June 9, 2010
Panama City, Panama

Panamanians are generally a carefree lot… but there are a few things that they curiously take very, very seriously. Mother’s Day is one example– it’s held in December, and the entire country shuts down for the day, including banks and government offices.

Voting is another example– it’s actually compulsory in Panama to go to the polls, and the government ensures that you don’t have any excuses by wrapping the event into yet another holiday.

The 10-year census is another… the government requires locals to stay home and wait for the census teams to show up. These teams go house to house interviewing residents in a single day, and afterward provide a small receipt indicating that the individual has already completed the census.

If a local is caught in the streets without this card on Census day, s/he can be taken to jail. While this requirement doesn’t apply to foreigners, the seriousness of this whole charade seems rather silly.

A few weeks ago, the government executed its latest census, and the results were quite interesting.

The preliminary data show that, since 2000, Panama’s population has grown by 17%, while the number of dwellings in the country has increased by 33%. In gross figures, there are now 3.3 million Panamanians living in 1.05 million homes.

Over the last 10-years, there has clearly been a dizzying housing boom in this country and an explosion of new housing units, particularly in Panama City. These numbers illustrate a few interesting points about the market.

First, as the population of full time residents has grown half as much the number of homes, it stands to reason that a substantial portion of the dwellings has been sold to nonresident foreigners.

You can see this on the ground quite easily by surveying the cityscape in the evening. Most of the freshly minted condo tower units, in fact, are sitting empty. The lights are off, and nobody’s home.

Given the straits that many people are finding themselves in these days, the oversupply of condos could be a great opportunity for the right entrepreneur. Each one of these units needs services, such as caretaking, bill pay, and short-term rental management. Most owners would jump at the chance to generate some revenue with rental income.

Problem is, there are few professional property management firms in Panama. I could name one, maybe two, and they are maxed out in their capacity. The other property managers in the city are one-man bands who work part time from their mobile phones.

I think someone who could provide well-marketed, comprehensive professional services would do quite well here.

The other key opportunity that I glean from the census data is the strong potential in ‘social housing’ projects. The government has an active commitment to increasing home ownership in Panama among the poor, yet the figures still show significant housing shortages in the key commuter towns outside of Panama City.

One of these commuter towns is called La Chorrera, roughly 20 minutes from the city. Its population has grown from 20,000 just a few years ago to over 100,000 today, and more people are moving there every day to take advantage of the strong job market in Panama City.

The people who move there often come from the interior of the country where they lived in dirt floor shanties with 7 other family members. The government provides incentives for banks and developers to build housing communities specifically for this market of first time buyers who have never had four solid walls and a ceiling.

As you could imagine, the homes are cheap to build and the demand is incredibly strong. Government data show the current housing shortage north of 50,000 units in this market, indicating that while the gringo segment has been vastly overbuilt, the local segment has a lot of opportunity.

Fortunately, most of the local Panamanian developers have largely ignored the opportunity. They couldn’t possibly sully their brands by building homes for commoners, which is why the housing shortage has been growing each year. This leaves huge opportunity for foreigners who can provide quality, cost effective units.

A few months ago I conducted an interview with a real estate professional here in Panama who I have known for several years. He’s German, and aside from running one of the top brokerages in the country with his partner, he also develops social housing projects.

In the interview, he explains the very compelling economics behind these projects, and you can listen to that interview here.

It’s not sexy or glamorous, but I think Panamanian social housing may be one of the strongest real estate opportunities in the western hemisphere at the moment. I would also put certain locations of raw land in Ecuador and Paraguay, as well as high yield Colombian properties in this category.

May 28, 2010
Chicago, IL, USA

Chicago is a really beautiful city– one of my favorites in the United States, actually, along with Austin, TX and Sheridan, WY. But while I enjoy being back in the US as a tourist from time to time, I’m itching to get out of here.

