241 - The Freight Market Is Collapsing, Here's What You Should Do to Save Your Business with Craig Fuller

0:00We have lost effectively seven years of economic growth in the goods economy. So when you look at volume of goods, we have lost, you know, 17 % year over year. Where do you think things are by Christmas? I think it's going to be worse. It's going to be a really rough holiday season. My view is the stock market is more likely to come down than go up. The job market is starting to become stressed. Already in the middle of whatever's coming, Wall Street hasn't woken up to it. No one else has in Washington.

0:32Craig Fuller, stoked to have you back. Owner of Sonar and Freight Waves. You are deep in the logistics and distribution space. You also own a lot of print media, digital media, but I had you on back in May. You had some prognostications. I'm going to start calling you Nostradamus because you were like, hey, this is what the tariffs mean to us. At that time, it was 145 % tariffs on China. We hadn't come down yet to where we kind of are equilibrium, I think at 55%, but you're like, these are the things that we're going to start seeing. So I'm going to highlight some of the things that you said, and then I'm just going to tee it up to you to ask what you got right and what you didn't get right.

1:08So you told us back then that these tariffs are going to rip it through the supply chain. It'll probably take about six months. It'd be a six months lag. You told us there'd be back to school shortages. There'd be stressed bonded warehouses. There'd be trucking slowdowns. And that kind of this new reality of free trade as we knew it would be over. And so it's fall. Nostradamus, what did you get right and what did you get wrong? The good news is the 145 % that we, at the time we did this recording, was sort of the peak of the trade tensions between China and the United States. That got resolved pretty quickly.

1:39There was a first sort of a step down to it. And then there's been this sort of extension that the administration, the Chinese have worked out to sort of bring in a more rational tariffs. You know, there wasn't back to school shortages, I think is the one part that did not happen is we didn't see inventory stockouts. I think it's largely because the market was able to respond. The administration sort of pulled back on their original 145 % tariffs. And in doing so, we were able to see a real surge of goods that came into the economy that sort of made up for that lost volume. And so, but we are seeing a tremendous slowdown in the goods economy that is happening.

2:17We are seeing the end of, I wouldn't say the end of globalization, and this is going to play out over decades, potentially, a reconfiguration of the global economy, continued tensions between China and the United States, continued tensions between the United States and the rest of the world. Those things are certainly happening. And so all of this is sort of in the backdrop of trade is one of the things, but certainly is sort of the epicenter for anybody in the economy. Okay. So I was doing some research and here's what I found so you're right there were the massive shortages in back-to-school shopping however year-over-year price increases with those back-to-school products was i believe one of the highest jumps it's been in the last two decades so we saw we saw a really big jump in the back-to-school prices the other thing the de minimis exemption which was basically anything under this dollar amount they didn't have to pay tariffs on eight hundred dollars yeah eight hundred dollars we said we're not doing that anymore yeah so companies like shimu for example we we've seen them raise prices pretty significantly.

3:20Imports fell really hard over the summer and it doesn't look like they're rebounding. The last thing that I thought was really interesting, and you've talked to me about this and we'll get into it, is this OTBI index, which measures the level of shipping logistics within the United States. It's just continued to decline. And I've seen you post multiple times on Twitter. Hey, look, this is, I've talked to many guys who've been in this space for decades. This is the worst that it's been. And so with all of that being the backdrop, like, where do we kind of stand now? And what do you expect in the near future for us?

3:53So this is tracking the volume of trucking freight transactions in the domestic economy. And what it's doing is looking at seasonality. Just for those that are watching this on screen, I mean, the shade of blue area is actually the current freight market. So it's sort of the 2025. You know, if you sort of go back to where we were a year ago, this green line is where we were a year ago. We're 15 % down year over year. I think what's really interesting is if you sort of look at where we're at, we're back to 2018 levels. And I want you to keep that in mind because it's a really important data point is the fact that we are back, we have lost effectively seven years of economic growth in the goods economy.

