Now Jeremy Grantham says 2005 will be the great black hole.

Where you stand often depends on where you sit. So it was that two bearish equity fund managers, FPA Capital's Robert Rodriguez and Grantham Mayo's Jeremy Grantham faced off to argue with a bond fund maven, Citigroup's Joe Deane, who was much more bullish on stocks than on his own asset class. The dyspeptic exchange took place on June 24 at Morningstar's annual mutual fund conference.

The U.S. economy is "in the early to middle phase of a really solid economic recovery. If I had risk money I'd put it in equities," declared Deane, a top-rated municipal bond fund manager who now oversees more than $7 billion in fixed-income assets at Citigroup.

Where will the markets and the economy be 18 months from now? Deane believes the Federal Reserve Board will shift back into a neutral posture and raise the Fed funds rate to the 4.0% or 4.5% area. "I don't think a rise in rates needs to be negative for stocks," he opined. "It's [the same reason] why they are going up."

Then it was Grantham's turn. For the last three years, Grantham has become the rock star of the financial conference speaking circuit, delighted to deliver his bearish view-to anyone and everyone-with a degree of certainty and confidence that is unparalleled in the investment business. "The bad news is that my story doesn't change very fast," he began.

Reversion to the mean is the central theme of Grantham's thesis. "The trouble with mean reversion is that it doesn't tell you when it's going to do it," he explained. "Everything will go the norm, we just don't know when."

Trendline price-to-earnings ratios started the 20th Century at 12 and moved up to the current level of 16. Grantham asserted that fair value for the Standard & Poor's 500 Index is about 750 and, since the bubble burst in early 2000, it has fallen as low as 775. Yet he was quick to point out that if the market decline didn't overshoot fair value this time, it would be the first time in history that this happened.

So how does Grantham explain the strong rally that began in the spring of 2003, after the invasion of Iraq proved initially successful? It was a "classic bear market rally," according to the entertaining Mr. Know It All. "Last year was the biggest return to speculation we can find," he claimed. "Everything risky went up."

While everyone was talking about the importance of protecting capital they behaved otherwise, as risk and return became synonymous-just like the good late '90s. "This is not how bear markets end," he added.

Why? Grantham, who has no shortage of explanations for why the Dow Jones Industrial Average hasn't crashed below 5,000 as he predicted a few years ago, also has spent some time studying the presidential cycle as it relates to stock prices. In Year 3 you juice everything up, "don't rock the boat in year 4 and clean up the mess in Years 1 and 2. But in Year 3, value is irrelevant." Year 3, of course, includes both 1995 and 2003.

There certainly is a grain of truth to that, so he followed it up with another one of his commercials for Prozac or Valium. "Next year is the great black hole," the savant proclaimed, trying to restrain himself from laughing.

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