too, and he covers shipping. I just think it's going to be a wild time to live through between the stop and go and who can make it through these periods of who's stopping. Because I think the story that I've told myself is, if the bigger and more well capitalized, people can get through this the backend like you said on a three, five, 10-year time horizon. They should be quite a bit stronger at the end of it. I don't own any stocks or anything in the space, but that's like I've been noodling on it for a while and that's seems fragility exposes those that are fragile, if that makes any sense.
Craig: Absolutely. The other thing is, when we think about what's happening around these long-term developments is that favors the American story, that favors the American dollar. One of the things that interesting is, if you follow this petrodollar conversation is, a lot of people believe that when the United States shut off Russia or the West shut off Russia in terms of the monetary system and the payment systems, that would largely make Russia, and the dollar would be at risk in terms of the world's reserve currency. But we've actually seen the opposite happen over the last two months, where the dollar has gotten enormously strong, because people are like, "The safe haven is United States." The reality is and I don't care whether you're a pacifist or you're an American nationalist, and you're stronger against military power is that, the reality is that the American military is the reason that we have enjoyed so much prosperity for the world, not just the United States over the last 70 years. It's the strength of the American military and the strength of the American economy that has kept the world relatively peaceful.
Now, there had been skirmishes, and there have been wars, and we know the war on terrorism, what happened in Iraq and Afghanistan is exceptions to that. There has certainly been interregional conflict. We haven't seen a massive breakup in world conflict largely because of America, and the strength of our military, and uncontested economic power. I think what is interesting about this is, China attacks its own economy, and attacks its own people, and looks a little irrational on how they're handling things is that really is for investors to say, I don't know that I want to put a lot of trust in the Chinese system. I want to move that money to where at least as crazy as America is. As crazy as the political system is and all the problems with all the insanity that exists inside the United States, I want to move it back there, because at least I know that they will always care about the money is that like, "Wall Street gets a bad rep. But there's a reason that Wall Street is as important as it is, is because it is the World's Financial Center."
China was trying to prop up Shanghai as an alternative to New York and it's losing that battle greatly. One thing I would also point out is, the stuff that I'm talking about the supply chain disruptions have always existed. There's always been wars, there's always been geopolitical events, terrorist attacks, hurricanes, economic cycles of supply and demand. The difference now is that, we are in this globalized world. We're very sensitive in these things and there's never been information or news that's been so pervasive and persistent able to talk about these things. It's the effect of social media of what's happened on the ground in places like China and in Russia. It's where we're able to get to the sources, if you will. It's the ability of real time data, whether it's economic data, high frequency data from credit card spending, or data that we track, which is supply chain data. This is all relatively new five-to-six-year development. So, then you have media that support this. All of these elements are now making things far more transparent. And just watching the news, if you watch the news-- [crosstalk]
Bill: Oh, it's terrible. It's terrible.
Craig: [crosstalk] it's a pretty impressing place. If you read my content or FreightWaves content, a lot of it right now is distressed, because we talk about things that impact our industry. You can call us a little hyperbolic, and you're probably right, and you should take a step back from that. The reality is that we provide a resource for people that are interested in the context of what's happening. Unfortunately, these events are so destructive to their individual outcomes that you end up becoming a little bit hyperbolic and how you describe them.
Bill: Yeah. Well, look, if I sat in your seat, I would say my incentives are to be correct. And then to the extent that I'm writing for the guy out there that may be thinking about buying that truck and getting himself screwed on the backend of a cycle, I don't want them to do it, because I want to be accurate and I don't want people to get screwed.
Craig: There're two things that drive any motivation that we have at FreightWaves. I think this is true for most people that are in the market is you want to be early and you want to be right. There is no other central motivation in what we do. I think the vast majority of people, human nature is that is, we build our business to describe the things that are happening, so that people can make decisions. Now, they can say, "Hey, I don't agree with this statement or this is a little or-- a lot exaggerated." Those are fine. Have an opinion. That's great. But the job that we have is to interpret these elements and things that people can understand and react to, and they can make their own decision on whether they agree or disagree. That's fine that they disagree. It's fine that they don't act on it, but at least they're informed.
