READY for a melt-up? Investors are generally upbeat about the prospects for equity markets this year but one intrepid fund manager thinks it is likely that American share prices could rise by 50% in the next six months to two years. Perhaps the biggest surprise is the identity of that pundit: Jeremy Grantham.

Mr Grantham, one of the founders of the fund management group GMO, is best known for a cautious approach to valuations. He was one of the investors who got out of the dotcom boom well before the top. His firm’s most recent prediction for seven-year returns are for an annual loss of 2% from American largecap equities; indeed among all the asset categories, only cash and emerging market equities and bonds are expected to produce a positive real return over the seven-year period. 

So how can Mr Grantham justify his views? He does not resile from his belief that values are high

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.

But what he does not see are the other indicators that have pointed to bubbles in the past. There is no sign of euphoria; the TV and newspapers are not full of stories about small investors who are day-trading stocks. (Perhaps because all the speculators are trading bitcoin.) Nor have we seen signs of the kind of late-stage acceleration in share prices that marked American shares in 1929 and 1999/2000 or Japan in 1989. Mr Grantham thinks that stage is next.

Meanwhile investors have the wind at their backs; the global economy seems to be improving, as the latest PMI numbers seem to indicate (although note the caution on China in my most recent post). America's tax cut package will give a further boost to profits. The Fed has been raising rates but is unlikely to do so fast enough to cause the market problems (particularly given the appointment of Jerome Powell, who is likely to be dovish, in Mr Grantham's view). 

Nor can Mr Grantham see the technical signs of a market peak; a concentration in a few stocks, for example. One important measure is the advance-decline line—the number of stocks that are rising versus those that are falling. That line was in retreat for much of 1929 and peaked in 1998, well before the bubble burst. It still looks positive today; this advance is pretty broad. 

There is a kicker, of course. If the melt-up does occur, then Mr Grantham thinks a meltdown, in the form of a 50% plus decline, is almost inevitable. Remember that a 50% advance followed by a 50% decline leaves the market 25% lower at the end of the process. 

The forecast has a good degree of plausibility behind it. This blogger still has the feeling that politics may intervene, perhaps over North Korea, where some have been calling for a "limited strike". But there is another sign of a peak—which is when noted bears give up and embrace the market. In his own way, Mr Grantham may be acting as a contrary indicator.