4:34When you look at volume of goods, we have lost 17 % year over year from where we were a year ago. The MAG-7 is sort of driving, it's not sort of, it is driving. It is driving, yeah. The speculation, the stock market. Meanwhile, 1.8 million people are employed in jobs tied to the MAG-7, of which a million of those people work at Amazon and work in warehouses. So just take that number out. So we have this economy that has 35 million jobs tied to, we would call the good sensitive sectors, the ones that drive the predominance of freight. Manufacturing is doing horrible right now. Energy is not doing well.

5:14Auto is not doing well. Housing and construction is not doing well. Transportation logistics are not doing well. And if you look at those categories, they employ 35 million Americans. So the question becomes, does it matter if the core part of your economy, the goods economy, is crumbling? Does it really matter? Is there a counter-narrative or a counter-argument? Like, I'm just going knee-jerk reaction. Okay, 2018, let's say we had a couple million people, population difference over that period of time? Is it so bad to be back at 2018 levels? I look at this and I'm like, how is this not a five alarm fire?

5:45How is this not being screamed from the rooftops? I was like, guys, we know that this is happening. Here's the data. And so in my mind, it's like, what justification are they giving themselves for not making this a priority? Well, think about the people that are driving the conversation, the people that can do something about this problem. Companies are laying off people. We've seen ADP because the government's closed. We're seeing ADP come out and talk about the fact that we are effectively not growing jobs. We're not adding new jobs in the economy. And the question is, why isn't anyone alarmed?

6:17Well, look at whom can do something about it. The Federal Reserve is sort of steadfast that the economy is growing. They're looking at the GDP number saying, hey, everything's fine. You look at the employment number. They're saying everything's fine. They don't want to be necessarily held accountable for some of the past actions that got us into this really weird spot in the economy. The Congress is completely disconnected from the goods economy. I talk to folks, members of Congress, on a semi-frequent basis, and they're completely shocked that the freight market is as bad as it is. People in the administration that could seem to care don't want to admit that their whole trade policies and their trade stance is not working.

7:00And then Wall Street is so drunk on AI and speculation that they don't have a reason to actually feel like that they need to bail out. That's what's just boggling my mind is you have this index that you pulled up, the OTVI. You can see how low shipping volumes have come. And if you're sitting here looking at it and you're like, well, shipping, what does that matter? You just name the industries that are most affected by this right now. 40 % of the economy is tied to logistics-dependent industries. Well, yeah, you've got construction, you've got manufacturing, obviously you've got retail, which you said wasn't as bad as it might be later down the road.

7:30But retail is the one part is sort of the one. And this is one of the reasons I think people aren't alarmed is that retail spending, retail volume, freight volume gets to be conspired. Our data to see it is actually holding up relatively well. It is growing retail. In terms of retail consumer goods, we call them city deliveries is up 7 % year over year, which is really a reflection that big box retail is doing okay. So you're getting reports from Depot and Walmart and Target. They're better. They're doing okay. It's the broader part of the economy, the core thesis of the mainstream economy, the blue collar jobs, which employ so many people are the very jobs, the very parts of the industry that are being completely impacted by combination of trade policy, Fed policy, employment picture, all of it's just not good.

8:17I guess from my perspective, we talk a lot about unemployment and inflation. I always hear the non-farm payrolls, right? Because they're like, well, farms seasonal, so we don't want to look at the farm payrolls. This shipping index, the OTBI, why is that not talked about in the same breath as those things? To me, that would be one of the leading indicators because anything that you sell that's a physical good has to be shipped from one place to another. Being talked about some, but the issue you have in Wall Street, you have it in Washington, the people that work in and around these institutions simply do not have a frontline understanding of how the freight and goods markets work.

8:53They're so disconnected from it. To them, it might as well be someone speaking in Spanish. I can sort of understand what they're saying, but I don't really understand what they're actually communicating to me. Transportation markets specifically work because someone is moving a product from point A to point B. Nobody moves products around just because they want to move them around. They have to feel like There's a reason to move. There's going to be a pull on the other end of that supply chain. One of the reasons freight is an incredibly powerful barometer of the broader economy is it's way upstream.

