JEREMY GRANTHAM is an investor with 50 years of experience in the markets who is known for his caution about the outlook for long-term returns (he works for the GMO fund management group). But he caused a stir earlier this year when he said the chances were high of a melt-up in the markets this year.

Buttonwood caught up with him when he visited London this week and asked whether the recent volatility had changed his view. He does think that the odds of a melt-up have fallen. The acceleration stage of a bull market, as in 1928 and 1999, tends to be smooth and quick. The trade tensions evoked by President Trump could be very damaging. He thinks that it is likely that, in five years, the American market may be 20% lower but this will not necessarily be via a sharp crash but through a series of advances and retreats.

The reason that the market has been doing well until now is the combination of low inflation and high profits; that explains why valuations are so high. US profits may have retreated from their peak (as a percentage of GDP) but will probably regain those highs by the end of the year. The puzzle is why profits have been high, and this may well be down to growing monopoly power in the corporate sector.

So what will cause the market to retreat? It will be a variety of factors; rising inflation leading to higher nominal (and real) interest rates, plus wage pressures as demographic factors mean that the developed world starts to run short of labour. Returns from developed world equities, and from government bonds, will be low: too low for US pension funds to achieve anything like their 7-8% targeted returns.

The best hope for investors lies in emerging markets which are cheap, relative to US equities, but not as cheap as they were. Indeed, a wide range of asset classes have been driven higher in recent years; a rule of thumb is that yields on farmland, timber of commercial property and around two percentage points lower than they used to be.

In short, the melt-up could still happen (he thinks the odds are around 40%) but enjoy it while it lasts. The longer-term outlook is desperately unexciting.