All- there were a lot of great comments and questions this week, I will review several here:

LATVIA

Excellent insights on Latvia and the way to trade the devaluation. Johan from Sweden asks if we are too late shorting Sweden’s banks. I think not, and here’s why:

Swedbank, one of the largest Swedish banks in Latvia, posted a 2 billion kronor ($250 million) second quarter loss just hours ago, compared to the average estimate of 1.27 billion kronor. Loan losses soared to 6.67 billion kronor ($850 million), a 1500% increase over last year’s loan losses.

This tells the story of what has happened to the bank’s loan portfolio *before* Latvia devalues. The post-devaluation carnage will be even worse.

Given the bad news, what happened to Swedbanks’s stock today? It rose 11.6%… simply because management expressed ‘confidence.’ I think this is absolutely insane.
Sweden’s banks have certainly taken a hit in the last 12 months, but the good-news story that management is spreading is just a charade to mask weak fundamentals. They will falter, they will fail.

Another important follow-up item about Latvia: Some of you asked me if Latvia has an ancestry citizenship program like Lithuania.

According to my sources, Latvia does NOT have anything similar to Lithuania.  Sorry.  But never fear, there are plenty of cost effective (and even free) passport programs out there.

One of the many things I’m working on is what will probably the most comprehensive second-passport guide out there; I’m partnering with a few other citizenship experts and plan on marketing this in the coming weeks.

BREAKING POINT

I want to thank everyone who contributed some very personal insights… so let me level with you about a few things.

Giving up US citizenship does not mean being barred from the country forever. I know several people who have done it, and they come and go regularly… while entry to the United States for a former citizen is not guaranteed, it is not guaranteed for current citizens either. Renouncing citizenship is more of a psychological exercise than anything else, especially for an expat.

That being said, I am still a US citizen, and I don’t plan on giving it up anytime soon. I think the US still has a future, but it will go through some serious pain first… so I’m willing to hold on to the passport for now until my assessment changes.

Sure, I have to pay stiff taxes in the meantime, but my expat lifestyle means I pay less. More importantly, my assets are safeguarded overseas, my businesses (except for one) are offshore, and I am enjoying bountiful opportunities around the world, both personal and financial.

As I hope you will find out soon when you hit your own breaking point, the expat leap is not all that scary… as ‘Tropical Freedom’ commented, jump in– the water’s just fine.

Taking baby steps is important for beginners… get a passport. Travel. Find places you love that meet your needs. Buy and store gold. Move cash. Buy property. Seek income and investment opportunities. Obtain a second passport.

It doesn’t have to happen at once, and it needn’t cost an arm and a leg. Many expats live an amazing lifestyle at a fraction of the price in their home country… they have children. medical needs. elderly parents. financial constraints. Every excuse for not trying has already been overcome…

Except for the will to act.

MISCELLANY

If I do end up coming to August 6th Atlanta entrepreneur event I mentioned on Wednesday, I will definitely make an announcement ahead of time to have a get together for anyone in the area.

I also received several questions about business opportunities and how to get started… as an investor and entrepreneur, I can say that this covers a lot of ground– so stay tuned and I will dedicate part of this missive to specific overseas opportunities that I see.

Also, for our readers who are already out there living an independent, expat life, please drop me a line… I would like to interview several of you for a regular series as I think it would be beneficial to the phyle at large.

If you’re interested, please contact us from the ‘Contact‘ link on our website.

A final note on Latvia today before I put the Baltics to bed for now–

Yesterday I argued that Latvia is definitely headed for devaluation, and that European governments are practically bending over backwards to make sure we know about it.

In comments yesterday, the astute Mr. Marriott pointed out that the grey economy is now flourishing in Latvia; this is undeniably true, and we see evidence of dark economies around the world in times of crisis. Argentina and Cuba are great examples.

But I would submit that the grey economy is even more reason for the devaluation– tax revenues become even lighter as dark economies grow, while the government’s fiscal burden remains heavy.

So how specifically do we profit from this?

One thing’s for sure, I am NOT going to short the Lat… Rado correctly pointed out yesterday that we will get eaten alive by the interest rate: the Latvian Central Bank is quoting the 3-month Lat rate at 35%, and that is not a type-o.

Hey, we might be right about the devaluation, but we could get killed waiting around for it to happen at 35%.