The travel I’ve just scheduled is a bit insane. Next week, I’m traveling to New York for an Atlas 400 event. Immediately after, I head to Panama… then Chile, Brazil, Madrid, London, Norway, Lithuania, Lebanon, South Africa, Zimbabwe, Kenya, India, Pakistan… and more.

I’m looking forward to the travel and meeting up with old friends on the road. Most of all, I’m looking forward to bringing you even more boots on the ground insights, especially as we gear up for our new premium service.

More to follow on this upcoming trip soon. For now, let’s jump into this week’s questions.

First, Gene asks, “Simon, I do alright, but the majority of my money is tied up in retirement savings. I’m afraid of what’s happening in the stock market right now, and I’m thinking about buying gold instead. Do you think that gold is a good buy at this price, and can I do this with my IRA?”

Great question. I mentioned a few weeks ago that it’s really difficult to ‘value’ gold as an investment speculation. Unlike a company whose balance sheet and management can be probed, or real estate that generates income and agricultural yield, it’s impossible to determine the fair price for gold.

As a speculation, I have a tough time chasing anything that has enjoyed a huge run-up, though I do believe that gold is seeing some breakaway fundamental changes right now in the way that investors are perceiving risk.

That being said, as a means to hold and protect your savings, gold probably makes a lot more sense, regardless of the price level. I hold physical gold, and I don’t really care what the spot price is. Why? Because it holds its value in relation to ‘stuff’ irrespective of the changes in paper currency.

This, after all, is the true nature of savings.

With your retirement savings, you can buy gold (and silver) through what my friend Terry Coxon calls an “Open Opportunity IRA”. This is a self-directed structure that puts you back in control of your own money and allows you to invest in just about anything, including most classes of bullion.

For US taxpayers, this Open Opportunity IRA is really a no-brainer for anyone with more than a few bucks in his retirement account… and if you haven’t already, I’d encourage you to give Terry Coxon’s book a try. It’s called Unleash your IRA, and he tells you exactly how to do it yourself.

For Canadians, the tax code now allows RRSP-ownership of certain gold coins. They must be of at least 995 purity and produced by the Royal Canadian Mint.

For Brits, the ISA retirement structure leaves few options for holding bullion.

Next, in response to my article about Uruguay no longer being a tax-free residency jurisdiction, ‘lf’ commented, “Unless Simon will come up with an idea how to get Martian passports, I doubt that a viable option really exists.”

I find this perspective troubling.

Countries change from time to time. It’s happened in the US, it’s happening now in China, it’s happened in Europe. Uruguay is no exception– they went from being a tax haven to jumping in bed with the OECD.

But to say that there are no viable options out there is simply an erroneous, defeatist attitude. Singapore is a great example– there are plenty of jobs and entrepreneurial opportunities available, the residency process is cheap and transparent, and you can become a citizen after 2 years.

I could cite several of other examples… but the larger point is that nothing is going to stay the same forever. You, your country, the environment, the society around you– all evolve and change over time.

The nice thing is that we can generally see major political changes coming years in advance. That gives us time to make preparations. Right now, you probably have a strong sense of the negative changes coming to the Western world, and that’s why we keep having these conversations.

Bob asks, “Simon, I was a bit confused about your article concerning Canadian citizenship. It seems more attractive to be a non-resident Canadian citizen. Is it possible to apply for this status directly without ever being a resident?”

No. You have to actually be physically present in Canada for 3 years out of a 4 year period. Then, and only then, can you apply for naturalization. If you take advantage of the offshore trust investor program, though, you can at least squeak by with a minimal tax burden.

Lastly, Jennifer asks, “Hi Simon. You haven’t mentioned anything about your sustainable community project in a while. Any update?”

Here’s the bottom line: I absolutely will develop a cost-effective, sustainable, offshore community where the amenities focus more on organic agriculture and livestock instead of golf courses and water parks.

