CHICAGO. Jeremy Grantham wants to rain on the parade. Glorious up tick of the last three months notwithstanding, the Boston based institutional money manager believes the decline of the U.S. stock market isn't over. He also believes stocks are still perilously overvalued. Worse, he believes they are destined to fall to below average valuations.

The only question is how long it will take.

To those who know Mr. Grantham this is not news. He has been bearish on the U.S. stock market for so long some observers--- including some at the recent Undiscovered Managers Wealth Management Symposium--- believe it reduces his credibility as an observer.

In fact, there is a reason he has been bearish for so long.

It's called history.

Here, extracted from his presentation, is why he believes we should remain cautious.

Bubbles Disappear Completely. Showing graphs of different bubbles versus their trend lines, Mr. Grantham points out that every bubble is symmetrical. If prices rise 100, 200, or 300 percent over their trend, bursting the bubble ends with a retreat that goes back to trend line. Then it continues and goes below trend line.

While stocks rose well above trend line in the twenties, the crash that followed gave up all the gains and then went below trend line. Ditto the 1946-84 bull market--- stock rose well above trend line, and then fell far below it after the 73-74 crash. There have been similar retrenchments in the Japanese stock market, in currencies, and in commodities.

We act traumatized by losses (and many are) but large cap stocks still sell at multiples of earnings, cash flow, and book value that are far above their long term norms--- and they are doing this in an interest rate environment that offers no competition.

Stocks Are Still Overvalued. By his measures, large cap U.S. stocks are still priced in the top 20 percent of their historic range---"the most expensive 20 percent of History." While real returns for common stocks have averaged 11 percent when stocks were relatively cheap, they have averaged 0 percent when they were this expensive. (It should be noted that Mr. Grantham doesn't have much company in this position: Steven Leuthold, who turned bearish for similar reasons, now sees stocks as reasonably valued. Others justify current pricing by pointing to current interest rates.)

Long Term Returns Will Be Weak. Making what he calls "kind" assumptions about the future, Mr. Grantham expects declining P/E ratios to offset all future gains from sales growth. This would result in an annual total return of only 1.4 percent for the next seven years. We could, of course, get to normal valuations faster by having another bear market leg down.

So where should we put our money? Where can we find investment opportunities rather than impending disasters?

Mr. Grantham is negative about large capitalization U.S. equities. He's also negative about traditional bonds. But he is positive about international stocks (large and small cap), inflation protected securities, international debt, REITs, and long-term investments such as timber. (Timber, he points out, has provided a higher return than the S&P 500 index, including dividends, for nearly a century.)

If he is right, the difference in return between now and 2010 will be major. While he expects U.S. large cap stocks to provide real (inflation-adjusted) returns of only 1.4 percent annually, he's expecting U.S. small cap stocks to provide 3.8 percent, REITs to provide 6.7 percent, large cap international stocks to provide 7.6 percent, and small cap international stocks to provide 9.7 percent.

That's quite a range. Basically, he's saying that your real wealth may grow only 10 percent in large U.S. stocks or it may nearly double in small international stocks over the next 7 years.

Query: Is any small investor money in the path of profit?

While mutual fund investors have embraced REITs over the last two years, witness the doubling of assets in the largest REIT fund, funds that invest in foreign equities have suffered the same net redemptions that domestic equity funds have suffered--- so there probably isn't much small investor money where Mr. Grantham thinks future returns will be.

And what else will happen in the next 7 years? The baby boomers will start to retire--- if they can afford it. Individual investors, still uncomfortable with the responsibility of 401(k) decisions, had best prepare for a white knuckle future.