What a scary title: U.S. Dollar Collapse & Inflationary Holocaust. These are the words of CNBC and Jim Rogers. However as Jim Rogers is predicting the U.S. dollar collapse, the U.S. dollar made a strong move on Friday on short trading with the crisis developing with Dubai’s Debt.

So how does one protect capital in this type of scenario? In my opinion, regardless of inflation or deflation, trend following strategies with groups of commodity trading advisors should protect capital, or even make money. You watch and tell me.

Many times just using logic an investor can steer away from problems. It seemed forever municipal bonds were considered one of the safest investments. One did not get rich by investing in municipal bonds, however they were consistent and the default possibility was almost not a possibility. Fast forward to 2009 - municipal bonds have to be one of the scariest investment choices. All one has to do is to look at State by State finances to be aware. California faces a $60 billion deficit, New York faces a $3.2 billion deficit and New Jersey faces an $8 billion structural deficit next year. If States run deficits like thi,s why would one want to lend them money? I surely would not. One could argue if a State defaulted…then the FED would bail them out. Who needs that aggravation and worry? We are in some extremely uncertain times. I hear day in and day out:
What do I do with my money?
Where is a safe place to put my money?

The answer is to diversify. Do not have more than 5% of your assets in any idea. Even leaving money in the bank is risky due to potential inflation. Now more than ever one should consider at least a 5% allocation to trend-following a basket of commodities. Trend-following strategies are liquid and transparent. When one trades commodities, one is dealing in real assets. At the end of the day, if the crisis worsens (unemployment now at 10.2% in the US), trend-following shines. People still need to eat. People still need heat in their homes. People still need to put gas in their cars. The world will not end but it stands the chance of changing very much from what we have taken for granted.

Lets face it…everyone seems to hate the US Dollar. Seems every Forex trader wants to be short the US dollar. So many think the US dollar will crash (maybe it will, who knows), but what I do know as a commodity trader is that when too many traders are on the other side of the boat something happens. My short on the US dollar was recently taken out.

What is interesting is that Nouriel Roubini is starting to speak about the US dollar carry trade. A carry trade is when traders/speculators borrow in one currency and buy assets in more risky currencies. I remember the blood bath for the Japanese Yen in 1998 when the Yen carry trade blew up. Julian Robertson took a major hit as well as countless commodity and forex traders. The US dollar has replaced the Yen and is the now choice of potential danger.

Today what do you call a gold bug? Cautious, prudent, scared or a trend follower

The fact is that gold is on the move once again. As I am writing this post, gold is knocking on the door of $1020 again. Is it time to start gold prospecting? If you are a trend follower in the commodity markets, you would need to pay attention or already trade to gold. It is one of the strongest commodities in terms of relative strength and price action. On a Donchian trading approach, one would have been long gold since $968 on Sep 2. There is approximately $1638 in profit per contract. The point I am trying to make is there are gold bugs who suggest buying gold as the world is ending and there are commodity trading advisors that trade a system, who follow the rules and seem to be on the right side of trending markets.

As every trend-following commodity trader knows…they do not know the future. I saw an interesting video Monday morning with Marc Faber discussing that in his view, the worst is ahead of us. Can he be right about the US dollar? Marc Faber believes that the US dollar will continue to lose purchasing power and the value of dollar will continue to fall.

Probably most commodity trading advisors know there is a glut of Natural Gas. We all know this from basic economics, the law of Supply and Demand. The fact is there has been a rising level of natural gas. Natural gas supply actually is standing at an all-time high. Put into context of the recession, demand has even weakened further, thus prices have been falling.

So one could take all of this fundamental knowledge and think they know where the natural gas market is headed. Sure… yet on the New York Mercantile Exchange on Friday, Natural Gas rallied about 25.2 cents, or 5.6%. This spike is enough to kill an unsuspecting commodity trader.

It really is interesting to read and watch the activity in the various commodity markets. What is becoming apparent is that Oil traders and commodity speculators are paying top dollar (a nice play on words) for options to protect their positions in the price of crude (or they are selling naked).The fact is the price of oil is up almost 62% this year. Comparing this to the S&P 500 or many other markets, this rise in the price of oil is what commodity traders - that are trend followers - are looking for.

