First, it was the technology bubble of the late 1990’s. Shortly thereafter, we experienced the real estate bubble. Now, we may be witnessing the third bubble—commodities, specifically energy.

The chart below shows us how painful the unwinding of a speculative bubble can be. The Nasdaq index exceeded 5,000 eight years ago but still remains more than 50% below the peak level. Housing is a similar story as the seasonably adjusted number of new homes starts has declined by 50% from 2004 and 2005 levels. Oil is showing signs of similar speculation as massive amounts of money are flooding into the sector. The price of oil is up 40% just this quarter. (more…)