Attacks in the Red Sea Are Reconfiguring Global Trade Again

26:39Now we're in 2023, we've sort of hit the bottom. And I would argue that the worst is already in the market for trucking. and we are not necessarily on our way back, but I don't think we're going to see things get worse as it relates to the trucking industry. Wait, I think Joe is being a little bit modest because at the beginning of 2023, we did have a couple episodes, and I think we did publish a couple articles as well about how bad the year could be for the trucking and also the shipping industry. And it did turn out to be an absolute terrible, no good, horrible year, or whatever the title of that movie was.

27:18But can you maybe put some numbers around it for us? Like how bad did things actually get last year? So it's an interesting conversation because think about the listeners to Odd Plots, mostly focused on macro stories for the economy. When they're listening to freight stories and they're hearing me talk about a freight recession or the bloodbath, they oftentimes assume that that means that the broader economy is struggling. Yeah, I think the big question was whether or not that indicates It's the consumer demand, isn't there? People are sort of mixing that up. So one of the interesting things is we now have, we bookended 2023.

27:51We're able to actually look at the entire year in sort of context. And what we've seen is that actually 2023 was a good year related to freight volumes. It actually, if you took out the COVID extremes of 2000, sort of late 2020, 20 and 21, and even parts of 22, what you've seen in the freight market is that the 23 was actually a really solid year. It continued to build momentum in terms of volume throughout the year. But it seems like we're contradicting ourselves in the sense that we're talking about how bad it was in 23, but we're talking about a relatively strong consumer and a relatively strong freight market.

28:31But the reason is that we had this massive expansion of capacity that took place during COVID. You know, So we saw if you take 2019 to the peak of capacity build, which really did not end. So the freight recession started in March of 2022. It wasn't until October of 22 before we started to see the market in terms of new capacity entrance plateau. So we're still seeing new entrants come in the market throughout 2022 until really the third, until the fourth quarter. And now what we're looking at is a situation where we've had all this excess capacity that's built out. And that's why 2023 was such a miserable year for the trucking industry is that we're talking 60 ,000 more trucking companies in the freight market today than what we had prior to COVID.

29:25And these aren't 60 ,000 trucks. We're talking 60 ,000 independent companies that are in the trucking industry, that have entered the trucking industry, that are out taking freight. And so what you have in the trucking market, we've talked about it a few times, all aspects of freight work this way, where you constantly have this demand that's driving supply. supply. So what happens is the providers of supply are constantly trying to catch up to demand because they see the inputs in their business. They see demand in their business. They see high rates. And so they're constantly trying to add new pieces of equipment to sort of soak up that demand.

30:03And what ends up happening is because of the fragmented nature of the market, they end up overcorrecting. So everybody is doing the same thing. The big carriers are adding trucks. The small carriers are adding trucks. New entrants are in the market. And we just get flooded with total number of interest. It's a classic commodity boom and bust cycle. And that is what happened in 2022 that brought us to a really miserable 2023. And what's happened over the last couple of months, we started to see a number of bankruptcies, YALO being the YALO 8 historical LTL carrier filed bankruptcy. It actually went out of business and it felt like this is a company that for many years felt like a cockroach that just wouldn't die.

30:46Government bail out, unions at one point had bailed them out. It constantly just stayed in business and everybody assumed that it would continue to survive in spite of the fact that it was not a well-ran company. And it is out of business. And you mentioned, you teased it earlier, Joe, is that we've seen some freight tech companies that raise lots of capital that also went under. And this is a function of a lot of excesses that get added to the market that the market just has to bleed out. Well, I'm glad you mentioned the freight tech companies because that's where I was going to go next. So we already know it was bad for a lot of companies in 2023.

31:24But going back to 2021, 2022, we got interested in freight, obviously, on the OddLots podcast. That was also a big year for tech and tech investing. A lot of VCs suddenly probably woke up to this idea of this world. were like, oh, the freight industry looks like a mess. I'm sure if we just apply our software magic, we can solve all of these problems. We saw some really huge fundraising, but then also in 2023, we saw the reversal of it. So we saw the freight brokerage convoy just to basically completely go out of business. I think we saw a pretty big downturn at Flexport. We've had their CEO, Ryan Peterson, on the show a couple of times.