It is really anyone's guess if the price of oil is a so-called dead cat bounce, if there was a rational reason the price of oil jumped, or if the price of oil will drop. To trend followers it absolutely does not matter. What matters is that price moved and depending on their trend following system, these commodity trading advisors took pieces out of the trend.

The question is are you the last one now to be buying gold? The list of successful hedge fund managers who have been buying gold has been growing. It is not just hedge funds…how about China?

What I find interesting is the fact that the hedge fund managers who successfully called the housing crisis are now buying gold. It is not just they are simply buying, they are buying in a big way. John Paulson who made a fortune in the subprime crisis is now betting heavily on gold. He has invested almost 50% of his fund in gold. He is not alone.

I am sure by this time you have heard of Ron Paul. It is very surprising that more people have not taken notice of Ron Paul & his thoughts on the economy. His statements seem very realistic.

Watch this Ron Paul Video and let me know what you think.

As Ed Seyokta ( one of the legends of commodity futures trading) would say Drawdowns are like exhaling. If you want to make money in commodity futures trading you will have drawdowns. Drawdowns are a natural part of commodity futures trading. A drawdown is any losing period of a commodity trading advisor or in any commodity trading system. The exact definition is looked at as a percentage retrenchement from a equity high or peak to an equity low. The issue with Drawdowns are not just the retrenchement from the equity highs but the duration of recovery to the equity highs. Depending on the commodity trading advisor or commodity trading system there can be periods that can exceed years. Unfortunately this is the point that too many investors just give up ( many times before the next swing upwards). This enforces that if one wants to be successful in commodity futures trading, two key words are paramount.

Patience and Discipline

Do you remember when everyone hated the U.S. dollar? Not saying the U.S. dollar is immune to devaluations, but the Euro might be at risk of falling. So ok all you online currency trading professionals: Should you go out and short the Euro? Well, look at these facts:

1. European bank losses from the financial crisis are now estimated to supercede the U.S. banks’ losses.
2. Since losses at European banks are set to increase, will they be able to lend? Probably not!
3. The IMF projects the European economy is set to contract 4% this year.That's worse than the 2.8% contraction for the U.S.
4. Labor protests have become more violent and common in Europe (France).
5. Standard & Poor’s predicted that debt defaults among high-risk European companies would overtake defaults among low-rated U.S. companies.
6. The EU Central bank was slow to react to the crisis and has cut interest rates much slower than the rest of the world. The ECB cut its key interest rate to 1.25% from 4.25% only in the fall. Possibly the only reason the Euro has not fallen is because those rates are still well above comparable rates in the U.S. and U.K.
7. The European economy faces further greater risks and worsening deterioration because of the deep economic and financial crises in the formerly communist Eastern European countries.

So taking those fundamental reasons, there is good cause for the Euro to fall. So how do you, the forex currency trading professional, play this? Maybe you are not a professional and need to learn. There are many forex training programs from which to learn technical approaches.

Gold almost took off past the $1,000 dollar range and is now currently at $879. This last week's soft CPI & PPI reports shows that we are currently in a deflationary period and that inflation will not be a concern in the near term. However with that said, Copper, Zinc and even Nickel are starting to move up …actually rapidly. Just Gold and Silver are in a down trend ( depending on your time frame).

The fact is Gold looks cheap. The next fact is that we all know inflation will eventually be a problem. The million dollar question is when will inflation kick in? In trading or investing, timing is everything. Gold is something different. Country after country is trying to devalue their currencies. Gold is real…so should we start buying gold?

Premier Wen Jiabao’s credit plan or bailout has possibly started to kick in for the world's third-largest economy, China. The prices of commodities such as copper and zinc are breaking out. The increasing demand for commodities and products from around the world should be an impetus for growth. Is this just a natural cycle or could Premier Wen Jiabao’s 4 trillion yuan or $585 USD billion stimulus package be the savior of the global recession?

Although first-quarter GDP grew 6.1 percent-- the slowest growth in almost a decade-- there was growth. However Chinese exports have continued to fall by the wayside. As the stimulus plan has started to produce results, there is still industrial overcapacity, increased unemployment and weak private investment sentiment.

