June 18, 2010
Madrid, Spain

Long haul flights from South America generally tend to leave in the evening, usually between 7pm and 1am. The airlines do this so that you arrive first thing in the morning and can catch any connecting flight you may need… which is nice for travelers.

The flight schedule does make things a bit inconvenient prior to departure, though.  Even with a late hotel check-out, you’ll have about 5 hours to kill before heading to the airport.

This happened to me yesterday in Rio, so I took the opportunity to work on my tan a little bit on Ipanema beach. Even though it was just a normal winter weekday afternoon yesterday, you would think they were having a supermodel convention at the beach given the abundance of bronzed beauties.

It’s no wonder why Brazilians are so carefree about life… how can you feel despondent when you’re immersed in warm weather, sunshine, mountains, the ocean, and gorgeous, friendly people?

After the 11-hour Iberia flight (average business class, in my opinion), I now find myself in Madrid, where I’ll spend the day before heading to London to meet up with some friends and Atlas 400 colleagues.

I’ll have more to follow on my plans next week; you may be interested in what I have in store regarding passports later this month. For now, let’s move on to this week’s questions.

Starting off, I got a chuckle from a comment by Garth this week when he said “the rose colored classes are on,” in response to an article about Rio. I thought I should take a moment and explain something about myself.

Here’s my confession: I am an unabashed optimist. I tend to see the good in everything– people, situations, and countries.  Even in the midst of chaos, my natural instinct is to see opportunities. There’s too much negativity in the world, and I’m weary of cynics who dwell on it.

You can always count on me to be candid about my thoughts, but don’t expect me to obsess over the negative aspects about a country. I will acknowledge them, and then move on… if a country’s issues are so serious that I don’t think you should consider planting a flag there, then I won’t even bother writing about it.

I recognize that people potentially base major life decisions on the information provided in this letter; this is a responsibility that I take very seriously, and I have a few simple rules that I follow which guide me as I write.

First, I won’t ever suggest a country that I wouldn’t recommend to my own mother. Second, I only discuss multiple flag tactics (banks, passport programs, corporations, etc.) that I have first-hand experience with and can vouch for.

Third, I won’t negatively bias someone’s opinion about a country simply because I don’t personally like it… I realize that not everyone shares my taste. As such, I tend to focus on the good points. If there’s not enough good points to consider, then it won’t be on my list. Simple.

Moving on, JT writes, “Simon, what are your thoughts on renouncing US citizenship?”

Renunciation is a decision that more and more people are making each year. The movement is still embryonic, but I expect the coming years that there will be great waves of Americans taking this step.

For most people, the chief reasons are generally financial– they no longer feel comfortable making Uncle Sam a 40% partner in everything they do around the world.

One thing’s for sure– no one should make this decision for emotional reasons because they hated Bush or hate Obama. These guys are as ephemeral as last night’s meat loaf. The decision should be made pratically with a well-reasoned financial analysis.

It is absolutely possible to mitigate or defer tax liability by properly planting multiple flags (i.e. business structured in one location, consumers in another, banking in another), but the ultimate tax break will come only when you renounce.

If you take this step, you have to pay a one-time tax to Uncle Sam as if you had liquidated all of your assets and taken the capital gains. Sammy gives you a $600,000 tax-free allowance and taxes you on the rest.  I’ll have more on this in a future letter; it’s definitely a topic worth discussing.

Next, Deiter asks, “If one were to disclose the existence of a foreign bank account, wouldn’t that make it accessible to frivolous lawsuits?”

Great question. One of main benefits of planting multiple flags is diversifying your sovereign risk so that your assets are no longer exposed to government agencies, tax authorities, and the court system.

Just because you disclose your assets, either due to government regulation or in a court-ordered discovery process, doesn’t mean that your assets are exposed. Let’s say you own property, for example, and you lose a court case… the judge decides that your property should be awarded to the Plaintiff.

Well, if that property is located within the court’s jurisdiction, then the judge can simply have the title conveyed to the other party. If the property is located overseas, far away from the court’s jurisdiction, then they have no power or authority to forcibly convey the title.

The same thing goes for bank accounts, gold stored overseas, etc. When you move assets overseas, you are effectively removing those assets from the jurisdictional authority of your home country.  Disclosing those assets as required by law does not eliminate that benefit.

Lastly, Dave asks, “Simon I’m curious. As a PT, what do you do for postal mail?”

Does anyone still use postal mail? My banking/credit card statements are all email, and if I need a parcel sent to me, I usually just give the hotel address where I expect to be staying by the time it arrives.

If you get a lot of postal mail, you could try the Swiss Post Box service. They’ll receive your mail, scan the envelope, then forward/shred/scan the contents upon your instructions.

That’s all for this week, have a great weekend.

June 17, 2010
Rio de Janeiro, Brazil

I’m dashing off to the airport this afternoon to catch my flight to Europe… but I wanted to leave you with a few final notes about Brazil.