9:31It leads the broader economy by as much as six to nine months. This is the whole thing called Dow Theory, which is when the transports are in a recession, they start to give off warning signs six to nine months before everyone else fills it. You can go back through different economic cycles. You know, we've had recessions in the past. This is exactly what happens. These big recessions, including the 2007 financial crisis, the freight market was given off warning signs as early as March. This was six months before we saw the collapse of the financial system. You can follow this throughout history.

10:03We've had periods, anytime there's a broader recession, it shows up in the freight market first. And so what I am saying, what I am guessing that's happening, you called me, I know Stradamus. I mean, so the great compliment, unfortunately, it's not true. I got a lot of things wrong. But what I would say is that the freight market data is warning us, it is flashing red, that there is a broader economic problem in the economy. And that's why, And it's not just the freight data. It's the ISM manufacturing index. It's consumer, some of the consumer data in terms of consumers are stretched. We're starting to see bankruptcy.

10:50Things like Google searches where people are looking at bankruptcy filings or how do I refinance my credit card or my student loans? How do I defer my student loans? Yeah. Yeah. You're seeing consumers worried about things. You're seeing the housing market prices. Housing prices are coming down in some markets quite sharply. And so you're starting to see a lot of stress. Well, I mean, to your point, we've seen multiple revisions now to the jobs reports, like multiple months worth of revisions. The whole year. We effectively, I mean, we wiped out a million jobs that the BLS said were there. I always looked at this jobs day because that was always the rebuttal that every economist who I've ever spoken with would rebuttal, but jobs.

11:33You talk about how bad the economy is. Yeah, but the jobs market is so strong. And you're like, great for you. I don't know. I don't see that, but great that it is. In reality, those numbers were not accurate. not even to get too wonky, but A, it wasn't accurate. And B, if you look at the participation rate, which if you don't know this, the way that they measure unemployment is those who are what they call actively looking or employed. So if you're a 35 years old man and you're like, well, I'm not looking anymore, they don't consider you to be unemployed. You're out of the workforce from their calculations.

12:07And so the participation rate, which measures people who are either actively employed or looking for a job has actually dropped pretty significantly over time. So even by citing like, well, unemployment's only at 4 % or 5%, whatever the number is, it's not really a true indicator of where we are from a full employment perspective, which is weird. So you've got the consumer economy, which is kind of in the dumps, which is obviously slowing. And then you've got this other side of things where Trump just signed this executive order where, hey, we're only going to have trucks made in America. And so it's like freight's kind of just getting hit from both ends of it.

12:42Let me ask you this. Here's a stat that I did a lot of research on recently. It might blow your mind. So you've said it a couple of times, 35 million people are employed by those industries, the 40 % of the shipping market. Did you know that there's about 30 million, give or take a couple million government employees in the United States, like federal, state, local, army, like that's not even the contractors. That's just people who are employed by state and local governments. It's like a two to one. If you look at the contractors to employees, it's even a bigger, it's like a bigger number, right?

13:16It's insane. It is insane. And that's been the backbone of our economy really since the financial crisis is so much of the growth in GDP has been government led spending of some sort. And we never really as an economy, yes, we've recovered from the financial crisis, because you can see it in the number, but structurally what's happened is the printing press has been helping sort of drive it. The issue right now is we have this massive hangover that's caused by a combination of sort of the printing press that started in 2008, 2009, quantitative easing, and you get into COVID level stimulus, and there just isn't the appetite, largely for political reasons, and maybe economic ones as well, but certainly political, to just put another stimulus pack.

14:06That's the big issue here is that no one's going to come rescue us anymore. I know. I think the assumption everybody would make is in the past when there's been significant economic downturn is you could expect either the Fed or Congress or the, you know, one of somebody in power to print money was going to come in with a printing press. And that's it's just not happening this time and so let me ask you this because sometimes i get down a rabbit hole where i'm like yeah this is freaking crazy and just start talking through it and i don't get to the so what part of it i'm talking about small business owners i'm not necessarily talking about the massive corporations but you know entrepreneurs who they're just trying to figure out their own business they might be listening to this and be like well not that i can do about the freight market if you were a small business owner what would you be doing to prepare for the next six months.