I agree with Dean and ‘Me’ that the safer tactic is to short Sweden.

Sweden’s banks dominate the Baltic banking scene; two in particular, SEB and Swedbank, are like cockroaches in Riga– they have branches everywhere and are about to get squashed.

In total, Swedish banks have roughly $75 billion of exposure to Latvia’s economy, roughly 25% of Sweden’s GDP. Devaluation of the Lat will have multiple effects on these banks’ balance sheets:

First, the banks will take an immediate hit to their equity as the book value of their Latvian holdings will become worth far less in Swedish kronor terms. Roughly 30% of Swedbank’s equity, for example, is based in the Baltics, and this will see an instant drop.

Second, the loan default rate in Lativa is going to skyrocket. Most loans are denominated in euro or Swedish kronor because the interest rates were lower; when Latvia devalues, borrowers will no longer be able to afford the foreign currency payment.

This will result in another hit to the banks’ equity as their loan assets evaporate and are replaced by a portfolio of worthless foreclosures and bankrupt companies.

Third, with such an intense reduction in Baltic economic activity, the banks will suffer another earnings decline. Baltic banking comprised 30% of Swedbank’s operating profit last year, and that profit will now certainly swing negative.

Fourth, after suffering a huge drop in equity and profitability, Sweden’s banks will likely be under pressure to raise cash, either from the government or in capital markets. These types of rights offerings, like the one SEB recently completed, will be highly dilutive to shareholders.

In short (ha), shorting Sweden’s banks with heavy Baltic exposure, either directly or through PUT options, is one way of profiting from Latvia’s devaluation.

One more thing I’d like to mention, completely off-topic.

A couple of you have asked about entrepreneurial ventures and Internet business opportunities. As an investor/entrepreneur myself, I believe wholeheartedly that the Internet provides a wealth of opportunity to earn money and live anywhere.

I’ve been fortunate to meet with and be educated by some of the industry’s sharpest entrepreneurs, mostly at small, private conferences held by insiders.

My friend and partner Matt, one of the industry’s more brilliant minds, knows the participants well and has been able to talk me in several times.

One such conference is coming up in Atlanta on August 6th… it’s short notice, but I’m going to try like hell to make it, and Matt will definitely be there– along with some top internet entrepreneurs. It should be a great networking and educational event, but the big draw for me will be racing.

The organizer is putting everyone through the Skip Barber Auto Racing school, and as a car lover, I really enjoy that sort of thing. There’s only 15 spots left– take a look if you’re interested.

Also, if you decide to go, make sure you drop me a line to let me know, I will try to organize an informal get together.

Yesterday I talked about the demise of the Latvian economy and how it will foretell the future of California. Today I want to talk about the opportunity I see to profit from it.

I have seen the face of crisis before, both in the military and as a civilian. But rarely have I seen such a well-telegraphed money making opportunity to profit from crisis.

Sure, there are a lot of cheap assets in Latvia right now– the real estate and stock markets have lost 50% of their value in the last 12 months… but regardless, I would cross off Latvia as a place to invest for now, and here’s why:

Latvia’s government is flat broke. It turns out that their miraculous economic rates over the last several years were built on a mountain of debt on the back of domestic consumption… and as we have seen in the United States, consumption-driven, debt-laden growth is totally unsustainable.

During the boom years, Latvian politicians erroneously assumed that the gravy train would last forever and began feverishly expanding their domain. Tax revenues were high, government spending was even higher.

Today, with the economy in the tank, tax revenues have cratered to the point that Latvia’s Treasury Minister is about to start peddling for change.

Why does this matter? Because Latvia had the poor sense of signing up for the euro peg in 2004 at 0.702804 lats per euro. This means that the government no longer has control of its money supply and must artificially intervene in currency markets to defend the peg.

Defending the currency peg in this case involves buying and selling tens of millions of euro on the open market, effectively manipulating the price of euro in lats. There’s only one problem… Latvia’s bankrupt government doesn’t have any money to defend the peg.

That’s where the EU comes in. Old Europe has agreed to loan Latvia a few billion euro to stabilize its economy and defend the exchange rate. Could this generosity actually work?

No chance.

Latvia is set to burn through several billion euros this year alone to finance its budget deficit. Add to that another billion or so to finance the country’s trade deficit, and a few hundred million in interest payments.

