Jim Paulsen is on the alert for runaway inflation.
In a notice to customers this week, the Leuthold Group’s chief investment strategist warned that this was the greatest risk to the bull market and that the stakes for investors couldn’t be higher.
“I would put reasonable chances that it could get out of hand and need the Fed and other political officials [and] The bond market should kneel to stop overheating, “he told CNBC’s Trading Nation on Wednesday.
Paulsen, who manages around $ 1 billion in assets, estimates the likelihood of inflation spiraling out of control at around 40%. He asks if the Federal Reserve’s temporary inflationary stance is correct. Paulsen is concerned that aggressive monetary and fiscal policies are delivering too much juice.
“Everyone sees the policies we have put in place here as so oversized and dramatic,” he said. “That takes us back to the inflationary period of the 1970s.”
Commodity prices have burned for the past six months. Sawn timber prices are up 195% while WTI crude oil is up 71%.
Although Paulsen reports inflation risks, he sees signs that the US economy may be able to weather them. He’s chalking it up to a completely different economy than it was about half a century ago, led by the baby boomer generation.
“They are past their peak years of spending and driving the economy faster than it could handle. We have a workforce growth of maybe 1 percent and it is being driven by an aging population today,” he said. “There is not much hope in the years to come, there is much to be gained.”
Paulsen sees an increase in productivity in the next few years due to the effects of technological innovations.
“Our leading industry is technology and the tagline is that sticker prices are going down every year,” he said. “We see that this affects other prices as well.”
He also attributes global relationships.
“Today we are a very open economy and our largest companies are competing around the world, which is a disinflationary force,” said Paulsen.
If inflation is temporary, Paulsen believes the bull market will last for years.
“The uptrend here could be pretty big as we could end up in a world of above-average growth with relatively low returns and low inflation,” he added.
For now, Paulsen remains bullish on the economic recovery and the stock market while being vigilant about inflation.
“We’ll probably have to wait until next year to get a better grip on whether this is just a passing event,” said Paulsen.
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