US Outlook So many reasons exist to be suspicious of the current boom in world stock markets, it's hard to know where to start. The renewed eurozone crisis, slowing growth in China, sovereign debt down-grades, the flattering effect of QE. I could go on.
But there is a more subtle flashing light we should be equally alarmed by: the fact that the financial whizzkids in the big banks are back, in force, making super-complicated derivatives again.
Many a psychological study has found that humans take about seven years to get over, and then forget about, a major trauma. Historically, stock markets, being driven by humans, have tended to have a similar length memory of catastrophes, before making the same dumb mistakes again.
But it hasn't even been five years since derivatives (on that occasion based on daft mortgages) blew up the world, and yet these exotic creatures have already returned. With a vengeance.
Research from Thomson Reuters declared that banks were creating more derivatives known as asset-backed securities than at any time since before the Lehman Brothers crash. Of those, 22 per cent were made up of – and forgive me the alphabet soup here – CDOs and CLOs. The very type of derivatives that exploded last time. At this stage last year, only 6 per cent fell into those categories.
In other words, banks are creating more of the riskiest types of the riskiest products.
Thomson Reuters delightedly applauds this as the "best annual start since 2007". That seems a bit like cheering record plutonium enrichment in North Korea.
A former UBS banker, who quit because he refused management's orders to push this kind of stuff to his clients the last time around, explained to me that the big banks just can't help themselves. The commissions generated are just too appealing.
But why are investors buying them? OK, some are purchased as a useful hedge to protect their clients from volatility, but often it is simply because other assets – most notably bonds – are hardly returning anything, so they pile into the riskier stuff.
Sure, they'll tell you the current generation of asset-backed securities is built on firm foundations. But they said that last time – convincingly enough to persuade Moody's and S&P to believe them.
The people making these products tend to be maths geniuses. That sounds fine, but it actually increases the risk that no one else in the bank understands them. Bosses don't know how potentially exposed their organisations are.
Let's hope that's not the case with Antony Jenkins, the new chief executive of Barclays, brought in to simplify his bank after the casino years under Bob Diamond. The biggest underwriter of asset-backed securities in the world for the past year? Barclays.