GMO’s Jeremy Grantham says that both bonds and stocks are overpriced, and that investors should have a substantial portion of their portfolios in cash, allowing them to take advantage when good opportunities do present themselves.

“The Fed is driving the S&P [500], which is overpriced … driving it from already substantially overpriced into what I would call dangerously overpriced,” Grantham told CNBC in a lengthy interview. “It wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive. So, we’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is don’t play the game and hold money in cash.”

Grantham says the market could continue to rise for a few more quarters, but at some point he says the market will “crack” again, as the Fed has created a bubble-bust cycle. He does see some potential in big “franchise” stocks. For institutional investors, says a good mix would involve being overweight in such franchise companies, modestly overweight in emerging markets, and underweight in everything else, with a lot of cash on hand.

To watch the full Grantham interview, click here.