How much money does that leave to defend the currency peg? Not much.

And there’s just one more problem… the preponderance of lending activity in Latvia is dominated by a handful of Swedish banks who recognize that their loan default rates are about to soar thanks to the deteriorating economy.

When the EU’s loan proceeds make their way into Latvia’s economy, instead of underwriting new loans and recycling the funds, many Swedish banks appear to be shipping the euros back to Sweden in order to cover their expected losses.

Naturally, this will mop up any remaining funds, leaving Latvia without any ammunition to defend its currency peg.

My conclusion is simple– devaluation of the Latvian lat is absolutely inevitable. The more their politicians say that devaluation is not an option, the more I realize that it’s the only option.

The political consequences of not devaluing are potentially more catastrophic than the fiscal consequences. Latvians already took to the streets earlier this year and ousted the sitting government. The new government’s plan, full of 30% wage cuts and tax increases, is not going to go over well with this crowd.

Latvians want to devalue. They realize that prices are too high and consider devaluation to be like hitting the reset button on pricing. The government will not be able to ignore them for long, especially when its river of credit runs dry.

Tomorrow I’m going to talk about the way I plan on investing based on my conclusions… but of course, I would love to hear from you to see if anyone has any thoughts on how to play a Latvian devaluation (or argument to the contrary).

I found out this weekend that Paul Krugman is wrong about Latvia.

For months, mainstream luminaries like Krugman have been telling me that Latvia is the next Argentina, and that the country is on the verge of economic collapse… wait, stop– what does this even mean? Have the lights suddenly gone out? is the garbage is piling up in the streets? has McDonalds stopped selling Big Macs?

Since I was already close by in neighboring Lithuania, I had to go find out for myself… so I jumped in the car and sped towards Riga, Latvia’s capital city, to get some boots on the ground and find out what’s happening.

As it turns out, Latvia has more similarities to the United States than anywhere else… and the lessons are important.

You see, for several years, Latvia was one of the fastest growing economies in the world; when Latvia pegged its currency to the euro, foreign investors saw a goldmine– they could invest in a privatized, emerging nation with no currency risk.

Foreign investment flooded the country, and Latvia became awash with cash. Large Swedish banks rushed in to set up branches and quickly came to dominate local capital flows. With so much money available to lend, consumer credit exploded. In fact, domestic consumption amounted for the most of the growth during the boom years.

GDP grew by double digits year after year, and (here is where the similarities start) everyone thought the good times would last forever.

In classic US-subprime form, Latvian bus drivers were able to obtain mortgages for homes that were totally out of their price league.

Lenders made it easy for consumers to spend more than they earned, and nobody cared because they had confidence in the currency and confidence in the government.

Naturally, economic growth based on confidence in two very shaky and corruptible institutions– government and currency– is totally unsustainable. As Mises said, “There is no means of avoiding the final collapse of a boom brought about by credit expansion.”

The bubble burst when people realized that that a bus driver’s salary cannot possibly afford a 600,000 euro apartment. World credit markets contracted, and as Latvia was among the most overleveraged, it has fallen the most. So far this year, GDP has contracted by an annualized rate of roughly 20%, and the worst is yet to come.

Last month, the government desperately held a Treasury auction to sell $100 million worth of notes. Total sales? Zero. Nada. No one is willing to loan the government money anymore.

This is where I part ways with Krugman… this is not the story of Argentina– this is the story of California:

* During the boom, the state’s largest contingent of economic growth was domestic consumption

* Consumption was driven by ever-expanding credit that was extended rashly and irresponsibly

* Credit expansion led to significant asset-price inflation

* Basic cost of living eventually exceeded average wages, but banks continued to lend

* Meanwhile, the government increasingly force-fed the state into a bloated beast

* Post-bubble, asset prices are now deflating, unemployment is well into double digits, and no one wants to loan the government any money

Sound familiar? Latvia will give us a lot of clues for how the story ends for California.

Today, confidence has completely eroded in Latvia’s currency and its government; the former government was ousted in a popular uprising several months ago, and the current government can’t find two nickels to rub together.

In response to last month’s auction failure, Latvian politicians have announced a budget austerity plan that involves cuts to pension benefits and massive salary reductions for state workers.

Furthermore, despite the housing market falling by 50%, home prices are still too expensive for locals. Food, fuel, and other staples are also more expensive based on local wages than in neighboring countries… so Latvia has a long way down, and there will be no government safety net.