14:59I think a lot of small business owners are already doing this. I was told this a long time ago, a mentor told me is you can't control your revenue, but you can control your cost. And I think one of the things that you learn running businesses, whether big or small, and you certainly see it in big businesses, is they always do layoffs. And everyone loves to attack those decisions, big corporate greed, laying people off. But we've seen so many cases of businesses that end up filing bankruptcy because they didn't take corrective action early enough. You can't control the market. You can't control your revenues in a down market.

15:31And no matter how much we all try to engineer revenue growth, we're still a slave in some ways to the market conditions. Those are well outside of our power. What about somebody who's looking at this and saying, I want to go on the offensive? Well, this is an opportunity because anytime you see a market as stressed as what we're in right or could potentially headed into, this is a time you should be acquisitive. This is an opportunity in a down market where you get to evaluate those things that are important, you get to prioritize it. We've done it this year, and we thought we would get a nice tailwind in the boating business.

16:04But the boating business was one of those industries that has been under a lot of stress this year. Tariffs have been a major impact. 60 % of my marine revenue takes place from March to Memorial Day. And think about that in 2025. That was right at the peak of Liberation Day. What I don't know that I appreciated is that Donald Trump's terror policy, which is different than certainly where even I was who studied supply chains back in November. I'm not an astrodomist. Obviously, at this point, I've proven I'm a fraud at predicting things. I thought all of his sort of trade would be directed at China.

16:42We wouldn't see sort of the pressure on the rest of the world. we wouldn't see. And so what happened to us is 60 % of our marine revenue, which is half our total revenue, 30%, is really confound in that three-month period. And we've effectively lost that whole season because companies were like, I don't know what's going to happen. So they always pull back. And I would say every business owner should consider the same. I'm not trying to top people out of advertising, but when you have so much instability, the first thing you do is just sort of cut your discretionary spend. And unfortunately for a lot of media businesses, advertising is discretionary.

17:16And so, Hey, I don't know if you remember this, but when we started this podcast, we entered into a social contract. I would spend time, energy, and money producing this podcast, interviewing these individuals and giving you insights into how to build, buy, start, grow your business. And you would like, subscribe, and leave me five-star review. Now, out of that, we both get to talk to really cool people and hear really cool insights. We both get a ton of value, but I just want to help you keep your word. So would you do me a favor? Will you go leave a five-star review for me on Apple or Spotify?

17:48It would really help. And if you want, even share this with a friend. We lost a lot of millions of dollars of potential revenue, not because they went anywhere else, but because they simply put their campaigns on hold, waiting to see where the tariff thing would happen. And so we've been forced to make, you know, look at our own business. We've been forced to evaluate our own costs. We've made some pretty substantial reductions in staff levels. But we've also said, hey, some of these titles that we own, we own 61 some odd titles. I think we've cut six this year. We said, look, these aren't making money.

18:21We probably should have addressed them two years ago. But now we have to address them because we're just not good. A lot of big companies today were founded during the 2008 financial crisis. And in fact, a lot of big companies today were founded during 2020 COVID. So we see this cycle where during recessions, many big companies kind of find their footing. I always love the stories, Nick, and I'm going to interrupt you, but I always love the stories of the super successful businesses where they had near-death experiences. And it wasn't the earliest days where the founder did something. It was like they were actually of scale.

18:57I think the story of Dell Computer having Michael Dell having to sell off furniture just to survive and the founder of BET also basically running out of money. And I think John Malone came and bailed him out. And even Walt Disney had to go when he was building Disneyland or Disneyland was running. He was running out of cash. He went to the hotel owners around Disneyland and basically said, hey, I can't pay my bills and begged them to bail him out. And they did. I love those stories because it just shows that two things. One is it serves as resilience. If you don't give up, it's very hard to put you out of business no matter what.

19:34It also shows that nothing is perfect in life. Like FedEx, Fred Smith went to the blackjack tables to make payroll. Like this is, these are the great stories that I think shapes founders and the founders that can navigate those things are in much better positions. So here's my question. Looking forward to the next six, let's say there is a recession. at some point in the next year, year and a half, if you were maybe an entrepreneur who didn't have your current business, because I don't think you want to be distracted from what you're currently doing, where do you think the opportunities are going to be?

