GMO co-founder Jeremy Grantham.

Jeremy Grantham, who called the market tops before the dot-com and housing bubbles burst, wants investors to know he hasn’t abandoned his bearish ways even though he appears more optimistic these days.

In a market note out Thursday in reply to “a few misquotes and misunderstandings by journalists” about earlier commentaries, GMO’s chief investment strategist writes that high stock market prices are not permanent and price-to-earnings multiples and profit margins will eventually regress.

But the pace of that regression, which historically took seven years throughout most of the last century, will now take about 20 years, and the regression will be only about two-thirds back from the “old normal,” writes Grantham.

(Related: GMO’s Grantham Sees Boom in Corporate Profits — for Now)

As a result, he expects 2.7% gains for the S&P 500, adjusted for inflation, for the next 20 years, “a rate bound to break the hearts of many corporate and public pension fund officers.” Other investors and financial advisors also won’t be happy with such lackluster returns.

Despite Grantham’s expectation that higher prices may last longer than previously, he is not abandoning the idea of bear markets. “There will always be normal bear markets” and recessions, writes Grantham.

He says the current market cycle “is likely to die of old age (or lack of labor) and go into a recession” in two or three years, but the recovery afterward will be different from the “old normal.”

“If we have a bear market soon, even a severe one, will it recover to the new normal of 23x or the old normal of 25x? I believe the former,” writes Grantham. But eventually he expects a “long-drawn-out and painful flight path back toward the old ratios we know so well.”

In the meantime Grantham is somewhat sanguine. “The current market lacks most of the behavioral indicators of a true bubble,” writes Grantham. It doesn’t have evidence of “bubble-type euphoria” seen in 1999 when lunch places were “touting stocks and not Red Sox replays,” Also, writes Grantham, a “fully fledged bubble in the U.S. … would take a considerably higher level on the S&P 500.”

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