32:03What happened with freight tech? What were the theses maybe of the investors who are going in like we can solve this and sort of like what reality did they run into that maybe it's a bit harder to solve some of these problems than they may have assumed you know they were playing the uber lyft yeah even airbnb playbooks which is hey i have this capacity and i can go out and create a digital app to sort of just if i could disrupt the taxi industry the way uber did that can also disrupt it seems like it should be doable here's the problem, is that the investors that really drove the high valuations didn't understand freight.

32:40They didn't understand the boom and bust cycle. Convoy arguably had the best roster. It had a dream team of investors. I mean, you had Bill Gates, Jeff Bezos, you had Reid Hoffman. You had the who's who of sort of Silicon Valley and sort of legacy tech that were investors. I mean, it was the best lineup of investors of probably any company in supply chain you could possibly have, and yet that did not help them survive. And the reason is that really the investors and the management team, when it first raised money and got into this business, did not understand how cyclical this industry is and how fungible the capacity is.

33:22So if I want to disrupt the taxi industry, the reason that that works is I have all of these consumers sitting at home with their cars that are idle 90 % of the time that can create incremental capacity in and out of a market. So as the market surges, you can have, and Uber has piloted this with their surge pricing. They will send out messages to their drivers and say, hey, there's a football game in town, or there's a big event in town. Please come out and get three to four or five X your normal rate. And they've created this sort of surge flexible capacity model that works really well in a business like Uber and personal transportation.

34:01The problem in trucking is there is none of that excess capacity sitting against the fence that can flex in and out of a market. And so what ultimately happened is that they were able to apply some digitization to the dispatch process and to the driver management process. But that was incremental. And one would argue, and Brad Jacobs has argued, that the incumbents were doing the same thing. is that effectively all of these companies were spending billions of dollars to build technology that everyone else was also building. And not just existing companies like XBO and C.H. Robinson, but you also had all these tech vendors, companies that provide software, that were also building technology that they could sell to hundreds of companies.

34:49All this was happening at the same time. And effectively what Convoy did not understand early on, which I think they certainly understood at the late part of the cycle, a late part of their business, is that freight is commodity. It's highly fungible. The capacity is highly fungible. And no matter how much money I spend acquiring the capacity, there is nothing to keep that capacity from going to the next highest bidder. And because of that, all of the money that they wasted in acquisition costs to acquire capacity was effectively meaningless at the end of the day. because that capacity could be found elsewhere.

35:27How much of it comes down to incentives as well? So I take the point about fungibility of capacity, but I also get the sense that there are industries out there that make money from their role as middlemen. They make money from a lack of transparency or opacity. And so we can talk about new technology to make this whole process more efficient, but if there are well-defined losers from doing that, they might not really be incentivized to change. So Tracy, let's imagine that we wanted to disrupt the gasoline industry. Okay. And we're going to create a gas station. And in this gas station, we're going to charge a dollar a gallon.

36:08We're going to open it up. We could build the largest gas station in the world in a matter of potentially weeks. A dollar a gallon we're going to charge and we're disrupting the industry. Now we have some neat technology to do this. That is what we've told our investors is we're able to disrupt the gasoline industry because our technology has made it more efficient for us to deliver gallons. Now, you and I both know at the end of the day that gasoline is a commodity. Yes. And it doesn't matter what we end up creating technology to solve for. Right. At the end of the day, all we've actually done is arbitrage the market, provide consumers an arbitrage.

36:45In other words, consumers are buying gasoline at a dollar a gallon. We've built this billion-dollar gas station in the middle of New Jersey that is the most successful gas station in the world, and we're doing tens of billions of dollars. But we are losing money on everything. Right, we're subsidizing the consensus. It has to be a full-service gas station in New Jersey. You've got to make that clear. That's true. It is full-service. We're using technology. Robots are doing this. Okay. But effectively, that was the thesis that they thought, the investors thought, that if they could increase the throughput of gallons, that their buying rate would be cheaper.