20:05Which markets do you see softening maybe the quickest or the most that would be really interesting for entrepreneurs to take a look at starting a business or buying a business so that when coming out of this, we know there's going to be demand because construction's not going away. Retail's not going away. Shipping and logistics is not going away, but there will be a recession. So some of these assets kind of will be on the cheap, so to speak. Where would you be looking? I think generally the rules of buying and business apply at any economy. Valuations drop tremendously and sort of opportunities open up much more so on the buy side.

20:38When the market's soft is actually when you get your greatest opportunities because there's actually some great businesses, high businesses that can cash flow that perhaps if you made some corrective action, how often? So I don't know sector specific because I think this applies in generally every sector. But how often have you looked at a SIM from a prospective seller of a business and you're like, man, I can go and cut 30 % of the cost out? Or how often has, if you looked at a business and be like, why do they run it this way? Or I could grow it. And I think, and so from my perspective, what happens in these down markets is that you end up having opportunities that would not be available otherwise.

21:21Airbnb is a great example of this. I mean, Brian, you talked about it, founded in the 2008 recession and the financial crisis. They also, it felt like we're going to file bankruptcy during COVID. I mean, the idea of having strangers come to your house. And look, they raised, I think, $5 billion from Silver Lake. And I think it was one of the greatest investments in Silver Lake's history was buying into Airbnb right at the front of COVID. And that thing went on a tear. And so one of the great things is everything reverts back to the mean. And so this is sort of the rule of business is when things are really hot, things are super inflated, eventually come back to earth.

22:01And when things are really bad, Warren Buffett has made a history of buying exceptionally great businesses or large physicians and businesses in the worst of times. So he bought Southwest Airlines at the peak of COVID. Bought Bank of America at the, you know, at the peak of the 2008 crisis. He bought American Express during the financial crisis. I think it may have been Goldman Sachs. He also took a large position there. What I was going to say is, like you said, you look at these Sims and you're like, I could cut here, here, here. More, what I've been looking at is they think the business is valued at what?

22:31I could take that same amount of money and go start a competitor. I think where the opportunities as well happen, especially if you're a business owner, is during these downturns, your competitors are going to be struggling. You can go and steal their best people. But Nick, here's the problem right now. at least according to the data, is that people are reluctant to leave jobs. Quit rates are at some of the decade lows because people are so nervous about the economy that quit rates, people going from one job to the other, people are staying put. I see it in even our businesses where two, three years ago, it felt like it was hard to hold on to people because people found so many opportunities elsewhere.

23:11They may have gone and started a business. And now it's the opposite effect where you end up with almost people who may would go other find another job that aren't leaving and not want them to leave. But you also want to make sure they're happy. So they're sort of just like staying a little frustrated with things. And so I think the best opportunities are going to come to look at businesses when markets dry up is when businesses, when founders get, they may have taken too much risk. They may not have a backstop for financing. That's when the opportunities open up. And a lot of it's circumstantial.

23:48I mean, you can have a great business that generates cash, it's nice to eat it, but for some reason, the founder's gotten, doesn't have a capital source or a resource. And all of a sudden the debt comes due, they're out of compliance with covenants. That's where the best opportunities come. Let's do some prognosticating really quickly, since we had so much fun the last time. Where do you think things are by Christmas? I think it's going to be a really rough holiday season. I think by then, people, a lot of the noise and the data will become much more relevant for people. My view is the stock market is more likely to come down than go up.

24:25And I think we might in a pretty substantial correction by the end of the year. Again, don't take stock trading advice from me. I'm a freight guy. I'm just telling you all, I'm telling your listeners, not like, don't listen to me about stock trading device, but that's my personal view. You know who Nassim Taleb is where he talks about the black swan events. What's interesting is that yes, there are black swan events, but for people who are paying attention that they're like, no, I saw this coming because this was in this data for you. What would be the Lehman brothers level equivalent, not just bankruptcy, but just financial moment, I guess, in the economy that you might expect to see over the next six months that kind of would change the dynamic that we're seeing?