Considering that I’m heavily involved in 3 operating businesses, multiple other investments, and I still write this letter each day, I simply don’t have the bandwidth to give a real estate development my 100% effort at this time… and I refuse to attempt something that I can’t give 100% to.

Given the upcoming offshore conference that we’re planning, as well as the pending launch of a premium service, I suspect it will be at least another 9-12 months before I’m ready to make that sort of commitment.

I appreciate all the emails expressing interest in the project, and I want to be clear that once I can allocate the time, it will be a top priority.

April 22, 2010
Vilcabamba, Ecuador

There must be something in the water down here.  They call this place the “Valley of Longevity” because it’s not uncommon for people to live well past the century mark… and it’s true.

Driving around the town last night and this morning, I couldn’t help but notice so many elders going on about their business. Mind you, I didn’t exactly card anyone (record keeping here is quite poor), but their appearance and the stories they tell clearly suggests an age that is unimaginable to most.

What’s even more striking, though, is their good health. You’d ordinarily expect a centenarian to be weak and decrepit.  On the contrary, these folks were extraordinarily alert, engaged, and physically fit (relatively speaking)… essentially, how you would consider a healthy 65 to 70 year old in the western world.

The 5-hour drive from Cuenca was breathtaking; I found the roads to be of excellent quality, and the scenery was similar to Wyoming and the Austrian Alps.

Make no mistake, though, the southern Andes in Ecuador are a far cry from Europe or North America.

I’ve talked this week about how Ecuador is an exceedingly cheap country… but in the major cities like Quito, Guayaquil, and even Cuenca, you don’t have to sacrifice too many amenities for the cheap prices.

Down here in Loja province, though, it’s like going through a time warp.  Houses without electricity and running water are common, and you see people riding mules and horses everywhere you look.

Consequently, as beautiful as it is, this isn’t an area that I would consider buying property. As I mentioned on Tuesday, being a ‘wealthy’ landowner next to a poor village is probably bad politics in Ecuador.

Ironically, I noticed a great deal of expensive new construction in the area, clearly catering to gringos who don’t mind overpaying for the privilege of living in the Valley of Longevity.

Compared to other property deals that I mentioned yesterday, the Vilcabamba properties are at least 3-5 times more expensive… $300,000 for a small house on 2 acres near Vilcabamba vs. $150,000 for a large house on 10 acres near Cuenca.

I’ve seen this happen in a lot of different countries… a particular area is ‘discovered’ by gringos, and they start building a community that’s eye-gouging multiples more expensive than adjacent properties.

Needless to say, the developers and sales agents always insist that their property is of much higher quality and luxury, hence ‘worth’ the enormous premium. My property tour in Vilcabamba was no exception, almost to the point that I wondered if I would receive a free bottle of snake oil for purchasing a lot.

Personally, I don’t see the point in relocating to such a free-spirited, healthy place, only to close myself away in an overpriced, walled-off, gated community.  Naturally, the marketing folks at these communities strongly disagree, and this is exactly what I was talking about yesterday when I discussed ‘trusted contacts.’

There are too many people out there whose business model is to take advantage of the uninitiated.  They look sharp and sound sharp, but their opinions absolutely cannot be trusted, particularly when it comes to the benefits of overpaying.

Here’s the bottom line– I’ve spent a week on the ground on this trip to Ecuador, and given certain changes in the laws since I last looked at the market, I’ve decided to definitely pick up some property here.

Most likely, though, I’ll be buying near either Quito or Cuenca, and with the help of my trusted advisors in those cities.  Land is cheap, beautiful, and of significant value… plus I’ll get some additional residency benefits that I’ll share with you later.

April 21, 2010
Cuenca, Ecuador

Last night I ate at one of the fanciest restaurants in Cuenca.  Everything except for the Chilean wine was locally grown and absolutely delicious, right down to the banana flan for dessert.

The total bill for my beautiful companion and I rang in at $40.02, including 3 courses with wine.

