The U.S. stock market isn’t in a bubble yet, but it’s getting close, said Jeremy Grantham, co-founder of GMO, the Boston-based asset management firm.

“We’re creeping to bubble land,” Grantham said at the Morningstar Investment Conference in Chicago on Wednesday. But he noted the stock market bubble won’t break when the Federal Reserve eventually raises interest rates.

“We need a trigger,” Grantham said. “Broadly overvalued markets won’t do it . . . We’re in a broadly overpriced market worldwide. The bond market is the most overpriced in history; fine arts sales are setting new records. These are not sufficient [for a trigger].  We need for individuals to become crazy buyers . . . Individuals are optimistic, but they’re not buying stock. No bubble has broken until individuals have poured into the market.”

He said there is a lot of hand-wringing over when the Fed will raise rates, but he reminded the audience the Fed raised interest rates eight times between 2004 and 2006 and the stock market still went up.

Grantham finds investing in the current market difficult, and said GMO is being prudent.

“I’m going to be very, very prudent closer to the election,” he said. “I recommend the same for you.”

He added another problem is Corporate America’s focus on the short-term by awarding stock options, buying back stock and pushing up profit margins at the expense of capital expenditures.

“We are buying stock back at a record rate, at a $700 billion annualize rate year-to-date. The ability to buy back stock and overwhelm earnings has a lot to do with how dismal capex is today,” Grantham said, adding that the lack of capex spending is a drag on economic growth.

Grantham said the push to focus on profit margins is not allowing the natural cycle of mean reversion to occur.

“For 20 years we’ve had abnormally higher returns. Instead of sucking in competition, we’re sucking in our own stock. We’re not expanding the economy because of high profit margins; we’re running away from it,” he said.

He added this can be fixed through regulation, as people can’t depend on altruism in capitalism.

“The SEC (Securities and Exchange Commission) has the complete authority to deal with it in a way that makes sense,” Grantham said, adding a firm regulatory hand and diehard capitalism work very well together.

“You need a policeman on the corner of Wall and Broad streets,” he said.

Grantham blamed the current state of the stock market on recent Fed chairmen starting with Alan Greenspan and up to the current chief, Janet Yellen, who he said will rescue the stock market whenever prices break. He noted the Fed’s action creates seven-year bull markets and 18-month bear markets, which he said is perfect for stock options.

It allows firms to ride the bull market higher, and rewrite the stock options during bear markets. Among his suggested fixes for stock options is to make them for five years and index them to an industry norm.

Grantham is known for his pessimistic outlook, including his concerns over the depletion of natural resources and worries about climate change. He addressed these issues at the beginning of his speech.

“I am not pessimistic, by the way; it is you who are optimistic,” he joked.

Grantham said that while he sounds bearish, he believes no problem is insurmountable.

“If we rise to the occasion we will overcome resource problems and deal with climate change,” he said. “The question is will we?”