What you do not know, can hurt you. Inflation is here.

Either one of two things is going on here: the people running the Fed are grossly incompetent to the point of malfeasance, or they are fully aware of the risks they are running but are going ahead for some unstated purpose, probably having to do with the need to continue to pour capital into the Big Four American banks which are closer to collapse than the public is allowed to know. These are the banks, after all, which have been making hundreds of millions of dollars off free money and the carry trade, and these are the banks which are at risk of insolvency as the foreclosure crisis grinds on.

Different Market, Different Reaction

As of this moment, the markets continue to be schizophrenic now that QE2 is official. Some markets dread the inflationary potential of this policy, which is why gold is up, the dollar is down, and the US Treasury bond market is selling off. Some US stock markets set new highs for the year yesterday, on the belief that only a fool would stand in the way of free money being poured into stocks by the Fed. “Don’t fight the Fed” has been a hallmark of stock traders for decades now, so why not follow what has always worked in the past, especially now that the Fed has explicitly stated that its goal is to get stock prices higher.

U.S. stocks have shot higher and higher since September 1 when QE2 was first announced, and there has been no significant correction to this advance. More unusual still is the fact that corporate CEOs have been relentlessly selling their stock for months now; the ratio of insider stock sales to purchases each week has been running as high as 1,000:1, which has never been experienced before. Insider selling is always a reliable sign of a stock market at its peak. At the same time, retail Mom and Pop investors have been deserting this market every week since Spring, which is again a highly unusual circumstance and one the stock market would never have ignored in the past. There are so many other unusual circumstances to this stock market that it is hard to pick out the most alarming, but one that everyone has noticed is that we have gone the longest period on record where the stock market is rising but the bond market is falling. Always in the past, the stock market could not advance if the bond market was expressing fear about inflation or the economy, which it has been for months now.

These type of discrepancies always get rectified, and the longer they go on the worse the reaction for the stock market. We are very overdue for that reaction by almost every technical and sentiment indicator that is published, and we have gone so long now without even a modest correction that the sell-off is going to be brutal. It is going to look as if the market is rejecting QE2, or at least it will look that way temporarily if the sell-off is a short term correction rather than a new leg down in a bear market.

Things to Watch

Here are some of the things to watch for that could trigger a sell-off:

a) a complete rout of the dollar leading to a currency crisis that can only be solved with higher interest rates in the U.S.,

b) a collapse in the U.S. bond market as traders respond to fears of hyperinflation,

c) a blow-out acceleration of the price bubbles underway in commodities,

d) a return to $100/bbl oil, which already crossed above the $85/bbl level yesterday,

e) a major credit default affecting the junk bond market,

f) a statement by the new House of Representatives leadership that Republicans will not vote for an increase in the debt ceiling, implying a possible default by the U.S.,

g) a massive lawsuit against a TBTF (Too Big To Fail) bank for tens of billions of dollars in damages due to fraudulent activity in mortgage securities transactions,

h) capital controls imposed by a major country like Brazil, and possibly involving large-scale selling of Treasuries and agency securities (Fannie and Freddie) by these central banks, or

i) a failure in Europe by Greece, Ireland or some other heavily-indebted country to roll over its public debt.

This list could be longer, but you get the idea. So much could go wrong given how over-stretched these markets are around the globe.

If any of these things happens, it will expose the fragility still thriving in the markets and the global economy, and it will make people understand that QE2 isn’t able to solve these problems. That’s when the realization will dawn on everyone that the Federal Reserve is not simply powerless to improve the economy, it is making things much MUCH WORSE.

** 10-step Inflation Survival Guide **

Commentary: Gold, Treasurys and blue-chips are safe bets

The bottom line is that regardless of whether another round of quantitative easing is a success or failure, the result will be the eventual rise of inflation and devaluation of the dollar.

To help investors prepare their portfolios, here’s a 10-step inflation survival guide.

1) Get rid of your cash

This may be hard for many risk-averse investors to do, but the bottom line is that during periods of rapid inflation, your money is literally worth more today than it will be tomorrow. So “spend” it. Whether it means buying a car now instead of next year or investing in the stock market, that depends on your personal situation. But sitting on cash will cost you in the long run. Read “How to Invest $1,000 Now.”

2) Bet against the dollar

So what do you do with that cash? Well, the other side of the equation is that when inflation takes root, a nation’s currency typically devalues. That means you would be wise to bet against the dollar. A number of ETFs allow you to do this. PowerShares DB US Dollar Index Bearish ETF (UDN 27.72, -0.01, -0.04%) is an inverse play on the New York Board of Trade’s U.S. Dollar Index. If you’re more sophisticated about currencies and macro trends, you can play exchange rates between the dollar and other currencies like the yen or euro.

3) Get rid of Treasurys

U.S. Treasury bonds are bad news during an inflationary environment. That’s because as yields start to rise — and at nearly zero, they have to, eventually — bond prices naturally fall. That means you don’t want to be stuck holding the bag.