For lunch, I ate at a local cafe– another 3-course meal with a chicken soup to start with, beef loin on a bed of rice, small dessert, and fresh squeezed juice right out of the fruit. That meal set me back a whopping $1.75.

I gave the waiter $2 and he literally followed me out of the cafe trying to give me my $0.25 in change back because apparently the $1.75 already included a 10% gratuity.

I’m telling you this because I’m trying to impress upon you how cheap Ecuador truly is, and how much value is in the price.

I think of countries like publicly traded shares on a stock exchange. Sometimes the market gets out of hand, and companies trade for an unjustifiably high multiple of their earnings and assets (think Amazon.com during the tech bubble).

In some instances, though, companies trade at a discount to their net asset value– we saw this in the first quarter of 2009 when many of the junior mining companies were trading at less than the value of the cash they had in the bank.

It doesn’t really matter how high or how low the price of a stock is, or what the market capitalization is… what makes a company attractive to buy is when it is significantly undervalued relative to its earnings, assets, and potential.

I value countries in the same way.

Brazil, for example, is like a company with a very large market capitalization that is trading at roughly net asset value, neither significantly overvalued nor undervalued.

Morocco, on the other hand, is a small cap company that is trading at a premium to its net asset value and earnings– sure, it’s cheap, but it’s a total disaster.

Ecuador, in my assessment, is like a deeply undervalued mid cap company.  It is not without its own problems and challenges, but price level here is substantially lower than the level of its well-developed infrastructure and amenities.

I’ll give you a few real estate examples to help paint the picture:

Here in Cuenca, I’m looking at a particular property near town that’s on about 10 acres with a 3,400 square foot main house (roughly 300 square meters) of quality construction. The asking price is about $150,000.

If you calculate the construction costs at $500 per square meter (which is extraordinarily cheap, roughly the same cost to build a no-frills garage in North America), then the construction cost of just the home is $150,000. You get 10 acres of land for free.

Another place I’m looking at is in the mountains on 20-acres of prime property.  The main house has over 350 square meters of quality construction that’s almost brand new, and the owners are asking $375,000. You can do the same math and see that they’re basically giving away the house at cost, and giving away the land for nothing.

You see my point.

As for taxes, local property taxes are a joke… most of the owners around here complain if their taxes go up from $52/year to $55/year.

The biggest issue with taxation is on rental income– if you buy a property and rent it out, a tenant must withhold a flat 25% on rental income, which means that yields are not as high as in neighboring Colombia or Panama.

Overall, I really think Ecuador has substantial value. Using my “10-year rule” and looking out into the future, I’m not convinced that the country is on a very steep upward trajectory like Peru or Cambodia… but even if it stays exactly the same, it will still be a great place to spend some time and even retire.

Like any real estate market, from Vancouver to Vanuatu, there are traps to watch out for in Ecuadoran property; there will always be sharks waiting to take advantage of the uninitiated, which is why I recommend for people who are seriously considering expatriation to rent first, or deal with an absolutely trusted advisor.

A trusted advisor can be difficult to find– foreigners tend to rely too heavily on Google and Wikipedia (which I regard as the black hole of accurate information). It takes a lot of time on the ground– I’ve spent years running all over the world building quality contacts while burning through crooks and incompetents.

Ecuador has been no exception. More to follow.

April 19, 2010
Quito, Ecuador

I don’t have to tell you that world governments are collectively pushing hard against people who abusively hide money overseas.

Governments’ primary motivation at the moment is to make sure that no one is evading their tax obligations; for now, they don’t care much if you pay taxes on your income, and then transfer after-tax earnings overseas.

In a way, though, their offshore crackdowns have become a self-fulfilling prophecy that is creating its own demand.

People who understand what’s going on are now more motivated than ever to take action using legitimate and available tools– proper use of international business structures, offshore bank accounts, foreign real estate, second passports, etc.

Why? Because they don’t want to get caught with their pants down when the window of opportunity closes.

