“It may be the case that the debt is better distributed because some highly-indebted countries have deleveraged, like the private sector in the US or Spain, and banks are better capitalized. But there is also now more sensitivity to interest rate movements."

The BIS warned it is annual report two weeks ago that equity markets had become "euphoric". Volatility has dropped to an historic low. European equities have risen 15pc in a year despite near zero growth and a 3pc fall in expected earnings. The cyclically-adjusted price earnings ratio of the S&P 500 index in the US reached 25 in May, six points above its half-century average. The Tobin's Q measure is far more stretched than in 2007.

“Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” it said.

Mr Caruana declined to be drawn on when the bubble will burst. "As Keynes said, markets can stay irrational longer than you can stay solvent,” he said.

The BIS says prolonged monetary stimulus in the US, Europe, and Japan has led to a leakage of liquidity, contaminating the rest of the world. The rising powers of Asia are no longer able to act as a firebreak – as they did after the Lehman crash –and may themselves now be a source of risk.

Emerging markets have racked up $2 trillion in foreign currency debt since 2008. They are a much larger animal than they were during the East Asia crisis of the late 1990s, so any crisis would do more damage. “The ramifications would be particularly serious if China, home to an outsize financial boom, were to falter," it said.

BIS officials doubt privately whether China can avoid a ‘hard landing’, fearing that the extreme credit growth over the last five years must lead to a financial reckoning. They also doubt whether the aftermath will in the end be easier to deal with in a state-controlled banking system where the Communist Party controls the credit levers.

The annual report suggested that China’s $4 trillion of reserves are a Maginot Line defence. It noted US was also a large external creditor in the 1920s, as was Japan in the 1980s, before each went into deep crisis. “Time and again, in both advanced and emerging market economies, seemingly strong bank balance sheets have turned out to mask unsuspected vulnerabilities that surface only after the financial boom has given way to bust,” it said.

David Fuller's view

How seriously should we take warnings from BIS, such as we find in this article?  The short answer is to respect them.  As an international financial institution, BIS is obviously not there to provide cheerleading when global investors are pushing up stock market valuations and driving yields down towards historic lows.  Instead, it should be providing prudent warnings of caution, not least to deter the development of financial bubbles.

Consequently, warnings from BIS are likely to be premature, at least in terms of financial market trends.  How many weeks, months or perhaps even years they may be premature is impossible to know in advance.  They are not intended as a signal to bail out of markets, but we need to stay alert and avoid excessive risks. 

My highly successful and experienced host on Friday, who I first met in Hong Kong during the early 1980s, felt that it would be harder to make money in stock markets over the next three years.  I could not disagree, although that does not mean that one needs to reduce exposure in performing markets substantially at this moment. 

Looking at both daily and weekly charts, and focussing on the USA because of its wide influence, here are some short-term reasons why.  The DJIA (weekly & daily) maintained its rising lows, despite some very bearish forecasts last week, and briefly touched a new high today.  The important S&P 500 (weekly & daily), although somewhat overextended and close to psychological resistance at 2000, also has rising lows and would need a close beneath at least 1950 to suggest downward mean reversion towards the 200-day MA.  CCMP (weekly & daily) is also somewhat overextended but steadied above its March high.  The risk is that the previous and larger trading range mostly above 4000 represents a penultimate peak, although a further retracement of recent gains would be necessary to increase this possibility.  RTY (weekly & daily) has fallen back from its March high with another downward dynamic on the weekly chart.  This index of smaller companies is now a likely leader to the downside as it has been underperforming this year.  Another test of 1100 would be a concern.