37:19Oh, I see. So it was like the volume would make up for it. I'll lose money on every transaction, but I'll make it up in volume. It's the same idea here, is that they were effectively subsidizing early on a lot of their capacity. And what they realized really late, and so they did change. Ultimately, Convoy realized about 2018, 2019, that that model just didn't work. That really all of the money that they had spent in subsidizing capacity and acquiring the capacity was meaningless at the end of the day. Because it didn't provide any long-term resilience or sort of commitments among the shippers and among the carriers to stay with their platform.

38:00That is really what happened. And at the same time, using our gasoline analogy, is that not only did a convoy have a gas station or we have this gas station in New Jersey, but now Joe opens up a rival gas station down the street and he's charging 99 cents. And so now all of those gallons that we've sold go to Joe's gas station, which is now cheaper. And that is the reason that trucking cannot strictly be disrupted through these technology apps is that they were trying to disrupt it by lowering the price, buying market share, and effectively subsidizing the customers. The customers were benefiting from this.

38:39The shippers benefited massively from it because they were getting cheaper costs. And that's how they were able to grow so fast. But what ended up happening is they learned pretty quickly that those commitments were not binding, that there was no such thing as contract freight. So this is really interesting because, you know, when I think when you get the Uber analogy, I mean, there's really feels like there's two elements here. One is just, okay, you can't be the Uber of trucking unless you have some capacity or unless you have some guaranteed capacity. Or ability to turn on capacity when you need it.

39:17But then the other, right, the ability to get that guaranteed ability to turn on capacity. But then the other question is, why do we need humans as part of the freight brokerage process? And why can't it be all computers like Uber is? And, you know, I want you to weigh in. We recently talked to Brad Jacobs, who is on to his new building supply distribution business, but also founded a freight brokerage. And there seems to be some dispute because I asked the question, I was like, why are there still humans in this business? And I know there's lots of humans because A, I went to the Arrive Logistics de facto trading floor.

39:53We've talked about it. I see with your community of FreightWaves fans, they're always posting freight brokerage memes. So I know there are a lot of people in offices who, you know, have one phone up or they're talking to a shipper and someone else is talking to a carrier. But Brad was like, no, there's a lot of it's getting on. What is the truth? Like, why are there still so many just setting aside the capacity aspect? Why are there so many humans or how many humans in this process? So it's interesting because Brad talked about the fact that, you know, when he got in this industry 10 years ago, it was largely humans.

40:28And then over time it had digitized. You know, I think the statement was he had 97 % of its freight was electronic. That very well may be the case for his business. Think of XPO's role in the business. It's a big, really predominantly, you know, in its focus on LTL, which means it has very large enterprise shippers, big commitments. It's able to digitize a lot of the transactions. And most of the bigger trucking companies are digital. Like if you go look at Knight Swift's operation, look at Schneider's operation, go look at Old Dominion. So that is like placing an order on a thing and it just automatically.

41:02That's right. And that's what the big companies want to do is they actually want to eliminate human contact as much as possible because that's how they're able to optimize the model. They use technology to do electronic transactions. And that probably represents 20 % of the business. It's the cream of the crop business. It's the business that every company wants because it's the high volume shippers, dependable volume. and standardized lanes, standardized shippers, standardized carriers, just like over and over real. Highly predictable, highly consistent business. And if you're building a network, then that's what you want because I can depend on it day in, day out.

41:41That's what the larger companies focus on. And if you ask the CEO of Knight Swift, you would probably get a similar answer about how much of its freight is electronically tendered. C.H. Robinson, the largest freight broker in the country, publishes that 78 % of its freight doesn't have a human touch. But the reality is, Joe, is that hundreds of thousands of freight broker people that are out there making up at least, you know, the numbers are as high as registered freight brokers in the 60 to 80 ,000 numbers. We track and think there's about 5 ,000 high scale freight brokers that do more than about$10 million in revenue a year.

