Back on January 3, GMO founder Jeremy Grantham captured the mood of the moment when he fired off one of his provocative memos to clients.

In the 13-page note he urged clients to brace themselves for a near-term melt-up in stock prices that might take the S&P 500 to the 3,600 area. A prominent footnote added that the views he expressed were his own and were not always closely aligned with his colleagues at GMO.

Citing an academic research paper entitled “Bubbles For Fama,” he pointed what many consider the single strongest indicator of a bubble—price acceleration. The paper was written by Robin Greenwood, Andrei Shleifer and Yang Yu and published by Harvard University.

“This is perhaps the third time I have agreed with mainstream economists in the last 50 years,” he wrote. “I have a firm principle of generously quoting when they agree with me.”

For the next three weeks, Grantham’s suspicions looked prescient. Equities closed out a strong 2017 accelerating dramatically in January. Grantham described it as “base camp, perhaps, for a possible assault on the peak.”

As someone who started covering the financial markets in 1987, those first three weeks of January 2018 looked like a mirror image of the first quarter in 1987 when the S&P climbed nearly 23 percent. By August, the index was up nearly 45 percent—only to end the year up 5 percent.

So why didn't this year's melt up continue? In January, Grantham thought the odds were between 50 percent and 55 percent in favor of that scenario playing out.

“As soon as it became clear the president was waging a war on global trade, the odds dropped to 35 percent,” he said in an interview last week. Simply put, when the two largest economies in the world decide to inflict damage on each other, the ramifications are likely to be widespread and many smaller players are likely to be collateral damage.

Anyone who has listened to corporate earnings reports from America's industrial companies realizes the effects of tariffs are starting to kick in. More significantly, the impact on the interconnected global supply chain could eventually reach deeper into the economy.

Some think it already is. Observers like Morgan Creek Capital's Mark Yusko think the tariffs could be the spark that triggers a  40 percent decline over the next two years.

Grantham isn't making that kind of argument. But the odds in favor of a melt up are closer to 20 percent as we move further into the late stages of the economic cycle. A big rally is still possible, he added.

Most big market declines have been preceded by bubbles and euphoria, but not all, according to Grantham. Some bull markets just dwindle and fade away. He has described the current bull market as an “anti-bubble.”

Grantham will be speaking at FolioFn’s SRI Investing conference in Colorado Springs on November 1.

Asked about research analysis conducted by the world's largest hedge fund, Bridgewater & Associates, claiming that 40 percent of the gains in equities since 1982 can be attributed to falling interest rates, Grantham said that the argument holds serious merit. However, he declined to place a specific number on this correlation.

On another subject, Grantham expressed amazement that the performance of his $900 million Grantham Foundation For The Protection Of The Environment ranked it in the top one percent of all foundations tracked by Cambridge. “Our foundation made a lot of mistakes,” he said.

Over 50 percent of the foundation’s assets are invested in broadly diversified venture capital. As of June 2017, a $58,000 investment by the foundation in Snap was worth over $12 million. Not bad for a value investors who disdains bubbles. The guess here is that the foundation has since unloaded the stock.

“Venture capital is what we [Americans] do better than the rest of the world,” he said, adding that S&P 500 companies have really cut back on research and development. “VC is far less overpriced than the blue-chip stocks.”