Inflation Monitoring — Standard Operating Procedure

Purpose

crashMonitor.js protects against precipitous market crashes (nominal price
declines). It does NOT protect against inflation erosion, where nominal stock
prices hold steady or rise slowly while real purchasing power declines.
This SOP covers the manual monitoring procedure to detect and respond to
sustained high inflation.

Why Manual, Not Automated

• Inflation develops gradually over years, not overnight. There is ample time
  to react with quarterly checks.
• The decision to reallocate involves macro context (Fed policy, fiscal
  trajectory, global conditions) that a mechanical threshold cannot capture.
• Overengineering a tail risk adds complexity and potential for mistakes.
• CPI is published monthly by the Bureau of Labor Statistics; a quarterly
  review of the trend is sufficient.

Procedure

Frequency: Quarterly (January, April, July, October — after BLS publishes
the prior quarter’s final CPI report).

Data source: BLS CPI summary at https://www.bls.gov/cpi/ or FRED
(https://fred.stlouisfed.org/series/CPIAUCSL).

What to check: Year-over-year CPI change (headline), averaged over the
most recent 3- and 6-month periods. Compare against trigger levels below.

Trigger Levels and Actions

Level 1 — Elevated Inflation (CPI 5-7% sustained 6+ months)

• Shift money market / cash holdings to a short-duration TIPS fund
• Recommended: VTIP (Vanguard Short-Term Inflation-Protected Securities)
• Continue holding S&P position normally
• crashMonitor continues operating unchanged

Level 2 — High Inflation (CPI 8%+ sustained 2+ quarters)

• Shift 20-30% of S&P holdings to inflation-hedge ETFs:
  • DBC (Invesco DB Commodity Index) — broad commodity basket
  • XLE (Energy Select Sector SPDR) — large energy companies
  • SCHP (Schwab U.S. TIPS ETF)
• All cash/MM in TIPS fund (if not already from Level 1)
• crashMonitor continues operating on the remaining S&P position

Level 3 — Runaway Inflation (CPI 12%+ sustained)

• Shift 50%+ of portfolio to inflation hedges (TIPS, commodities, gold, energy)
• Candidate ETFs:
  • GLD (SPDR Gold Shares)
  • XOP (SPDR S&P Oil & Gas Exploration)
  • DBC, XLE, SCHP (from Level 2)
• Reassess whether crashMonitor’s trail parameters need adjustment for the
  remaining S&P position

De-escalation

When CPI trends back below a trigger level for 2+ consecutive quarters,
reverse the corresponding allocation shift. Return to 100% S&P + MM as
the baseline when CPI is sustainably below 5%.

Background

This procedure was derived from research into historical inflation scenarios
(1970s stagflation, 2022 inflation/rate hike cycle) and analysis of how
different asset classes perform during inflationary periods. Key findings:

• S&P 500 provides long-term inflation protection (5-10+ years) but can
  deliver negative real returns for 1-3 years during high inflation.
• Money market yields lag inflation — guaranteed real loss during high
  inflation.
• TIPS provide direct CPI-linked protection.
• Upstream commodity producers (oil/gas, mining) are effective inflation
  hedges. Regulated utilities and nuclear operators are NOT, due to
  long-term fixed contracts.
• Modern US hyperinflation would develop over 2-5 years with clear warning
  signals, not as an overnight shock.