Our job is to be right about what we're seeing, and form and bring context to it and to be early in that cycle. Because if you wait, I think way too many people, particularly, reporting in our industry and even economist, they wait until after a recession has happened where they call it like, "Oh, that was a recession a year ago." They're always very late, because they wait for all the data. The problem is, when you're in these markets, we are in freight and supply chain, these developments happen so quickly, you have to be very on the frontend, and you have to interpret, and make guesses based on a lot of data. So, our goal is to be first, and is to be right, and that's the only motivation that we have.
Bill: I've been laid on a lot of this stuff, because I've been waiting for the data. But thanks to the power of Twitter, man. I've gotten myself to open my eyes. I use it where I'll float out a tweet or whatever. Sometimes, I try to put something that will get people to respond, but I don't try to do that too often. But I put out one tweet this weekend, where I was trigger warning to the bears or whatever and it was all about how good the Fed thought the economy was. Some of the comments were like, "Well, dude, that's how it looks at tops, by definition." And it got me thinking and I said, "You know what? I'm glad that this exists, so that I can throw idiocy out there and then get less stupid."
Craig: Well, the reality also is not always a look at tops, but you got to think about what the Fed uses to draw their conclusions is, the US economy and the global economy is massive. There're all these nuances that happen. They're using government data, they're using officially-- Then they have secondary data points that they look at. But they tend to use these very large macro datasets to make really profound policy. The reason that they wait for government data to act is that, they want to make sure that they've had as much perspective on what's happening on the ground and it's right, because it's politically dangerous if they go the wrong way. One could argue economically dangerous if they go the wrong way.
The Fed's always going to be late to the game. It's just built into their model. Looking at government data versus the data that we track, we know that government data is lagging. And any commentator in freight that's using government data is going to be behind the ball. They just are, because it takes a long time for the government's data to show up, because a lot of it's based on survey data, surveys are largely sentiment based, and it takes a while before that sentiment shows up with all of these data points. Because it lags, there are typically much better and high frequency data, which is going to show these developments well before it becomes official.
It's true that this high frequency data can also call false narratives. It's all true that it can be wrong at times. But I think the goal of an analyst with a goal of someone like myself is to interpret that and make judgment calls by doing channel checks, make judgment calls by looking at historical patterns and saying, "We believe this is a sound judgment to make this call right now based on what we're seeing knowing that we're going to be so early in the cycle that a lot of people are going to call us out for being nuts." And that's okay. Because I would rather have gotten that call than missed it entirely.
Bill: Yep. Well, I couldn't agree more. I appreciate your time. I really have enjoyed this and I hope you have a couple flights that you enjoy between now and the next time that we talk. And again, thanks, man, I hope people learn about you, and read you, and I look forward to speaking to you, again.
Craig: Yeah, I appreciate you having me. And you can find me on Twitter @freightalley. I'm @freightalley. It's the best way to connect with me on Twitter. I don't check LinkedIn. LinkedIn is a disaster, by the way. Can we just talk how bad LinkedIn is? I thought Microsoft would fix some of it, but come on, Microsoft fix it. It's so bad.
Bill: I think the problem, man, is once you figure out how to use Twitter and once you built your network on Twitter, LinkedIn just looks archaic.
Craig: I actually think you're right. The problem is, LinkedIn has this, everybody's equal. People that don't provide a lot of--
Bill: They are super vanilla.
Craig: LinkedIn is a disaster. I get so much inbound junk and I don't even read it.
Bill: Yeah. I'm with you. It feels so corporate. Twitter feels like a meritocracy.
Craig: You can say what you want to say, you can be wrong, and you get called out on it, and trolled.
Bill: Yeah. People tell you, "You're an idiot," and then you're like, "All right, well, maybe I actually am" or you show that you're not.