Is there opportunity here? Absolutely. Tomorrow I’ll tell you what I’ve found.

Today I wanted to get down to the business of answering some of your questions from earlier this week:

First of all, I apologize if I failed to make things clear when I started this letter: I am no longer part of Without Borders; Notes from the Field is not affiliated with Casey Research or Without Borders.  Furthermore, Notes is free and not tied to any other subscription that you might have.

LITHUANIA:

I received one question about the passport program– Lithuania has a very straightforward citizenship program as long as your ancestors were born before 1940. You can also marry a Lithuanian, and citizenship is granted after 3-years. My understanding from speaking to the Minister of Justice is that there is little red tape in the program.

ARGENTINA:

A few days ago you asked about the Cafayate (pronounced Cafa-zha-tay) project in Salta province, Argentina.  Doug Casey is involved in the project and he gave me a personal tour of the site last December… it’s absolutely beautiful, and I can definitely see the appeal for many people.

To be clear, most of Argentina’s problems will be localized in Buenos Aires province. Salta is far away, near the Bolivian border, and has an almost separate and distinct culture than the porteno culture of BA that I decried in my original article. Salta is much safer than the capital and I do not expect it to feel the same level of social chaos.

My honest hope (though it may be a pipe dream) is that, if Buenos Aires burns in an economic meltdown, Salta will break away to an independent republic.

FINLAND:

Have I ever been detained or stopped while traveling w/ gold and silver? Yep. It depends on the country, but in most places this is not illegal. The customs officials searched my bag, looked at the gold, and put it right back. They were much more interested in the enormous stack of foreign currency that I was carrying, including the $10 trillion Zimbabwe note.

I would not prescribe a particular amount of gold and silver to travel with because, as I stated, this is not illegal… it would be like suggesting a particular number of bottles of water or DVD movies to travel with.  For the time being, officials do not regard gold/silver as monetary instruments.

If you have any doubt, you can always declare it on Fincen Form 105

PANAMA:

Panama does not have the equivalent of an FDIC; most of the world does not. Does this mean the banks are unsafe? No. It means that they must practice sound banking because they do not have taxpayer money to bail them out.

OTHER:

The biggest question I get is for specific WHO and HOW to get started offshore; I explained last week that I was working on a way to share my contacts with you… this information will be for limited distribution so as not to overburden my network, but it will hopefully solve the ‘WHO’ problem.

In the meantime, to get started on the ‘HOW’, I wholeheartedly recommend that you read Mark Netsmann’s book The Lifeboat Strategy; Mark is a leading asset protection specialist and a trained lawyer… I know Mark and have read his book– it is definitely worth the price if you are serious about saving your ass and your assets.

Yesterday I wrote to you about Lithuania and all the great things it has to offer– it’s inexpensive, has second citizenship, a low flat tax, and beautiful women.  These are all great reasons to visit from time to time (and obtain a passport if you are so fortunate), but today I want to tell you why you should not invest any money here, at least not for now.

I don’t trust Russia.

Last winter in a dispute with Ukraine, Russia shut off the gas pipes and brought several European countries to their knees; the episode underscored how vulnerable Europe is to the whims of Putin, and Lithuania sits right on the fault line.

In 2004, the country began talks to ascend into the European Union; as part of the talks, Lithuania agreed to decommission its Soviet-era nuclear power plant that supplies 80% of the country’s electricity.  The reactor is due to be shut off at the end of this year, and they have NOTHING to replace its capacity.

The government assumes that they will be able to buy electricity from Russia. I don’t.  Putin proved last winter that he would gladly choke off the rest of Europe from their energy supply if it served Russia’s interests… and I believe that similar situations may rise again.  Lithuania already receives its natural gas supplies from Russia, and adding electricity demand is potentially catastrophic.

Lack of stable energy supply is a giant red flag for foreign investment, whether it be starting a business or buying property.  In fact, I think that the Lithuanian property market will probably experience a second shock when the government imposes a national property tax.

Lithuania is currently running a deficit around 4% of GDP; the government has come under intense pressure from the European Union to cut its deficit, and the only thing on the table right now is a tax increase.  This situation underscores the insanity of supranational alliances– on one hand, the European Union is demanding that Lithuania spend less money to reduce its deficit, meanwhile NATO is expecting the country to increase its military spending… they must be expecting the Latvians to invade.