4) Bet against Treasurys

You can benefit from the flip side of the collapse in Treasury bonds by shorting them. You can do that by purchasing an inverse ETF just like the previous play on the dollar — for instance, the ProShares UltraShort 20 Year Treasury ETF (TBT 35.23, -0.05, -0.13%). A more sophisticated play is to buy puts Treasury funds such as the iShares Barclays 20 Year Treasury Bond ETF (TLT 98.04, +0.06, +0.06%) . Either move not only protects your portfolio from a likely collapse in T-Notes but provides a nice potential for profits.

5) Buy Treasury inflation-protected securities

These types of U.S. Treasury bonds (known as TIPS for short) provide the safety of a government bond with the bonus of protection against inflation. You can buy these outright, or via the iShares Barclays TIPS Fund ETF (TIP 111.50, -0.38, -0.34%) . Unlike conventional Treasurys, these bonds see their value adjust with inflation to ensure you don’t get eaten up as the dollar fades. If you have any doubt whether or not TIPS work or how bullish Wall Street is on this vehicle, consider that in October the U.S. Treasury successfully executed its first-ever TIPS auction in which the bonds actually had negative yields. That’s because the specter of inflation is so likely that investors were willing to enter the investment in the red with the expectation of rising yield over the life of the investment that makes a short-term loss well worth it.

6) Buy gold

Gold has already significantly run up in price in 2010 with the expectation of inflation — along with a low-risk, bunker mentality among some conservative investors. But if inflation takes hold, this dollar-backed commodity could soar even higher. If this turns out to be the case, don’t be tempted by mining companies. Your best bet is to buy gold through a reputable dealer or through a gold ETF like the SPDR Gold Trust ETF(GLD 136.38, +0.35, +0.26%). Read “Gold Prices at $10K — Optimistic or Just Insane?”

7) Buy crude oil

Like gold, crude oil is priced in U.S. dollars. As a result, when the dollar drops in value, it takes more dollars to buy the same amount of oil. That means oil prices rise in an inflationary environment, as do profits for pure plays in the crude oil sector. Retail investors cannot trade spot crude, but they can invest in an ETF such as the iPath S&P GSCI Crude Oil Total Return ETN (OIL 24.70, +0.10, +0.41%), which reflects West Texas Intermediate (WTI) crude oil futures contracts. Then there are more conventional oil plays such as energy blue chip Exxon Mobil Corp. (XOM 70.00, +0.62, +0.89%) and pipeline partnerships such as Magellan Midstream Partners (MMP 56.02, +0.95, +1.73%) , which offer plump dividends.

8) Invest heavily abroad

A weak U.S. dollar implies higher returns can be found abroad. After all, if investors won’t be buying Treasurys as readily, they will putting their money somewhere else. As for where the opportunity lies, that depends on how much risk you’re willing to take. Many foreign stocks trade on domestic exchanges as ADRs and can readily be traded via your brokerage accounts. If you are not comfortable investing in a specific stock, you can invest in a specific region or currency via an ETF — such as the iShares MSCI Brazil Index ETF (EWZ 81.16, -0.42, -0.51%) as a pure play on Brazil, or the CurrencyShares Canadian Dollar Trust (FXC 99.41, +0.22, +0.22%) if you believe in Canada. You may want to consider broader global funds in the ETF and mutual fund arena such as the iShares Emerging Markets Index ETF (EEM 48.49, -0.09, -0.19%) or a whichever global mutual fund your 401k provider offers. Read “Top 5 Asia Stocks Trouncing the Market.”

9) Invest sparingly in domestic tech stocks

Technology companies seem to be a bedrock investment for any portfolio. Regardless of economic circumstances, the most innovative computers and software are necessary to our way of life and will always be in demand. Consider the massive launches that Apple Inc. (AAPL 317.13, -1.14, -0.36%) pulled off in the recession with the 1.7 million iPhone 4 sold in the first three days, or 3 million iPads in about two and half months after its debut. And this doesn’t even acknowledge the weight of corporate IT spending as businesses upgrade networks and optimize productivity with the latest gadgets and software. You should never put all your eggs in one basket by abandoning the U.S. altogether — but realize that sluggish domestic stocks will suffer in amid a weak dollar environment. To root your portfolio in America, diversify with some domestic tech stocks.

10) Invest sparingly U.S.-based multinationals

Another way to invest in domestic stocks but avoid inflation is to take shelter in multinationals. Think blue chips like Caterpillar Inc. (CAT 83.54, +0.36, +0.43%) and United Technologies Corp. (UTX 76.75, +0.51, +0.67%) , which saw significant lifts to profits in the fourth quarter of 2009 thanks to a weaker dollar. That’s because a weak dollar actually lifts foreign operations of these multinationals and more than offsets challenges in the states. Consider that a year ago, United Technologies’ chief financial officer told Bloomberg that the company adds $10 million in operating income for each penny the euro gains versus the dollar. Or in the case of Caterpillar, a weaker U.S. dollar means cheaper exports — so foreign businesses can buy expensive machinery at a better price and are more likely to go shopping. Domestic companies like CAT and UTX are actually helped by a weak dollar — so seek them out as a way to balance your major investments abroad.

Contribution: Jeff Reeves is editor of InvestorPlace.com . As of this writing, he did not own a position in any of the stocks or funds named here. Follow him on Twitter athttp://twitter.com/JeffReevesIP .