8 minute read
Economic Update
Growing Pains Continue – Q1 ‘2022
In this column months ago, we predicted, “While the recovery from this self-induced economic shut down will have plenty of challenges, just as all economic recoveries do; and the rate of recovery will be very different in some segments of the economy, as well as very different for individual companies in each industry; the strength of the overall recovery will be far faster and far more robust than anticipated. Certainly, there will be segments of the economy and individual companies, that were previously healthy, which will be left behind and become the buggy whip’ manufacturers of the 2020’s. There are also many industries and individual companies, that were already in a state of decline, whose demise will happen more quickly than it otherwise would. In turn, the survivors will thrive as few competitors remain in many industries, and entire new industries will emerge and create prosperity in areas that did not exist in 2019.”
LOOK AT THE CAUSE, NOT THE SYMPTOM -
We remain convinced that our very bullish thesis is correct (an outline is at the end of this article). However, continues to be a cacophony of reports, coming out of almost every media source, filled with warnings about what we should be worried about – first it was the Delta variant and then the Omicron variant, government spending and debt, Federal Reserve policy, inflation, supply chain shortages… Each and every one of the concerns reflect an economy that is swelling with prosperity, as demand grows faster than supply, and productivity surges at record high rates. Every time we hear about a concern, or a new reason to worry, we look for the underlying cause. Every time we do, we see economic expansion, not contraction; we also see markets doing what they do with incredible efficiency. DONALD BROUGHTON
Managing Partner, Broughton Capital LLC
DEMAND EXCEEDS CAPACITY IN ALL MODES OF TRUCKING –
Load posting in the spot market has steadily increased. The number of loads posted in all modes in 4Q ’20 was 1.6X 4Q ’17 and 1.8X 4Q ’18 (the two previous peaks). The number of loads posted in all modes in 4Q ’21 was 1.5X 4Q ’20 and the full year of ’21 was 1.9X the full year of ’18. In recent weeks, it has remained unseasonably strong and is now >8.5X the levels hit at the bottom in 2020.
We are going to assume that if you are reading this article, you already know demand in trucking is strong - In all three modes of truckload trucking, the amount
by which demand exceeds capacity suggests that pricing will be extraordinarily strong for both spot and contract rates throughout 2022.
That said, we expect pricing power to remain stronger and expand for a longer period because demand growth will be outsized, and many of the demand drivers are also offering jobs to potential drivers. These jobs pay well and, in many cases, offer better ‘quality of life.’ As a result, trucking will struggle to add capacity. This will be especially true in reefer and flatbed.
DRY VAN - demand is being driven by strong consumer spending and the explosion in e-commerce. We expect the strength in consumer spending to continue as new household formation has reached a frenetic pace and the last 18 months of housing starts have hit at levels not seen since 2006 (before the 2008 housing crash). While it initially drives strength in demand for Flatbed section, for several years after a house is completed it drives demand for Dry Van. Purchasing a new house is only the first step for a young couple. Almost a decade of spending follows the house purchase, as they make the house their home, and most of those goods are delivered by Dry Van.
E-commerce plays an equally powerful role - distribution centers are not the traditional balanced model which Walmart perfected (i.e., homogenous loads inbound are matched at a ratio of 1 to 1 with outbound loads of mixed goods that are exactly what each store needs). Outbound loads fully utilize each trailer’s capacity and depending on the retailer and the season, may weigh out before they cube out. In the land of e-commerce fulfillment, inbound loads are less optimized (goods mixed to meet immediate and volatile demand). After
each item is bubble wrapped and placed in a cardboard box that is often too large, the outbound loads always cube out and they run at a ratio as high as 8 to 1 when compared to the of inbound loads. This expands the number of loads inbound and explodes the number of outbound loads. Over the road truckers might dismissively point out that, “All of the outbound loads are very short lengths of haul.” While they would be correct in their assessment, we believe that the sheer magnitude of additional drivers needed combined with the ability to offer drivers the luxury of being “home every night” will thwart most over the road Dry Van carriers’ ability to attract and retain enough drivers to grow their fleets. Instead, most will struggle to keep their current fleets seated.
REEFER - demand did not collapse quite as much as Dry Van and Flatbed did, which is part of the reason for its lower level of volatility in spot and contract pricing. Grocery stores still had to be stocked during the quarantine and the Covid vaccine is only one of the medical supplies which require temperature control. Although any incremental demand from medical supplies is already fading, an entirely new driver of incremental demand has been created.
Not just pizza and Chinese food anymore – over the last year many restaurants failed, but those that survived are thriving. Consumer buying habits have been completely retrained. Diners of all ages have learned how to order breakfast, lunch and dinner on their phone. Delivery services such as Door Dash and Grub Hub are booming. In areas where restaurants have fully reopened, many of them are back to pre-Covid (not socially distanced) maximum capacity for in-house dining, yet their receipts from take-out are still exceeding the receipts from dine-in. Since most restaurants do not serve any processed food, they use far more fresh / frozen food stuffs than most households. Since they also tend to make larger serving sizes the amount of food stuffs they consume is magnified even further. We believe the vast preponderance of this shift in purchasing behavior is permanent. If it is, it not only magnifies demand, but in a similar fashion to the e-commerce demand for local drivers, Door Dash and Grub Hub compete for available labor, offering regular home time without the need for a CDL or a drug test. Most Reefer fleets will be unable to grow and will struggle to keep their current fleets seated.
FLATBED – strong demand is being already being driven by the construction and automotive industries, with a significant wave of additional demand now being added by the oil & gas exploration industry.
The rally in per barrel WTI crude oil prices, above $60 in March ‘21 and above $70 in September ’21 (even trading above $80), means the price materially exceeds the cost of production via fracking in all the major fields. This has already almost 3X the number of oil rigs being actively put to work - from a bottom of 172 in August ’20 to 491 last week. Just as e-commerce and food delivery govern the addition of capacity in Dry Van and Reefer, Oil & Gas Exploration will offer alternative high paying employment to potential drivers for the Flatbed industry. Driving demand while constraining capacity as it offers competing employment to Flatbed drivers.
WHERE ARE WE GOING?
Continued economic growth at an accelerated pace - the recovery is already well underway; economic growth will be technology driven and more disruptive but also more dynamic than previous cycles; led by the U.S., Asia, and Northern Europe; propelled by unprecedented productivity increases. We predict most financial markets will continue to inflate in value, the European Union will struggle to survive, and the U.S. trade deficit will steadily shrink until becoming a surplus (within the next 10 years). Although our outlandish prediction of 18 months ago, “outsized growth in productivity and prosperity will result from the Covid driven acceleration in technology adoption” has now become a reality. We believe it is only beginning, will continue to be stronger than expected, and will have an extended period of duration. Finally, we predict that current fears about inflation are dead wrong. There will be an
incredible wave of prosperity created over the next several years, rivaling the post WW2 era, and developing into a period that historians call the “Great Post-Covid Boom.” And, it will happen without inflation.
After spending over two decades as one of Wall Street’s top Analysts and one of its leading Market Strategists, Donald Broughton founded Broughton Capital in 2017. Broughton is notorious as a hard-hitting forensic accountant, using Sell ratings more often than any other analyst. He is highly regarded for translating goods flow data into economic forecasts that have proven to be highly prophetic. Additionally, Broughton is convinced that most individuals know much more about the economy than they realize and believes that economists are only boring because they are lazy or choose to be.