First, to properly set your expectations, Brazil is not poor– it’s not some third world country where everyone is grateful that foreigners have arrived to sprinkle their pocket change. A typical university graduate in Brazil, for instance, can expect to make $1,500 to $2,000 per month starting off, net of taxes.

Second, along the same lines, Brazil is not as cheap as one might expect. In fact, in many respects (retail sales, restaurants) it can be damn expensive.  I expect that there may be a downward correction in the currency (real) to offset this, but it will be short-lived as Brazil’s vast resources will always be in demand.

Third, to give you an idea of exactly how much incredible resource wealth Brazil controls, take a look this interview with Eike Batista. Batista is a Rio native whose vast oil holdings will undoubtedly make him the world’s richest man by the end of the decade by an enormous margin.

In the interview, Batista is thoughtful and well-spoken about the massive transition that Brazil has undergone since its days as a fledgling banana republic.

It’s worth watching because I think it gives a strong sense of the country’s mentality: Brazil is culturally self-contained. There is no obsession with the US economy, American movies, French fashion, German bonds, Saudi oil, or US/European politics.

With a nation of over 200 million, they have their own culture, music, movies, brands, wealth, and resources; as such, there is no deference given to the old economies of western dominance… and this level of confidence is highly unusual, even in China.

Check out the interview so that you understand what I mean… and with that, I have to run. We’ll talk again tomorrow when I’m on the other side of the Atlantic.

June 16, 2010
Rio de Janeiro, Brazil

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June 15, 2010
Rio de Janeiro, Brazil

Here’s the best way that I can describe Rio de Janeiro– it’s what you get when you mix the gorgeous vistas of Vancouver with the beach culture of Miami, the chaos and squalor of Mexico City, and the carefree attitude of the Caribbean.

Rio is one of those places that everyone has an opinion about… and the opinion is completely binary. Book a trip to Rio and tell your friends– I guarantee you’ll get one of two responses:

“Wow. I’m jealous, I’ve always wanted to go…” or
“Are you crazy?!? You could get killed there.”

The city has that reputation– free loving, sun drenched beautiful people with a passion for life and partying, as well as the low life criminal thuggery that plagues the city streets.

Like most rumors, both of these contain elements of truth.

Yes, Brazilians are gorgeous and fun loving, but there’s more to their lives than sexual hedonism. And yes, there is crime in Rio, but you’re not going to get stabbed on the street for the 15 cents in your pocket.

The truth about Rio is that it’s a major work in progress… and it probably always will be. They’re trying hard to eradicate poverty, mostly by redistributing income from the wealthiest Brazilians and increasing police presence in the legendary poor ‘favelas.’

This is why it makes sense to either bank in Brazil, but not live there… or to live in Brazil, but not bank there. You don’t want to get caught up in the country’s tax net.

As an aside, Brazil is one of the easiest places in the world to meet people.  Brazilians are extraordinarily friendly and welcoming people. This is different than, say, the folks in New Zealand… who are quite nice, but not especially inclusive.

Brazilians will literally take you by the hand and bring you into their group… and unless you have a major personality disorder, you’ll have at least 30 new best friends within your first 24-hours on the ground, even though neither of you will understand each other’s language.

One of the people I’ve met on the ground here is a special forces police officer named Fabio. We were talking about crime in Rio, and what an awful reputation it has internationally.

Rather than tell me about it, Fabio and I spent an entire evening driving around in the worst favelas to get a boots on the ground taste.  (* he was off duty and we were in my rental car, so it’s not like I had an official police escort which biased the observations)

From what I saw, the poorest, ‘most dangerous’ favelas seemed quite similar to the worst neighborhoods I’ve seen in Detroit, South Dallas, Los Angeles, London, and Hong Kong… but without the luxury of electricity or four walls and a roof.

The people who live in these areas are unquestionably poor… in sharp contrast to the high life condos on Copacabana and Ipanema beaches. But being poor does not make them murdering rapists, which seems to be the reputation that these favelas have in the press.

As I mentioned, the government’s solution to address the poverty has been to tax the income of other Brazilians and dump those funds into grants and public works projects around the favelas.

This simply doesn’t work. It’s like the trailer park tenant who wins the lottery– give that guy a million dollars and he’ll be right back in the trailer park within 3 years.

Lifting people out of poverty requires much more consideration than simply throwing money at the problem. Poverty is often something that people are born into… but they stay that way because they lack opportunities to develop the vision and skills required to deal with the outside world.

Ironically, the private sector has started addressing the issue in its own way. Fabio took me to a couple of nightclubs that are located in the worst favelas. As it turns out, they’re quite popular with the locals… rent is low so the drinks are cheap.

All the workers I saw, from the parking attendants to the bartenders to the bouncers, were all from the favelas… earning a decent wage and developing real world skills.

It seems, in my opinion, to be a much better solution than forking over a bunch of money to the tax collector.

