As a young boy growing up in the Bronx, Leon Cooperman could buy two pretzels for a nickel from a street vendor called Bob. Those days are long gone.

While Cooperman has significantly deeper pockets today, as the chairman and CEO of Omega Family Office, he was still shocked at the $13 price tag per pretzel and $6 bottles of water at the Yankee Stadium this summer.

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“Prices are crazy,” the hedge fund billionaire said on Fox Business’ “The Claman Countdown”, sharing that he also bought his youngest grandson a Yankees cap for a cool $56.

Inflation isn’t only stinging Americans at the ballpark; its effects have rippled through consumer prices, from gas and groceries to both new and used vehicles.

The Federal Reserve’s efforts to tame inflation through “higher for longer” interest rates could have a negative impact on “corporate profits and economic growth,” according to Cooperman — something that savvy stock market investors will want to keep a keen eye on.

Higher for longer rates

Last year, Cooperman said Fed chairman Jerome Powell “has no idea how high interest rates have to go to stem economic growth” — and he stands by that comment today.

“I don’t think interest rates are at a peak,” he said ahead of the Fed’s rate announcement on Nov. 1.

The problem with interest rates staying “higher for longer” is that it will keep borrowing costs high at a time when the U.S. government’s budget deficit and national debts are growing.

“I’m less worried about inflation than I’m worried about the fiscal position of the country,” said Cooperman. “We’re borrowing from the future through extremely aggressive fiscal policies, which bear no relationship to what the country can afford.”

The U.S. Department of the Treasury recently released its Final Monthly Treasury Statement for the fiscal year through Sept. 30, 2023, showing a deficit of $1.7 trillion — the largest outside the COVID era.

The deficit is up 23% from the previous year mainly due to a drop in revenues and an increase in spending on Social Security, Medicare and record-high interest costs on the federal debt.

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Guns or butter policy

When Fox Business anchor Liz Claman suggested Congress and President Joe Biden don’t seem to be “in the mood” to deal with the deficit, Cooperman said “both political parties” played a role in building the deficit and now they must deal with it.

“When Donald Trump was president, he was running a trillion dollar deficit and the economy was fully employed,” he said. “Biden has made it worse because of economic circumstances and what’s going on with two wars.”

Biden recently asked Congress for $100 billion in new foreign aid and security spending, including $61 billion for Ukraine and $14 billion for Israel — two drastic geopolitical situations that are “very negative for fiscal policy,” according to Cooperman.

He said the U.S. is currently facing a “guns or butter” situation — a tradeoff governments face in spending on national defense or on domestic programs. He thinks that policy could lead to more inflation, which will be “negative for stocks.”

Stocks under strain

The Fed’s “higher for longer” interest rate strategy has already started to impact the stock market.

In October, the yield on the benchmark 10-year U.S. Treasury note hit 5%, its highest level since 2007. Soaring Treasury yields have triggered a stock sell-off as investors reassess the balance of bonds and equities in their portfolios.

This is threatening to weigh on equity performance over the long-term — and stocks are already trending down. The S&P 500 dropped 1.77% in August and another 4.87% in September. Looking ahead, Cooperman thinks the S&P 500 is “going nowhere for a very long time.”

“I think the bulk of the market is coming down,” he added. “Earnings are up a bit … but if you take out the Sainted Seven, the market is down for the year. You see companies doing relatively well and not being rewarded and I think it’s because of the macro environment.”

Things aren’t going to get any easier for stock market investors in the New Year, according to Cooperman. He believes the U.S. will fall into recession in 2024 as a “result of qualitative tightening, the price of oil, the strong dollar or Fed tightening.”

A recession could result in stocks decreasing in value, making it more difficult for investors to realize capital gains. It can also lead to heightened stock market volatility, which can make active investing more challenging. But remember, it can also provide opportunities for value investors to buy shares in quality companies at a discount.

With traditional assets under strain, investors may seek to hedge against high inflation and interest rates by investing in alternative assets like precious metals, real estate or fine art.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.