Craig: [laughs] But the thing is, 20 minutes later, people moved on, because it's so high frequency in terms of the content. But you can say something stupid and I've done it plenty of times. 20 minutes later, most people have forgotten it. But the problem for a lot of people but Twitter is, it invites a lot of trolls, because it just nature of anyone can say anything. But LinkedIn, I would pick Twitter any day over-- I got to ask. What do you think Elon Musk going to do with Twitter?
Bill: I don't know, I can tell you that, my strong opinion was that, Twitter was not run like a business should be run. I think Jack even came out yesterday after the deal was done and said, "It's not meant to be business. It should be a public protocol." But my history with Twitter is long and I don't know how else to say it. I'm just going to say it. In 2020, my wife's cousin committed suicide. He was the Robinhood trader that committed suicide. I use Twitter to get that story out there and it really showed me the power of that platform, because my family was at a complete loss for what happened. I asked a question, because I legitimately wanted an answer. It's a combination of people can't look away from something like that.
But within 18 hours, I had pieced together what had actually happened without knowing anything about what had happened. To see the power of that firsthand, I was like, "Oh, my God, I can't believe it." Now, he has built a trillion-dollar company with no marketing expense outside of his Twitter account, basically. I think he understands what that platform is and how powerful it can be. I think he's right that they have gotten a little bit overly sensitive on what is said. So, I don't know exactly what he's going to do with the free speech aspect. I don't want it to become the worst corners of the internet, but I don't mind it opening up a little bit, if that makes sense.
Craig: Thanks for sharing. It's a tough--
Bill: It was awful.
Craig: Tough. I remember that story.
Bill: Yeah.
Craig: But it is a powerful-- If you think about the impact of social media, the Bird app has-- The most influential people in society are somehow connected on Twitter, either on a frequent basis or on a regular basis. There is no more powerful way to connect based on the thoughts, and then the merits of your thinking, and your thoughts than through Twitter. It is the most powerful far more than Facebook. We are talking about LinkedIn. LinkedIn is more of a joke of the three. It's B2B. B2B media is a really, there's a hole-- One of the things that I'm a big fan of is content supported. Is this video, you put this on YouTube?
Bill: Yeah.
Craig: I've bought the Flying Magazine.
Bill: Oh, cool.
Craig: I bought the Flying Magazine, which is the Media Business for pilots, because I'm a pilot. FreightWaves is largely a business that for five years one of the fastest growing software companies in the world that largely didn't spend any money on marketing, because we had our media business, the Bloomberg business model. You think about that, Bloomberg got to $10 billion in revenue with almost nobody in marketing. They spent very little in marketing. In fact, they hired their CMO and they're $8 billion in revenue and had three people marketing when she showed up.
Bloomberg has the best business model of content-supported data. We did that largely at FreightWaves and I bought Flying Magazine thinking, "Okay, I'm a pilot. This is a passion project. But there's got to be some way to monetize the content behind it." I think we've now moved into real estate, which is a different story for a different day. But I think Elon Musk, like you said, built this entire brand image on Twitter, and created the most powerful and automotive company on the planet, and it was valuable automotive company in the planet simply through a Twitter handle of just been a world class troll, at the same time, being a world class thinker, and it built this narrative that no company on the planet, automotive will ever touch.
Bill: Yeah. I'd tell you and this isn't Monday morning quarterbacking. I said this to my friends. It was wild to watch him go hostile on Twitter and make that bid. When people were like, "Oh, he's not going to raise the capital." All I could think about was, "Can you imagine actually thinking he couldn't raise the capital? Look at what this guy has done on social media." And then you saw the people that came behind him and supported him. I was like, "This thing is over." I didn't know that the board would accept it or not, but I knew he had that lined up.
Craig: The reason it works for him so well is that, no CEO in America-- [crosstalk]
Bill: He plays by different rules.