Someday, and likely soon, cash-starved governments will implement whatever measures are necessary to trap capital within an economy, enslaving people to taxation, regulation, and inflation.

These are called capital controls, and I think that they’re an absolutely certain part of our future… though ‘future’ is the operative word. There has been a lot of insidious legislation passed around the world recently, but none so far has been capital controls, at least in developed countries.

A few weeks ago, blogger after blogger set off a wave of panic across the Internet by announcing that capital controls had, in fact, been implemented in the US. They were erroneously interpreting a new law called the HIRE Act, claiming that certain provisions were tantamount to capital controls.

This interpretation was simply wrong.

Frankly, I’m pleased that so many websites are now paying close attention to expatriation issues. It seems like every time I turn around, someone is sending me an article from a new website that is doling out advice on internationalization.

I think this is fantastic, and indicative of a growing concern around the world. The problem is that most of them are armchair expats handing out monkey see, monkey do information from Google or Wikipedia that is totally inaccurate.

Misinformation can cause panic and even direct financial loss… this is why you want to be careful about your advisers and go straight to the source.

For example, if you want information about international taxation, talk to an international tax attorney, not Wikipedia. If you want to know about expatriation, talk to people who have successfully done it, not the armchair expat who watches CNN International.

This is one of the chief reasons why we are in the process of redesigning our website; it will allow subscribers to connect with each other in order to swap stories and advice based on their own personal experiences. More on that later.

Today, though, I really wanted to set the record straight about the HIRE Act. On March 30th I initially responded to the misinformation about capital controls; in that missive, I promised that I would soon conduct an interview with an international tax law expert to shed more light on the subject.

Today is that day… and if you’re interested in objective truth about capital controls without all the ‘Chicken Little’ sensationalism, I highly encourage you to check out this interview with Mark Nestmann.

In the interview, we’ll discuss:

- What are capital controls and why the HIRE Act doesn’t qualify
- What capital controls will look like when they’re implemented
- Warning signs to watch out for in the future
- What you can do today to protect your savings
- Options for opening a foreign bank account

Mark Nestmann is an uncontested expatriation expert. As a trained international tax lawyer, Mark has been in the industry for two decades and authored many books on the subject.

One of them, the Lifeboat Strategy, is a really comprehensive, actionable guide to expatriation.  If you’re wondering how to develop a legitimate strategy for going offshore, you should absolutely start with his book.

(as an aside, Mark is putting the finishing touches on a new update to the book which he will list at a much higher price. Anyone who purchases the Lifeboat Strategy today at the lower price will be automatically sent the updated version at no charge.)

I hope you enjoy the interview.

April 8, 2010
Panama City, Panama

Do you remember that really awkward phase we all went through as adolescents?

Growth spurts, voice changes, menstruation, and yes, pimples– in the end, while we all came out of it more mature and grown up, there was a difficult and sometimes painful transition period in which we had to learn how to deal with new realities.

Developing countries go through the same sort of transition, and it can be just as awkward and painful.

Typically, they try to transition from fledgling banana republics with corrupt governments and byzantine regulatory systems to stable democracies with a growing middle class and reformed tax code.

Most countries have a very difficult time with this.

For example, I expect China to undergo significant pain as their economy continues to inflate. One day the Chinese will find that their rising currency and wages are no longer cheap, and they’ll have to seek competitive advantage in something other than manufacturing knick-knacks.

In other words, a country of a billion people cannot go from making socks to being the world’s investment bankers overnight, or without any fuss.

These sorts of transitions are very difficult because they affect the entire social landscape– employees are laid off and have to retrain to new skills, businesses go bust and reinvent themselves, etc.  Of course, politicians always get in the way by passing laws which only prolong the pain.

Overall, the transition cycle is not easy, and few countries pull it off well.  In my assessment, Panama is one of the countries succeeding.

