They say the time to get really nervous is when the last bear turns bullish.

Did this just happen?

Jeremy Grantham, legendary investment manager and the chairman of Grantham, Mayo Van Otterloo, has been Wall Street's most respected and consistent bear for most of the past decade.

But his latest letter to shareholders sags with the weary tone of a man who is tired.

Tired of warning that the market is overvalued, only to see it keep rising.

Tired of fighting the Federal Reserve.

And tired of holding on to cash, waiting for the inevitable disaster that is forever postponed.

The title to his letter says it all: "Fed Up."

"Of course I'm fed up," he explains. "We had risk on the ropes."

Grantham's referring to August, when the meltdown he has long been predicting seemed at hand. The reckless were about to get punished, the prudent rewarded, and risk-taking repriced back to normality.

But instead of allowing the knock-out blow, Grantham writes, referee Ben Bernanke "ends the round early, extends the break, and allows a dangerous injection of adrenaline."

Result? Hopped up and "carefree" financial markets shrug off everything from the housing slump and the dollar decline to slowing corporate profits, and come bouncing back to even riskier and more dangerous levels.

No wonder he's fed up.

OK, Grantham still believes Wall Street, based on long-term earnings and multiples, is about 50% overvalued. He believes house prices will have to "fall 25% tomorrow, or stay flat for five years," to get back in line with long-term measures. He believes pretty much everything else, from bonds to emerging markets, are overvalued too.

Ominously, for the first time in 20 years he is now worried about inflation as well. And he joins a small but growing number who distrust the benign "official" consumer price data.

But the bear seems to have lost his growl. His prediction for the next 12 months? "A modest up year, with a mixed return to risk-taking but strong emerging market performance, would be my guess."

He suspects Wall Street might eke out a small gain, even if earnings fall modestly. "Any major bearish behavior is likely to wait for another 12 or 18 months," Grantham writes, though he adds: "accidents do happen." He advises cautious asset allocation spiced up with some emerging markets.

Grantham has always been a watcher of the presidential cycle, which has tempered his fears of immediate declines. Wall Street has usually done well in the third and fourth years of the presidential cycle. And perhaps I am reading too much into his tone. But this is surprisingly sanguine.

What's changed? In a word: Bernanke. Grantham hoped the new Fed chairman would take a tougher line on bubbles and easy money, but at the first test he brought back the punchbowl with no resistance.

"For a short while I had touching faith that the more 'academic' Bernanke would take a tougher line than Greenspan," Grantham writes, "and he did sound fairly fierce early on, but as the heat turned up he overcame any qualms and threw in the towel quickly enough."

The fact that the party has found a new friend in Ben Bernanke may be a good reason for being more bullish for a while, regardless of fundamentals.

For a peek at Grantham, Mayo Van Otterloo's holdings, check out this portfolio on Stockpickr.
In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.