42:19They're still predominantly human-based. And what they're dealing with are the exceptions. So what happens is a large volume shipper takes 95 % of its freight and sends it over to the XBOs and the CH Robinsons and the, you know, the, the Knight Swifts. And so they get all of the electronic stuff dispatched. What's left over is the really hard to manage. It's either a lane that nobody wants. It's somebody who literally shops price on every single load. It's a commodity that nobody wants. And you'll see in the meme, if you go on Twitter or on X, you see all the memes and freight making fun of the kinds of freight that nobody wants.

42:59This is the type of freight that's left over. What's an example of a type of freight that no one wants to deal with? Grocery. Oh, okay. You have to have like a special truck. Yeah. Well, you have to. It's typically going to a grocery store. It takes a long time to unload it. They're miserable because they're in a cold trailer and a refrigerated trailer. They have to use something called a lumper. a lumper is i pay somebody at the dot to unload me or the driver has to unload themselves they can take eight to ten hours to load at a like a farm they go into a farm facility or distribution center it could take eight because they're all hand loaded think of like a crate of tomatoes oranges or something a lot of it's like loaded not on pallets but actually sort of flow full loaded so this is undesirable freight for a lot of these guys it has really tight transit times So that's a type of undesirable freight.

43:47Flatbed, which is hauled to project sites. You're not going to a warehouse, but you're going to a construction site. That has to be manually unloaded. It can take sometimes hours or longer where the truck's got to sit. And so there's a lot of freight that's just undesired. And that's where a lot of the freight brokers, the humans still take and manage a lot of these sort of long tail transactions. transactions that isn't the world that an xbo plays in that is the world that the predominance of your freight brokerage the folks that are on freight twitter that are doing the brokerage job that's where they that's a large percent of their freight is managing the light bulb moment the sort of makes sense well so much of this reminds me of the move to electronic trading in the corporate bond market right like it takes a long time and like the stuff that starts being electronified first is like the standardized trades, the easier ones.

44:37But again, like incentives play a role there too. It took 20 years before consumers had access to effectively trade at very low cost without a broker, right? So you saw this, you saw early in the 90s, you know, sort of happened in the early 90s to sort of late 90s, the internet was born. And then all of a sudden I could trade for, you know, myself, I could execute my trades. And then all of a sudden you got into low cost trading. And then now we're in sort of zero cost trading as consumers. But you still have the finance industry. High frequency trading has not gone away. You still have, you know, these large trading floors that are people are involved in this transaction, involved in these services that extend beyond just executing a trade.

45:18I mean, I can't remember the last time I called a broker to execute a standard stock trade. but I may go to a broker if I have something that is unusual that I want to do, or perhaps a product that I'm not familiar with, or something specialized. And that's really where we see the freight brokerage industry. All those humans are really helping solve those problems. Sure. But you make an interesting point, and I use this analogy a lot, is freight at the end of the day is a commodity. It is price sensitive, and it will move at its best to the lowest cost provider, ultimately. That's what it's trying to search for.

45:50Most of the transactions can be digitized and electronically, but everyone is investing in the same technology. They're all trying to digitize it. And because they're all trying to digitize it is no one actually has an advantage. There is no equivalent to a New York Stock Exchange where I can put my servers right next to the clearing engine and get nanoseconds because this is a market that is not centrally cleared or exchanged. And so there is no time advantage that I can get in terms of being closer in terms of executing. So really what we see is companies try to take the highly commoditized freight, the big companies that have the balance sheets and are asset-based are picking off the really highly desirable freight that can be electronically managed.

46:35And the freight brokers, which continue to proliferate and grow, are taking care of the stuff that can't be easily electronically managed.

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48:44Learn more at chase.com forward slash business card. Chase for Business. Make more of what's yours. Accounts subject to credit approval. Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank and a member FDIC. I have just one more question, which is, again, I think the last time we spoke to you in 2023, you were talking about a coming bloodbath or the bloodbath in trucking. Looking out to 2024, how would you characterize it? I think we're going to trade at the bottom for a while. Like, I don't think it's getting worse. I don't see a situation where things are, quote unquote, deteriorating further.

