Jeremy Grantham sat down with Consuelo Mack at WealthTrack to expand upon his recent bullish comments about the US markets. However, far from being bullish, the essence of Grantham’s comments were extremely bearish, suggesting investors could expect only a couple of percent real return over the next couple of decades in US equities. The veteran investor also made bearish comments about the US bond market. His advice is to rotate out of US equities and pile into emerging markets, as much as you dare.

It must be noted first that Jeremy Grantham has called a few stock market bubbles — the tech stock bubble of the 1990s and the global credit bubble of the 2000s, to be sure. And he was spot on in timing the 2009 market bottom. See my February and March 2009, Jeremy Grantham: “Pull the trigger” and More bullishness from Jeremy Grantham.

So when Grantham, Co-Founder, and Chief Investment Strategist at Boston-based fund manager GMO, talks of how to deal with a market melt-up, we should listen. In contrast to his written piece a couple of weeks ago, the views Grantham expressed in his WealthTrack interview show someone who is quite concerned about overvaluation in US markets, both in absolute and relative terms. I want to pick apart what he said and follow it with the video of his conversation.

Here’s the macro picture he presents: there are a very few number of bubbles in US equity market history. There’s the one that ended in 1929 and the one in the 1950s and the one that ended in 1999. But that’s it. So, it makes statistical analysis very hard. Moreover, it’s even more difficult to predict a bubble because they start out of nothing. Grantham believes it’s only moderately possible to predict that last phase of a bubble, the melt-up because there the telltale signs of overvaluation and euphoria are all around. And that’s why he’s made his call now.

Grantham says that “by traditional standards, the market is very expensive, extremely expensive.” Yet, at the same time, here we are, going into the 10th year of an economic expansion and cyclical bull market. And we are seeing a synchronized global expansion. In Grantham’s view, this is fertile ground for a bubble. In fact, the essence of every bubble is “Wonderful fundamentals, euphorically extrapolated”. Good fundamentals are “a base for real optimism”. But combine them with a late cycle environment, high valuations, and unrealistic extrapolation and you have the makings of a bubble. And Grantham says, “there’s never been a bubble when the fundamentals did not shine.”