20-years ago, with its puppet dictator, open drug trade, and banana exports, Panama was nothing but a bad punch line.  Over the last decade, though, the country has been able to successfully develop a service-oriented economy with robust tourism, banking, and transportation sectors.

Today, while the country is definitely no Shangri-La, Panama is thriving and on a very clear upward trend.

Remember, this is ultimately the most critical point to consider when planting a flag overseas– is the country or jurisdiction on an upward trend? Will it be a better place 10-years from now?

When you survey the political landscape in developed countries, the headlines generally tend to get worse and worse.  Certainly, not all news is bad, but the subversion of civil liberties, erosion of financial privacy, and rapid growth of big government seem to be at least weekly occurrences.

Meanwhile, in developing Latin economies like Panama, Chile, and Peru, things are consistently improving– they are going through the awkward growth phase as smoothly as possible.

As an example, the Martinelli administration in Panama recently passed comprehensive tax code reform.  While increasing the sales (consumption) tax by 2%, it cuts corporate and some personal tax rates, reduces some property tax rates by half, and completely eliminates over 30 types of tax.

This new, simplified tax code is a major step in the right direction, and it will be excellent for business.

The government here clearly understands that successful businesses hire employees and generate wealth in the economy.  This model has done wonders for Singapore and Hong Kong, and Panama is following suit.

Yes, there are still elements of poverty, corruption, drug trafficking, etc. in Panama.  The trend, however, is undeniably one of consistent improvement and greater economic freedom.  Ultimately, this is exactly what helps countries successfully transition through those difficult growth phases.

As I’ve said before, until these economies become large or popular enough, local capital markets tend to be off-limits for armchair investors.  I don’t see TD Ameritrade offering access to the Peruvian stock market anytime soon.

It is possible, however, for intrepid active investors to open local brokerage accounts and capitalize on the rising tide… though the most passive investment opportunities generally tend to be foreign bank accounts (which provide liquidity and exposure to the currency) or property (which is non-reportable and an excellent inflation hedge).

More on these topics in future letters.

March 31, 2010
Panama City, Panama

It appears that not all is amiss with sovereign debt: Panama may be one of the only bright spots, at least in the western hemisphere… the country recently had its debt rating upgraded by Fitch to ‘investment grade’ with a positive outlook.

Now, I have been quite vocal about my disdain for the ratings agencies… these organizations completely missed the boat before the financial crisis, slapping AAA ratings on shaky subprime bonds. And yet, for whatever reason, the financial community as a whole listens to them.

An investment-grade debt rating is still a major badge of honor for developing countries– something they all strive for but few achieve. In Panama’s case, even though I take umbrage with the rating agencies, the upgrade accurately reflects the country’s very sound economic fundamentals.

Last year, Panama was past of a very small, exclusive club of countries that experienced positive GDP growth.  The combination of capital inflows to the banking sector, multiple public works projects, and of course, the expansion of the Canal, kept Panama afloat.

Over the last several years, Panama’s economic trend has been quite positive. In 2004, the country ran a deficit of 4.9% of GDP and had a debt level of 70% of GDP.

By 2008, the country had reduced its debt level to less than 50% of GDP and had run 3 straight years of budget surpluses. Even last year, Panama ran only a slight deficit of 1% of GDP– a completely negligible number in the world of sovereign finance.

Thanks to sustained growth, substantial tax reforms, and increased toll revenue from the Panama Canal, the government expects that it will cut its debt level to 35% of GDP by 2014.

By that time, Panama’s sovereign debt rating will likely surpass that of Greece or Spain.

Other strong economies in the region to watch in the short-term are Peru and Chile.

Peru has reduced its debt to 26% of GDP and also posted positive GDP growth in 2009.  Lima has transformed itself from a run-down punch line just a few years ago to a thriving capital city, full of commerce and culture.

With major exports of copper and gold, Peru is well positioned to capitalize on a resource boom, particularly having diversified away from the United States– it has established strong trade ties with Brazil and China, and also decreased its ‘dollarization’ from 82% to 46% over the last decade.