49:21Now, to an individual player that's in the market, they may feel differently because their balance sheets are probably wrecked at this point. They're taking freight that they're not making money on. They've been doing this for probably 14 to 18 months. And so to them, it may feel like they're at the end of the line. And there will be a number of trucking companies that fail over the next couple of months. But I think as a market wide, I think we're in many ways on the way back up. And so I think it will take a long time to churn out this capacity. But I think we'll see improving conditions for carriers as capacity bleeds off and as demand looks like it's going to stay persistent.

49:54The consumer has stayed strong for miraculously strong in this cycle. It looks like, going back to the conversation we had very early on about nearshoring and reshoring, it looks like that is starting to take place. And because that stuff has a long lead cycle is we're starting to benefit from some of that now. And as a manufacturing reshoring really take place in our economy, that will drive additional freight demand. And so as we continue to bleed off carriers and we see improving economic conditions in manufacturing and in inventories have bled off, that will help promote higher rates but also higher demand.

50:36And ultimately the industry will heal and sort of will enter a new cycle. And one could argue – Then we'll have more capacity. One could argue. Well, this is the advantage, I think, this time around is that, you know, we do see tightening credit, which is the only thing that's going to stop the growth of trucking. Oh, interesting, because I guess the last cycle, it was not only were freight rates going up, but you also had extremely low cost of financing. You could get it for almost nothing. You could borrow money for almost nothing. And small banks were, you know, fueled with so much cash and the government was putting pressure for them to deploy it.

51:14That is no longer the case. I think what, and it's really the community bank model. It's the community banks and the folks that are in that sort of small business lending are the folks that really control the outcome of the market. They've tightened up. They started to look at trucking as a riskier business because chances are almost every community bank in America has some trucking asset in its portfolio. And because of that, I think they're starting to say, hey, this may not be a desirable industry to invest in or to lend money to the way it was before. And that tightening credit standards will make it more difficult for small businesses to borrow money and thus make it harder for new expansion to take place.

51:52And I've talked to a number, you know, in Chattanooga, I'll run into people or even at the airport in other cities. And people who know, recognize me or know of me have talked about their small trucking cups. I had a guy who said he had a bank deal that fell apart because the banker reads freight waves. And he was like, did you say sorry? He's like, I have a good business, but because you're talking about this freight recession, you have to continue to do that. I said, well, my job is to inform them. I said, you should thank me because had you borrowed that money, you may be in a different financial situation.

52:26So I think there is more awareness about the issues in trucking, and that will probably keep the capacity growth at least at bay. But we will be back. This will be a really boom market once again. We will see higher freight rates at some point. The vibes will be really strong on Twitter where everyone's super excited about high freight rates. And there will be an argument that this time is different because that's what they'll say. This time is different. It's not going to roll over. This is different for all the sorts of reasons. And we will talk about that on this show. And we will predict when it will fall apart again because it will.

53:04All right. One last quick question. I'm going to pivot. We, you know, founder and CEO of FreightWaves. We always talk to you about freight. You also have this whole other business and aviation media and other aviation assets. I want to do like an hour with you at some point talk about that. But just real quickly, is it really true that there's more airports than McDonald's in the United States? This is an insane stat that no one – I think everyone finds it hard to believe. So if you take the total amount of private – this includes private airports and public airports. So most people think of airports.

53:30I'm thinking of like JFK and LaGuardia and Newark. The predominance, the vast majority of airports in the United States are actually privately owned airports or community-owned airports, places that have very small runways of 1 ,000 to 2 ,000, 3 ,000 feet. They can't accommodate even a jet accommodating small aircraft. There's 19 ,000 of those. And I think the number on McDonald's is like 16 ,000. Amazing. This does not surprise me at all. Really? Yeah, because just where our place is in Connecticut, there are two McDonald's within like a one-hour radius. There's at least three airports. One of them is for sale, and I've been thinking about it.

54:05You should buy an airport. I got to check this out. That episode, then we know what the next episode of this is going to be. But one of the – people think that private airports is all about jets. And they always think it's like really rich people. But the predominance of the folks that use these small airports are farmers. That's what I was going to say. And they're agriculture. And our entire ag ecosystem is dependent upon airplanes and bees, but airplanes to do things like cop dusting. And so a lot of the airports are used in places out in the heartland for farming. They're also used to things like mining, you know, extraction and stuff.