As if we haven't gone through enough stress this past year, now we need to worry if our bank will pass the government stress tests. For the last two months 200 federal examiners have worked/audited the nation’s biggest banks to determine how these banks would hold up if the recession deepened.

The stress tests are based around a series of “what-if” projections; if the economy worsens or deteriorates. For example “what-if” unemployment rises to 10.3 percent next year, “what if” home prices fall an additional 22 percent, and “what-if” the economy contracts by 3 percent or even greater. The U.S. Treasury has said that the tests are not pass/fail. However it seems that the institutions that will be found to require more capital….will have failed.

So far we have not seen anything like the stock market crash of 1929. The stock market crash of 2008 has been unforgiving. Did we just experience a Bear Market Rally? Is the SP running out of gas?

Intel Corp (INTC) said it faces a “fragile” economy. J.P. Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), Fannie Mae (FNM) and Freddie Mac (FRE) all are stepping up foreclosures on delinquent homeowners. So much for the Obama administration’s housing-rescue plan. Will the unemployment rate exceed 10%? The volatility has been great, stock investing has been tough. Is there another Black Tuesday lurking on the horizon?

Maybe it is me, but with all these huge numbers…a billion dollars here…a trillion dollars there.. my head was starting to hurt. I do not think I am alone with these worries. I believe that most people would agree they have a hard time comprehending the actual numbers involved. As one who is always curious and researching, I wanted to really see if I was overreacting to these huge sums of money being placed around and to the current economic crisis. I needed some way to put this into proper historical perspective. There have been numerous bailouts (bail out) throughout history's various economic crises. Now the lender of last resorts seems to be the IMF. The financial crisis or economic crisis whichever you want to use is of epic proportion. The current cost of the bail out now exceeds $4.6165 trillion dollars. Put it simply this financial crisis or economic crisis (bail out) is now the largest expenditure EVER In American history.

Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined: More interesting, was the speed at which the money was (printed) spent.

No one really knows which direction we are headed, however it seems that Nouriel Roubini and Eric Sprott, CEO of Sprott Asset Management are leaning toward Economic Depression. So far, we have not had a crash similar to the 1929 crash, however in many sectors ( building, real estate, manufacturing) there exists an economic depression. The causes of depression are widespread. From cheap money to reckless lending. I hope, as you do, we do not end up in a situation similar to the 1930 depression.

Nouriel Roubini and Eric Sprott were interviewed last week. It is informative and interesting.

Aren’t we all having issues with the current “Recession”. Now Warren Buffett and Berkshire Hathaway Inc (BRK.A.) are having theirs. Berkshire Hathaway has had big losses in its stock portfolio with losses in Wells Fargo & Co. (WFC) and American Express Co. (AXP). Besides stock losses the next problem is the rating of the company itself. The irony is that one of his companies ( Moody's) is the one lowering the rating on Berkshire Hathaway.

Rating companies came under sharp criticism for issuing high ratings prior to the Mortgage meltdown. Too many of the CLOs, CMOs and CDOs ( collateral debt obligations, collateral mortgage obligations, collateral debt obligations) that were given high ratings have been proven to virtually worthless.

Everyone seems to want to know when they can pick up all the bargains in the market. Seems that risk is a forgotten word. There are those that think that this is simply a BEAR Market rally. There have to be reactions and markets do not go down forever. The truth is only time will tell. The fact is the Dow rose 39.51 points, or 0.5%, to 8017.59, its highest close since Feb. 9. The Nasdaq has risen 25% during its four-week winning streak.

Highlighting the decreased awareness of risk has been the following; Treasury prices dropped, now the yield on the 10-year note is pushing towards 3%. Gold slipped under $900 an ounce ( today it is at 879.00. The Chicago Board Options Exchange Volatility Index, (The VIX) a technical gauge of investor anxiety, sank 5.6% to fall under the 40 mark. The dollar climbed above 100 yen.

All the papers are claiming inflation is non existent. Well, maybe for the short run it might be. Looking back at the Great Depression of 1929 there are many similarities to the current situation and inflation could raise its ugly head.

In the midst of the Great Depression there was a strong upward trend in commodity prices that began during 1933-1935. This move was a reaction to the inflationary policies of the F.D. Roosevelt administration.