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There are bullish pundits and bearish pundits – and like broken clocks, some are always looking brilliant. And then there is Jeremy Grantham , chairman of investment management firm GMO LLC.

We’ve mentioned Mr. Grantham in this space before (as recently as last week), and we like him because he isn’t a broken clock. He has been skeptical of the U.S. stock market in the recent past, but then said in March of this year that, well, in his words, “if you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot.”

The S&P 500 was then poised at just 676, or 10 points above its 12-year low touched just days before. At the time, he believed the index’s fair value was 900. In the summer, he then forecast the index could rise to a high of 1100. Right again.

On Tuesday, Mr. Grantham released his latest quarterly commentary on the market. Far from converting into a perma-bull, he’s sounding cautious – even if the global economy does recover.

“The normal tendency of an economy to recover is nearly irresistible and needs coordinated incompetence to offset it...,” he said in his note. “But this does not mean that everything is find longer term. It still seems a safe bet that seven lean years await us.”

He argued that price-to-earnings ratios, after adjusting for normal profit margins, are well above fair value now that the S&P 500 has rallied 60 per cent from its low in March. He believes the index’s fair value is now just 860 – or more than 19 per cent below its current level.

“Major imbalances are unlikely to be quick or easy to work through,” he said. “For example, we must eventually consume less, pay down debt, and realign our lives to being less capital-rich. Global trade imbalances must also readjust.”

But at the same time, he acknowledges that concepts of value don’t mean a whole lot next to the powerful forces of low interest rates and generous liquidity. At the same time, momentum is also helping to push stock prices higher, to a point where the market is looking silly again.

This will end – he guesses in the first few months of next year – due to two factors. First, economic and financial data will disappoint, revealing the longer-term troubles of the developed economies. This will put pressure on profit margins at a time when labour cuts are no longer a quick fix.

Second, with U.S. stocks looking overvalued, gravitational force will at last kick in.

“I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again,” he said. “I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels.”

For him, “painfully” implies a dip of 15 per cent – but a drop below fair value is more likely, and that could bring a 22 per cent setback.

“Unlike the really tough bears, though, I see no need for a new low,” he said.

Meanwhile, the long-time fan of emerging markets warns that they are well on their way to bubble territory – but he doesn’t want to exit those investments too early.

“For once in my miserable life, I would like to participate in a bubble if only for a little piece of it instead of getting out two years too soon,” he said. “Riding a bubble up is a guilty pleasure totally denied to value managers who typically pay a high price to the God of Investment Discipline (Thor?) for being so painfully early.”