Runaway inflation is the biggest risk facing investors, Leuthold’s Jim Paulsen warns

Runaway inflation is the biggest risk facing investors, Leuthold’s Jim Paulsen warns

Jim Paulsen is on watch for runaway inflation.

In a note to clients this week, the Leuthold Group chief investment strategist warned it's the biggest risk facing the bull market, and the stakes couldn't be higher for investors.

"I would put decent odds that it could get out of control and require the Fed and other policy officials [and] the bond market to kneejerk in order to shut down the overheat," he told CNBC's "Trading Nation" on Wednesday.

Paulsen, who oversees about $1 billion in assets, puts the probability of runaway inflation at around 40%. He questions whether the Federal Reserve's transitory inflation stance is correct. Paulsen is worried aggressive monetary and fiscal policies provided too much juice.

"Everyone looks at the policy that we put in place here as just so oversized and dramatic," he said. "That takes us right back to the inflationary period of the 1970s."

Commodity prices are on fire over the last six months. Lumber prices are surging 195% while WTI crude oil is up 71%.

Even though Paulsen is flagging inflation risks, he sees signs the U.S. economy may be able to weather them. He chalks it up to a vastly different economy than about a half century ago led