GRANTHAM: Stocks Are 65% Overpriced, But They're Not A Bubble

Grantham, who has a penchant for sniffing out market bubbles, continues to warn stock market investors that they're in for an era of low returns. GMO's Ben Inker recently said we should expect average annual returns of -1.3% for the next seven years.

This is not to say that stock prices can't still surge in the near-term.

"They're 65% overpriced," Grantham told Barron's Lawrence Strauss. "If they go up another 30%, you would have a true bubble, at which point stocks would be close to twice their fair value. Similarly, in 2000, stocks were more than double their fair value. So they are quite capable of doing that."

Here's Grantham on bubbles:

There are two good standards for a bubble. One is boring statistics, and the other is an exciting behavioral frenzy, on which so many good books have been written. And based on the boring statistics, the data is really very clear: We are not even that close to a bubble. With the S&P 500 at around 1860 recently, we are at about a 1.4- to 1.5-sigma event. Another way to say that is that we are between one and two standard deviations outside the normal distribution of stock-valuation levels. A two-sigma event would put the S&P 500 at 2350. So using the standard definition, it has to go up another 30% from here to get to a bubble. But you don't know when an ordinary market move is a bubble; you only know that in hindsight. As for the second test, which is euphoria, I like to joke that in 2000 here in Boston, Celtics replays were displaced at lunchtime at the greasy spoons by talking heads on TV. You would go to one, and they would be touting the latest Internet stock. But I've noticed recently that they are still playing the sports highlights on the televisions in the pubs here.

Grantham spends some time talking about investor sentiment, bonds, and food. Read the whole interview at Barrons.com.