Now… if you’ll excuse me, I have to get going… I was a complete bonehead and managed to lose one of my passports, so I have to dash off to the consulate to get it replaced. And Brazil plays its World Cup opener today, which basically means the entire country is on holiday this afternoon.

More to follow tomorrow on passports.

June 14, 2010
Rio de Janeiro, Brazil

It’s nice to be back in Brazil again… if you haven’t been to this country, I highly recommend that you check it out.

Brazil is one of the largest countries on earth in terms of both land mass and population (over 200 million); consequently, there is tremendous diversity. The capital city of Brasilia is completely different than the tourism hub of Rio de Janeiro, which is completely different than the commercial center of Sao Paulo.

As a nation, though, it has an incredibly bright future, mostly due to its substantial economic prospects. This is what I want to talk to you about today because it’s one of the reasons that I think Brazil should be on your radar for planting multiple flags.

Remember, when you’re considering foreign jurisdictions, it always makes sense to plant flags in countries that have strong economies– they will be the least likely to change their policies and deteriorate.

Below I outline the reasons why I expect Brazil to maintain its economic power in the future, which is why it is should be on your radar for multiple flags, especially residency, citizenship, banking, property, or investment:

1) Industrial capacity. Long-term economic power is derived from the ability to turn savings and resources into productive goods and services.  A nation’s industrial capacity is its means to accomplish this task, and includes things like the quality of its work force, magnitude of entrepreneurship, availability of factories and heavy equipment, etc.

Brazil has all of these elements in spades; it can manufacture the full range of products, from raw materials to finished goods, in a variety of sectors including agriculture, biotechnology, automotive, and even airplanes.

2) Technological  capabilities.  In the long-run, real economic growth requires two key ingredients– a substantial pool of savings which can be invested in production, and technology which boosts productivity.

In many ways, technology is the more important of the two because the right technology can obviate the need for capital.

In Brazil’s case, the country has been able to effectively develop and deploy alternative fuel technology that has eliminated its import need for retail gasoline. It’s amazing that the Brazilians have been able to do this, but other countries haven’t.

3) Resource independence. Being reliant on foreign countries for vital resources is a death blow to an economy. Real power is rooted in independence, creating a position of strength at the bargaining table.

In this respect, Brazil is one of the most fortunate countries on earth. It requires absolutely nothing from the outside world to sustain itself and is blessed with massive reserves of just about every resource a country could ever want, including the three most important: energy, food, and fresh water.

Given the vast amounts of oil that continue to be discovered off the coast of Brazil, the country will likely end up as #3 or #4 in the world in terms of proven oil reserves. Additionally, Brazil is home to more fresh water than just about every nation on earth, and its agricultural capacity could easily feed the entire hemisphere.

As such, Brazil is in a fortunate position in global trade– other nations are in desperate need of Brazil’s resources, and that directly translates into wealth and economic power.

4) Consumer market strength.  The stronger a nation’s consumer market, the more powerful its economy becomes to the rest of the world.  The US is in that position now– companies around the world want to sell their products to US consumers, and they’re willing to make necessary concessions to achieve that end.

If you’ve ever run a business, you know that your biggest customer frequently has more clout than your biggest shareholder. The customer is always right, and the same rule applies in macroeconomics.

By nature, Brazilians tend to be spenders, not savers. If you think that the average American is a shopaholic, hop a plane for the nearest Brazilian shopping mall and marvel at all the useless trinkets and knick-knacks that they waste their money on.

As the US consumer market runs out of steam, I’m convinced that the Brazilian market (numbering well over 200 million) will pick up the slack. They have the right consumer psychology, and they’re getting richer by the day from their immense resource wealth.

5) Balanced macroeconomic fundamentals.  Economic power starts with a healthy balance sheet. Debt to GDP ratios and government spending must inspire confidence in global financial markets, not horror.

Brazil’s economy is fairly sound. It has experienced crisis in the past, and the trend is towards more stability, more discipline.  The government and society seem determined to not repeat the fiscal mistakes of the past.

6) Political and military reputation. It’s no good having economic power if you can’t back it up with military power; how are other countries going to take you seriously if they know that they can just waltz in and steal your resources at gunpoint?

Brazil doesn’t exactly have the most active military forces on the planet– you don’t hear about the Brazilians deploying soldiers to 30 different countries at a time. Yet, its military remains strong enough that no one would be stupid enough to start a fight unnecessarily.

This stability generates investor comfort and helps promote growth in domestic financial markets.

Overall, each of these factors bodes very well for the Brazilian economy, which means that as a multiple flag jurisdiction, it will likely improve rather than deteriorate.

I would also suggest parking some of your long-term savings in the Brazilian currency (the real), which you can do through an Everbank foreign currency account, or the Wisdomtree Trust ETF (NYSE: BZF).

Over the next few days I’ll talk a bit more about Brazil, as well as what I think is the best part about the country– its passport.

More to follow.