Profiting From Putting Out The FIRE Economy

A common thesis among US perma-bears is that we are witnessing the destruction of what Eric Janszen has dubbed the FIRE Economy: finance, insurance, and real estate. For those who accept this thesis, how can this be traded profitably?

One natural strategy would be to short sector ETFs.

(XHB) - An ETF for homebuilders, XHB is an ETF that seems likely to fall if the FIRE economy is not revitalized. It is currently trading above its November 2008 lows, and has been well correlated to the S&P 500.

(XLF) - An ETF for the US financial industry, XLF is also an ETF for those interested in trading the extinguishing of the FIRE economy. Like XHB, XLF is currently trading above its November 2008 lows. It has declined a few less percentage points than the S&P 500 has dropped since August of 2008.

(KIE) - KIE is an ETF of insurance companies, and thus shorting it may be of interest for those looking to play FIRE extinguishment strategy. KIE has fallen about 11% more than the S&P 500 has fallen, but it is still currently trading above its November 2008 lows.

A collapse of the FIRE economy will likely correlate to dollar devaluation — and thus anti-dollar trades related to shorting bonds or going long commodities/metals may be of interest to those looking to short the FIRE economy.

What Replaces FIRE? 

Right now, the only portion of the US economy that is growing is government; individuals and businesses are spending less. Thus, government spending is in a position to dictate where we may see wealth be transferred and where new booms may emerge.

Below are some ETFs that may correspond well to government spending over the next four years:

(PPA) - With war on two fronts, ongoing geopolitical tension, and increases in military spending, defense ETFs may be one area wealth may be transferred to. PPA has outperformed the S&P 500 over the past six months as well.

(GEX) - An internationally diversified ETF for alternative energy, which has been a stated priority for the Obama administration, and has reacted positively to Obama-related news — thus suggesting the market does price government actions into this ETF.

(PBD) - An ETF focused on tracking clean energy technology companies. As investments in tracking and controlling carbon emissions grows, PBD may be well positioned to profit from this injection of capital.

Timing FIRE

A simple way of trading this scenario would be to short the FIRE ETFs on bearish trends, and buy the replacement ETFs in bullish trends. Momentum in the charts can lead the way.

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