I have personally spoken with two government ministers here since I have been on the ground; the Minister of Education and Science, and the very youthful Minister of Justice (MiniLove in Newspeak).  Both are intelligent, libertarian-leaning men who understand that the EU’s requirements are hypocritical and detrimental… but admit that they will likely impose a tax increase in order to comply.

The best part of the conversation went something like this-

Me: What is the greatest risk to Lithuania?

Minister of Justice: Our government.

I couldn’t agree more.  Given the coming energy crisis that I expect, and the increase in property tax, I expect the property market to take a big hit.  There will be blood, and you can expect me to be there afterwards to find the best deals… because once the bottom hits, this place will have a lot of potential.

Tomorrow, I will be answering the mailbag and addressing some of the issues that many of you have been asking about it.

About a month ago I was attending a private, invitation-only meeting with some of the finest unconventional minds in finance. We gathered for three days at a luxurious oceanside resort on the Maryland coast to have an open exchange of ideas, debate our philosophies, and play poker ’til dawn.  Lobo Tigre, editor of the International Speculator and my former colleague at Casey Research, approached me with an interesting proposition on the last day.

For several years now, Lobo has been actively organizing and lecturing at foreign youth camps designed to teach libertarian ideals to English-speaking Eastern European students; his latest camp was scheduled for Lithuania, and he asked if I could attend to lecture the students on my international investment and entrepreneurial ventures.

I love speaking and teaching, and when a mutual friend told me that there would be adoring Belarusian college girls there hanging on to my every word, I couldn’t say no.

I’m reporting from the youth camp today and have had several days on the ground in Lithuania to get a sense of the place.  While I have been to the Baltics before and have a lot of experience in Estonia, this is my first trip to Lithuania.

For the geographically challenged, Lithuania is one of three small former Soviet republics (including Latvia and Estonia) sandwiched in between Russia, Poland, Belarus, and Scandanavia.  The official language is Lithuanian, though because of the language diversity in the region, Russian and English are widely spoken. It truly boggles the mind to wonder how the system works– five neighbors, five different languages.

For a small country of 3.5 million people devoid of significant natural resources, Lithuania has a fairly sound, developed economy. They have managed to build up an export base and attract foreign companies because of its cheap labor and close proximity to Russia.

Labor is very cheap, among the cheapest on the continent except for Romania and Bulgaria.  Minimum wage is less than $3/hour, and administrative costs are negligible; this is perhaps one of the greatest benefits of Lithuania.  Starting and running a business is very easy here. Labor laws are straightforward and quite reasonable, keeping unnecessary burden off the entrepreneur.

The country’s tax code is also quite reasonable. Personal income tax is taxed at a flat 15% rate, and corporate profits are taxed at a flat 20% rate. In fact, the entire tax code is only 53 pages– very simple. This is very attractive for foreign businesses and makes Lithuania an attractive destination for European entrepreneurs.

Lithuania is also one of the world’s most unknown second citizenship options; the government grants instant citizenship to some foreigners with Lithuanian ascenstors born before 1940, and it is easy to obtain one by marrying a Lithuanian… and trust me, for single men this would not be an unattractive option.  Lithuania is a great passport because it is part of the European Union and provides visa-free travel to many countries around the world.

Vilnius, the capital city, is quaint and scenic. The center of town boasts a historic ‘old town’ district with trendy bars and restaurants– it’s small but very pretty. The real estate is reasonably priced, and renting can be an absolutely phenomenal deal.

A furnished, swinging one bedroom apartment in the center of old town can run as little as $500/month, and it can be leased for short periods of time (usually one month).  For the short-term traveler, I stayed at the 4-star Euro-Royale Hotel in a palatial room for less than $100/night… so Vilnius is definitely worthy of consideration for anyone looking to have a great time in Europe on a limited budget.

I met with Oober Haus Real Estate advisors, the largest property agency in Lithuania– you can check out their website at www.oh.lt (in English) and contact Martynas Gudelis at +370 677 67868 for more information.

As much as I would like to find a way to invest in Lithuania, I am not investing a penny here right now… on December 31st 2009, something will happen in the country that has me running away like a scalded dog. I’m curious to see if anyone knows what it is…

More on this tomorrow.