54:40And so the vast majority of those airports are very small airports that most people will never see, will never notice, unless they get in a small airplane and see all the little gals. They are very unassuming. Some of them are just fields. They're literally, most of them, the predominance of them are grass fields that pilots fly into. And frankly, these are farmers that keep an airplane in the barn and they fly it out. Craig, we can talk to you for another hour, but there's just me to have you back before too long. Thank you so much for coming on. Thanks, Tracy.

55:24Tracy, I can't believe you didn't tell me that there's an airport for sale by you. And now it seems obvious that we have to do an episode on the business of running an airport or how much that costs. I am definitely up for doing an episode. One thing I learned from being an aviation correspondent is I would not personally as an investor put much money into it. We talk about like cyclical industries. Aviation is also one of those that just goes up and down, up and down, up and down. Well, yes. But I think the publicly traded airport stocks, and we're really getting off topic from where we started the episode.

55:59I think actually publicly traded airport stocks have done really well, even if the plane, even if the carriers haven't done so great. I can't remember. There was this amazing chart. And I think it was like everything attached to air travel like does reasonably well. Like the aerospace manufacturers, although this was before the Boeing scandal, so I'm sure it's changed. But like the aerospace and the airports do well. And then the airlines are just constantly cycling like in and out of bankruptcy. sea. But anyway, I severely doubt my ability to run a rural airport. On the main area that we talked about, that was such a good conversation.

56:35I love talking to Craig and I feel like we touched on a bunch of things. It's particularly interesting, you know, just starting off the sort of some of the geopolitical considerations in the U.S. about the degree to which we want to make sense for the U.S. to invest resources in patrolling the Red Sea. Yeah. I mean, that seems to be a huge topic of conversation at the moment. The idea that maybe we could get to a place where the Red Sea just isn't considered a viable pathway for container shipping, at least. That's really interesting. I'm also thinking back. Do you remember when the Suez Canal was like last closed?

57:14Not during the Ever Given thing, but during the what's it called? The Six Days War? Is that what it was called? The Six Day War? Yeah. Do you remember that? I mean, not like actually remember because we weren't alive. But I think there were a few ships that got stuck there during that time. And they were stuck for like years. Wow. And there's some really interesting accounts from people who were on those ships. I think they started their own trading system and postal service where they had little like postage stamps. Oh, we got to do, we got to do, find a historian to talk about that. Yeah. I can't remember why or how I know that, but it seems like a fun topic.

57:50Anyway. So many good things. Also, freight tech, I thought that was really interesting. And that explains so much because I know that there's like a ton of brokers. And I also, you know, Brad Jacobs saying, no, we do it. It's so electronic. So hearing that explanation of like, okay, you can electronify the high volume commodity lanes and lines and products versus the long tail of weird places and undesirable goods. Anyway, so much good stuff. Well, also just the insight that freight is ultimately a commodity. Yes. And you have to think of it that way. And it's funny that we landed on air travel in the end as well, because I remember one of the first things I learned when I became an aviation correspondent was that air travel was basically a commodity as well.

58:32You know, you have a set capacity that is leaving at a certain time. You either have those seats filled or not. And that was always the way that I was taught to sort of think about it. Anyway, shall we leave it there? Let's leave it there. Okay. This has been another episode of the Oddbots podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Craig Fuller. He's at Freight Alley. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. And a thank you to our producer, Moses Onda.

59:05For more OddLots content, go to Bloomberg.com slash OddLots, where we have transcripts, a blog, and a newsletter. And you can chat about this episode with fellow listeners 24-7 in the Odd Lots Discord. We have a transport section in there. There'll be a lot of interest in this. We also have a defense section in there too. So discord.gg. And if you enjoy Odd Lots, if you want to pool all our money together to buy a small rural airport in Connecticut, then please leave us a positive review on your favorite podcast platform. Thanks for listening.

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