Policy

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hedgeye_policy.JPG

 

New estimates show that the federally chartered U.S. multiemployer pension insurance system is on track to be insolvent by 2025.

While much attention has been paid to the severe shortfall faced by many state plans, a similar crisis is happening in multiemployer plans, which are now paying the price for setting wildly optimistic discount rates that understated their true liabilities.

If you want an object lesson in myopic, can-kicking government dysfunction, just read this report and weep.

Multiemployer pension funds, a monstrous “pooled” creation of unions and many employers, were never intended to be solvent. From the very beginning, they were able–like state and local plans–to choose whatever discount rate they found convenient (the higher the better, boys!).

What’s more, member firms were allowed to drop out of these plans without paying anywhere near the cost of their remaining liabilities. This created a free-rider incentive to quit and hurried the financial unraveling of these funds.

Sure, the Great Recession and the subpar recovery of construction added to the burden. But these plans were never as healthy as single-employer plans.

Some Democrats are backing measures (like the proposed Butch Lewis Act) that would bail out these plans, and the PBGC, by issuing low-interest Treasury debt. Thus are the majority of taxpayers, who do not have DB plans, supposed to shore up the benefits of an aging cadre of workers who do while letting the companies and unions off the hook.

Hey, if the U.S. Treasury has access to free money, why not spread it around to all of us?

Insolvency Coming? The Multiemployer Pension Crisis - zneil


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hedgeye_policy

Takeaway: We forecast that Iran oil exports will be less than 1 mbd in January as three countries receiving extensions go to zero imports.

Headlines about Trump Administration “waivers” for eight countries announced Monday has created a false narrative in oil markets that US sanctions are not a big bite into Iran’s oil exports. But we think a quick review of the State Department’s implementation plan shows the sanctions bite is indeed real.  

It’s important to recognize at the start that these are not waivers or exceptions but rather deadline extensions for a few countries to get on a path to zero imports. The word waiver is a legal term in the law but the State Department is implementing it as a deadline extension.

On Monday, Secretary of State Mike Pompeo called the deals “temporary allotments” and announced the eight countries as China, India, Turkey, Japan, South Korea, Greece, Italy and Taiwan.

Our review of the deals with eight countries makes it clear to us that the Administration’s plan will result in cuts to Iran oil exports of nearly 1.5 million barrels per day (b/d) as early as January and pushing Iran’s exports to below one million b/d.

Here is what we believe are the key details of the deals:

  1. The eight countries have agreed to reduce exports by at least 20 percentand be on a path to zero by April 1.
  2. Three of the eight countries (we believe Greece, Italy and Taiwan) will go to zero imports on January 1.
  3. China has agreed to limit Iran imports to 360,000 b/d, according to a Reuters report. This amount is a much greater cut to China’s imports from Iran than the general 20 percent reduction requirement.
  4. South Korea has agreed to limit Iran imports of condensate to 4,000 b/d, according to an S&P Platts Oil report.

As we said previous notes, we think that getting China, India and Turkey to reduce imports now in exchange for the deadline extension is significant and a clever move by the administration. That’s because almost no one expected any of the three nations to comply with sanctions.

As a result, we have modeled new forecasts for Iran exports in November and January. Our forecast model for November has Iran exports at 1.186 million b/d, which would be a cut of 1.3 million b/d from May.  The forecast model for January has Iran exports even lower at 950,000 b/d which translates into a cut of 1.45 million and is in line with what we are told is the State Department estimate once the accommodations are in effect.

If China, Turkey and India also agreed to eventually go to zero, it is a very big deal. Therefore, it is likely that Iran exports decrease further after January if the accommodated countries begin on the path to zero.

As we have said in previous notes, we think China is a special situation. We noted a Reuters report that China expects to receive another extension of its accommodation in April in return for further reducing Iran imports to 220,000 b/d. We can’t confirm this report but it would not be surprising.  In our view, China likely never plans to go to zero imports, and no one in the US government believes it either. We are a long way from April but if the US can get China to further reduce imports to 220,000 b/d, it would represent a cut of 530,000 b/d in imports of Iranian oil and be a huge diplomatic victory for the administration.

The False Narrative On Iran Oil Sanction “Waivers” - zooo


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