Chile, despite the recent seismic disaster, is also well positioned to capitalize on a resource boom. The country has strong incentives for foreign investment, and it continues to be the continent’s beacon of political stability.

I could go on at length about these two economies, and I likely will in future letters… but for now, suffice it to say that we will likely see the strongest regional growth in the near term from Panama, Chile, and Peru.

Due to their limited size, and the fact that markets are more transfixed by Brazil (and other shiny objects), there is no easy way invest in these countries, at least through a major North American or European exchange.

Many foreign brokers will be able to set you up with a local trading account, though my assessment is that the property markets pose more value for small investors.

Why?

As I wrote in yesterday’s letter, capital controls are coming… when Joe Biden suggests that redistribution of wealth is really just being ‘fair,’ capital controls are truly a foregone conclusion… and it’s the same conclusion in most developed western nations.

Unless you want your money trapped in an economy that is guaranteed to inflate and tax your savings away, you should think about moving at least some money overseas… and for now, buying foreign property is one of the best ways to do that.

Naturally, it’s better to consider countries with thriving economies and solid fundamentals that are indicative of continued growth and stability. In the Americas, that certainly includes Panama, Peru, and Chile.

March 26, 2010
Vancouver, BC

I’m headed to Panama shortly where I look forward to meeting up with my friends and colleagues in the Atlas 400 group. We’re going to an exclusive deep-sea fishing resort for a few days, and afterwards I plan on taking up some unfinished business in Panama.

One of the things on my agenda is to revisit the sustainable community concept that I began discussing a few months ago. This is something that I really want to do, for personal reasons… I’ve always wanted a place that doesn’t rely on ‘the system’ for food, water, power, and security.

In my travels around the world, though, I’ve not yet found a community that provides this, at least up to my own standards… it’s possible that one exists, I just haven’t seen it yet.

I have a detailed plan in mind that will start small and allow the community to grow as the market dictates; my biggest challenge is time. At the moment, I have several other business and investment obligations on my plate, and I’m hesitant to commit to another major undertaking.

As I said, though, for personal reasons I would really like to develop this community, and I’ll be making a final decision once I meet with my team of architects and engineers in Panama over the next 2-weeks. Stay tuned.

On to this week’s questions:

First of all, Tom asks– “I’m exploring Hong Kong at the moment and am wondering if there are any subscribers in HK who would be willing to talk with me about the residency process. I’ll be here until April 3, then off to Singapore where I will be conducting similar due diligence.”

If anyone is in the area and willing to meet with Tom, please drop us a line and my assistant will forward your contact information to him.

William asks– “I live in the US and so does my business partner. We have a start up internet business hosted in the Netherlands. We have been trying to find a way to incorporate and get a bank account offshore. I have had many problems while researching this. Any suggestions?”

First of all, it’s a fantastic idea to plant a flag overseas when you incorporate a business, particularly one that’s internet-based. A properly-structured foreign corporation provides a way to legally defer tax payments (similar to an IRA) plus you have substantially reduced liability.

There is no “one size fits all” solution though. The most important thing you can do is talk to a qualified tax attorney in your home country– that means someone who understands international tax law, as well as the benefits of individual offshore tax jurisdictions. (this is a rare species)

It’s absolutely critical that you do this because no one in an offshore jurisdiction really understands the tax and structural implications that affect you.

Get the right advice and it will pay huge dividends in the future. If you need a referral, drop us a line. I have tax attorney contacts in the US and the UK.

Jack asks, “Simon, do you have any suggestions for an American who would like to open a bank account in Thailand?”

Yes. Don’t open a bank account in Thailand. It’s a beautiful country, but not a place with a trustworthy financial system. Thailand is highly corrupt and immature as a banking center… and there are too many solid options in the region– Hong Kong, Singapore, and Labuan are great alternatives.

