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.

Upon that cheery note, Grantham turned the microphone over to FPA Capital's Robert Rodriguez, who started by describing the financial markets as a "vast wasteland of value" that represented a "time for extraordinary protection." Before going any farther, Rodriguez was quick to mention that his firm had just announced it would close his own FPA Capital fund "because we can't find anything." Rodriguez has about 37% of FPA Capital's assets invested in cash.

Unlike Grantham, Rodriguez didn't see any near-term apocalypse looming. "We don't expect stocks to collapse this year," he told attendees. "It's very hard to deploy capital rationally. Earnings [growth] will decelerate rapidly in 2005 and 2006 and will start to approach the rate of nominal GDP growth. If interest rates rise, it will be tough for stocks."

But there are numerous other problems, like the threat of terrorism, on the horizon. "People are not being compensated adequately for unquantifiable risk," Rodriguez contended.

It was a sign of the times that the only modest bull on stocks in the group was the fixed-income expert, Deane. But even he was cautious about the structural risks embedded in the foundations of the financial systems. "I have a funny feeling that the carry-trade is bigger than it was two or three months ago," Deane warned, "The spread is the largest in history. The wind has been at your [equity investors'] back since 1981 and now it isn't. People really need to stress-test portfolios." Some bull, that Deane.

Grantham, the chief grump, quickly brought up two issues related to the carry-trade threat: debt and hedge funds. Emerging markets have been one of the few sectors he has favored. "Debt could really mess up emerging markets, which are now at 14 times earnings," he declared.

Like many sophisticated investors, Grantham was shocked that the Indian stock market could drop 25% in two short days this past spring. How did it happen? "Foreign hedge funds," he explained, adding that some emerging markets have declined 18% this year on rising earnings.

The less histrionic Rodriguez was far more subdued and patient. "There's this feeling out there that you have to do something," he warned. "You don't have to do something. You can wait. We're waiting until the investment odds are structured more in our favor."

While that was undoubtedly sound advice, the final word was Grantham's. He expressed what he called "nostalgia for March 2000." Back in those good old days, REITs yielded 9%, not 5.5%, and Treasury Inflation-Protected Securities were at 4.2%. Admitting that virtually all the bulls are now in hibernation, he lamented that there was no one left "to insult."

As someone who has watched Grantham on several occasions describe the inevitability of a staggering bear market in a manner so convincing that it induces laughter (or panic), this observer had the feeling that he was watching a brilliant actor giving a great performance for the 1,000th time while struggling to restrain himself from bursting into laughter on stage.

No matter how smart they are, no one can be that sure there will be a 1930s-style bear market. And the current bear market is looking much more like a bear market of time, a la 1966 to 1982, than the leap off of Mt. Everest that Grantham so delights in depicting.