Craig: -half the stuff he posts. But it's because he has delivered, and had so many doubters, and he continues to push the envelope. It's a remarkable story. I'm looking forward to seeing how it all works out but we'll see. I don't know how much impact he'll actually have on the merits of how Twitter operates. We'll see.
Bill: I think a lot, man. I was part of this super follow test group. It was a beta product. People were going to pay-- Well, some 26 people currently pay me $9.99 a month for this feed. It's a separate feed behind Twitter. I can tweet out something that only those 26 people can see. It's a cool concept, but it's very hard to get another network started. A lot of the value of Twitter is putting a thought out and then having anyone comment, right?
Craig: Connecting with people that you would never otherwise connect with or think to connect.
Bill: I said, I'm an audio brand. My super fans or people that are fans of the podcast. I'm going to need to be able to deliver them a unique audio experience. I need access to private spaces. This was months and months and months ago. Their answer on the call to me was, "Well, just set up a Zoom call." I was like, "How do you not understand that?" You can capture value by keeping people on the platform, and you're asking me to go out, and set up stuff outside. What are you doing? And not one of them was like, "That's a bad idea." So, I just think he's going to change the whole ethos of the company.
Craig: Well, I think difference between Jack Dorsey owns 2% or something, for whatever reason he was ineffective, maybe it's because he owns such little of the company and [crosstalk] was forced out of Twitter.
Bill: I honestly don't think he can't at the end of the day.
Craig: I think you're right. But as a founder you get that way. You have to be reengaged, especially when you own 2% of the business. I think he came in because he felt obligated to it and it's like his baby. But I think at some point, if you can't appoint your own team-- He had a finite amount of control. I've seen people attack him as if he was incompetent. You got to go back and read the story of actual Twitter as he was forced out at one point. In the cap table, he has only a very small percent of the company and he didn't get to appoint the board, though. The board was largely appointed by other people. I think as a founder, you lose a lot of interest in the business when you don't own 100% of it or you don't have full control, and you don't get to make all the decisions. I think, Musk doesn't care. Like you said, I think he'll get to go do what he wants to do and the speed at which you'll do it will be pretty profound.
Bill: Yeah, I think that's right. The other part that I have told myself about Jack and I have no idea if it's true or not, but he came back and I think he did a lot to help the platform stay relevant. But man, running any social media platform through the Trump years, I don't care, especially a Silicon Valley one. I'm sure his employees were bitching every single day. I'm sure politicians are bitching at him every day. I bet he just got rundown and then he gets this board that he doesn't like--
Craig: Oh, I bet, because it was a no winner at that position.
Bill: No.
Craig: Because you couldn't muzzle Donald Trump. Like you said, you had your employees on here, you had this, "Hey, we want to be the town [crosstalk] relevant as a person." But destructive as a person, which is, I know that It's insane when you think about the fact that he was President and yet, the last few years have been far more-- I think most people assumed that after he was out that the world would calm down.
Bill: Yeah, not so.
Craig: Politically, Biden's policies are quite similar to Donald Trump's, if you look at on a policy basis. It's just that Donald Trump was far more verbose. Now, Biden's tried to do things that are obviously keeps trying to move the world towards a far more-- The stuff he says is not stuff he's actually accomplished. But if you look at what he's actually doing is a lot of it's very similar to Donald Trump in terms of populism, nationalism. It's just that Donald Trump was in your face about it and we all like, "look. Shut up."
Bill: It's a little bit much. It's a little much.
Craig: It's like, "Stop talking."
Bill: Yeah, well, and then to your point, at the end of all that after managing it, he gets activists involved, then he doesn't have his own board. I think he was just like, "Fuck this. I don't want to do this anymore."
Craig: Yeah, I would be. It's not fun when you've been attacked and you're--
Bill: Indeed.
Craig: Yeah. Anyways, well, that's for another day. So, I appreciate the time.
Bill: Yeah. I do, too, man. Have a good one and we'll be in touch.
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