The stock market outlook for 2012 and beyond from most analysts is something along the lines of it will improve, but slowly and not by a lot.
The average forecast of analysts for the S&P 500 Index in 2012 is a gain of 7 percent before dividends, according to Yahoo! Finance's Breakout blog.
But what if most of these analysts are too young to have experienced a big equity bubble collapse and therefore do not recognize one when they see it? This is a possibility recently raised by GMO's Jeremy Grantham.
In a macroeconomic sense, Grantham thinks the U.S. economy will not easily recover from the high level of debt overhang, the loss of perceived asset values and the gross financial incompetence on a scale hitherto undreamed of.
The U.S. and the developed world in general also suffer from slowing population growth, an aging profile, an overcommitment to the old and inadequate long-term savings.
Lastly, the U.S. economy will be hampered by depleted infrastructure, poor education and the decreased long-term effectiveness of the government.
Commenting on the stock market, Grantham said all major equity bubbles - the U.S. in 1929, the U.S. in 1965 and Japan in 1989 - broke way below the trend line values and stayed there for years.
The S&P 500 Index from 1964 to 1978. Chart produced using Microsoft Excel.
He said looking at the 10 biggest bubbles before the year 2000, it took an average of 14 years for the market to recover to the old trend.
Under the stewardship of Federal Reserve Chairman Greenspan and Chairman Bernanke after him, the tech bubble crash of the early 2000s did not breach the trend line and the 2009 crash, once it breached the trend line, took only 3 months to recover back to it.
Grantham credited this success to the loose but dangerous monetary policy of the Federal Reserve.
However, with interest rates at zero and the Federal Reserve's balance sheet at nearly $3 trillion, Bernanke may be running out of bullets to play his stimulus card again.
The next market bust, said Grantham, may well be like the old days.
The last time that an equities bubble burst and stayed below trend line values for years was the 1970s. Most investors today, however, were not in business back then.
Below is a chart produced by GMO that shows how the S&P 500 would behave if it followed the pattern of the average of the 10 previous big equity bubble busts.