Warren Buffett says buy. Jeremy Grantham says it will get worse. Both are celebrated value investors. Who is right? It all depends upon your view of the third derivative of investing. Today we look at valuations in the stock market. This is the second part of a speech I have given in the past few weeks in California and Stockholm. I am updating the numbers, as the target keeps moving. While from one perspective things look rather difficult, from another there is a ray of hope. What can you expect to earn from stocks over the next five years? It should make for an interesting letter. Note: this will be a little longer than usual, but part of it is there are a LOT of charts.

I should note that I am rewriting this on Monday. For the first time in over 8 years, I missed my Friday night deadline (see below). Last week's title for the letter was "The Economic Blue Screen of Death." By that I referred to the old "blue screen of death" that we used to get on early versions of Microsoft MS-DOS and Windows. You could be working away and suddenly, for no apparent reason, the computer would freeze up and you would get a blue screen. The only thing you could do was unplug the computer and hit the reset button - losing everything that was not saved when the computer crashed.

I likened this to the economic situation we are in now. With consumer spending "resetting" to a new lower level, we are going to have to hit the reset button on many business plans, and thus investments, as consumers are going to spend less and save more. Is that level 3% less? 5%? More? No one knows, but since we have not had a consumer-led recession since 1982, too many businesses assumed that the US consumer, like Superman, was bulletproof.

What will be the eventual savings rate? Will we get back to 7-9% from less than 1%? Maybe, because people are going to realize that savings today are the key to a happy retirement. That would put the new level of consumer spending a good deal lower than it has been. Thankfully, that climb in savings will not happen all at once but will play out over more than a few years. I think we will look back in the middle of the next decade and be quite amazed at how much US personal savings have increased. However, this is the Paradox of Thrift: what is good for the individual is hard on the economy, as by definition increased savings reduces consumer spending.

This week we will look at a fascinating debate between two well-known investment analysts, I show you how to spot a stock market cheerleader, and ponder the significance (if any) of what the surprising GOP win of the Senate portends for our investments.

I am on the road as I begin to write this week's letter, speaking at the National Endowments and Foundations Symposium on the prospects for the economy and the markets for the coming year. Interestingly, when I spoke at this conference last year I was soundly taken to task by some pension/investment consultants for suggesting that the stock market would drop for a third straight year, even as the economy would Muddle Through.

This will be an unusual e-letter in that I am going to focus on some recent interviews with well respected investment analysts or economists. I believe you will find them as instructive and thought-provoking as I did. I will quote them directly and then make comments.

The first is from Barron's with Jeremy Grantham. Grantham is a very highly respected money manager and analyst. His firm manages $22 billion. There are many in the investment industry who hold Grantham in almost guru status. He has earned it.