A basic low-power microprocessor (like the MSP430) will run at 1MIPS at about 0.5mA. (Less when sleeping.) At 3V, that's 1.5mW. A Sharp epaper display, like on the Pebble, consumes basically nil when not changing, although I can't find data on energy use when updating. A traditional STN LCD uses about 1mW.

So I reckon it's plausible, just --- thermoelectric generators have traditionally been really inefficient, and I don't know whether getting 2.5mW of electricity out of 85mW of heat is possible. Particularly if you're like me and wear the watch quite loosely.

Edit: Datasheet: http://www.ti.com/lit/ds/slase54a/slase54a.pdf

That's an FRAM model with non-volatile RAM, so it can power down completely without losing memory. It claims it'll sleep with the clock on at 450nA. (That's nano, not milli.) It also claims it'll run with the processor on at 120 µA/MHz, so the 1 MIPS figure I quoted above must be about 4MHz. I've never run one below that but I gather they'll go down to about 500kHz. Enabling peripherals costs more, of course, but you can leave them powered off until you want to use them.

So, yeah. Totally plausible.