According to Jeremy Grantham, the co-founder and chief investment strategist of asset manager Grantham Mayo Van Otterloo, "we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market."
Grantham's view is that a melt-up or end phase of a bubble is likely within the next six months to two years. He thinks there's over a 50% likelihood of this happening.
"I recognize on one hand that this is one of the highest-priced markets in U.S. history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market," Grantham writes in the latest GMO Viewpoints, "Bracing Yourself for a Possible Near-Term Melt-Up."
If there is a melt-up, then the odds of a subsequent bubble break or meltdown are "very, very high," Grantham says, predicting over a 90% chance of this.
He adds that if there is a market decline following a melt-up, it is quite likely to be a decline of some 50%.
"If such a decline takes place, I believe the market is very likely (over 2:1) to bounce back up way over the pre-1998 level … but likely a bit below the average trend of the last 20 years, as the trend slowly works its way back toward the old normal on my 'Not with a Bang but a Whimper' flight path," Grantham writes.
Among the factors Grantham considers are the acceleration of price, the euphoria in today's markets, and what Grantham calls "touchy-feely measures of market excess."
According to Grantham, the data on the high price of the market is clean and factual.
"We can be as certain as we ever get in stock market analysis that the current price is exceptionally high," he writes.
However, he also notes that the classic examples of bubbles bursting are not just characterized by higher-than-average prices.