Market Overview

Neel Kashkari: Fed not Likely to Yank Morphine Drip Anytime Soon


PIMCO's Neel Kashkari sees the Fed's easy monetary policy as a morphine drip which is going to continue to be administered to a market that has become dependent on it.

Kashkari spoke to CNBC on Squawk Box on his new note signaling strong corporate earnings and reaffirming his care for equities, which is based on the continuation of easy monetary policy.

"We have looked at five scenarios that would threaten corporate growth, and believe there are no risks," Kashkari says. First, Kashkari does not see labor costs going up with the latst employment coming in weak and unemployment maintaining its high levels. Second, he does not see a global recession, although growth should continue to be slow. Third, Kashkari sees gradual decline in the dollar, a currency he is a secular bear on. Fourth, Kashkari believes the Fed will continue to keep the cost of capital low. And last, he believes corporate tax rates are not likely to go up based on current Washington trends.

"Based on these, profits can stay strong. Obviously, individual companies will see pressure, but as a whole, these factors are going to be supportive of corporate margins, in the near future in the least," says Kashkari.

"Our view of equities has not changed in the last several months," continues Pimco's Head of Global Equities. "Whereas the sentiment around the world has changed from fear to euphoria and back in the middle and now into fear, we are cautiously optimistic and focused on managing downside risk."

Part of this risk, according to Kashkari, comes from the fact that markets have become so beholden to the Fed's monetary policy. "Every time the Fed tries to back away from massive easing policy, the markets react," he said, referencing what happened following FOMC minutes last week. "My last analogy to this is morphine drip. It does not cure the underlying disease. The moment you try to take the morphine away, the patient wakes up horrified, in a lot of pain."

"Risk markets have become dependent on the Fed's easing policy. The moment the Fed retracts, markets are going to react and that will force the Fed to react," concludes Kashkari.

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