If you want to have a bank account in denominated in Thai Baht, you can easily do this at a number of other banks in Asia, such as HSBC in Hong Kong.

Finally, Mark asks, “Simon, you said the price of housing in Malaysia is $1400 per square meter– if I did my math right, this works out to $128 per sq ft. This is the low end of new housing in the States. So, from that perspective it doesn’t seem that inexpensive. Your thoughts?”

First of all, just to clear things up, when I said the price of housing in Malaysia is $1400 per square meter, I’m referring to the average cost of high quality, expat-level housing (not raw land) in tier-1 neighborhoods.

With few exceptions, this is lower than comparable costs in the US, Canada, and Europe. To be honest, Detroit is probably one of the cheapest places on earth to buy property right now… probably cheaper than Malaysia. A speculator may be able to make a fortune in Detroit– but with tremendous risk.

“Low prices” don’t always mean “great value.” And despite the low prices, there are a few things that really scare me about US real estate.

First, continued government intervention makes me want to run away like a scalded dog. The government is unable to ‘fix’ anything other than elections, and their continued intervention in the housing and mortgage markets will only lengthen the pain in the sector.

Second, state and local governments are broke, and as a source of revenue, I’m convinced they’ll be looking to increase property taxes. In the hardest hit areas, I expect tax rates to more than triple.

Third, in the medium-term, I also expect prices to keep falling… stagnate at best. If you consider the supply/demand fundamentals, there is still way too much supply on the market, and not enough households or available credit to fill the void. In my assessment, this is not the bottom.

To me, while there are some bubbles forming on the continent, parts of Asia demonstrate significant value as long-term property investments, currency diversification, and residency flags. I don’t see those benefits in the US at the moment, particularly given the risks.

That’s it for this week; have a great weekend and we’ll talk again on Monday.

February 19, 2010
Bangkok, Thailand

I really need to start out today’s letter by expressing how truly humbled I am to be part of such a fantastic community.

Matt and I have spent much of the last few days combing through resumes (200+ so far) for the job openings that I posted on Monday, and the caliber of talent and energy is really impressive.

Applicants vary in age from 17 to 70. They come from all stations of life– corporate executive, successful entrepreneur, student, homemaker; and they  hail from at least 18 different countries, from Guyana to China to the Netherlands to South Africa.

I’ve read every email with great interest and have made difficult choices to narrow down the pool of candidates. If you submitted an email, you might just be hearing from me in the next week or two.

Now… on to this week’s questions.

Karl asks: “Simon, we own a condo in Pattaya, Thailand and a home in Boquete, Panama so your comments have real meaning for us.  I am having trouble trying to decide how the decline in the US dollar will affect Panama which uses the US dollar for everyday commerce.  Can you comment on this?”

This is a great question. There are a couple of important factors that you should understand about the US dollar–

First, it’s like what Churchill said about democracy: the dollar is the worst of all major fiat currencies… except for all the others. Only three currencies can handle the massive capital flows of the global financial system without a major impact, and the other two (euro, yen) are in even worse shape.

Second, in the event of a critical dollar collapse, the currency of a country will be less relevant than its net exposure to the United States.

Panama has independent means of supporting itself thanks to the Canal, a robust financial system, global tourism, etc. So in the event of a dollar collapse, asset prices in Panama will definitely rise relative to the decline of the US dollar.

Sure, you might be paying $20 for a loaf of bread in nominal prices, but the inflation-adjusted standard of living should remain fairly stable because the Panamanian economy will still have independent income to support itself.

This is a similar fate as a country like Saudi Arabia whose ‘riyal’ currency is pegged to the dollar. Like Panama, Saudi has an independent source of income. If the dollar collapses, oil prices will spike, and the long-term inflation-adjusted effect for Saudi will not be too severe.

Contrast this with El Salvador which has no independent means of income and relies heavily on the United States for both remittance income and roughly half of its exports… Thus, El Salvador is much more vulnerable to fluctuations in the dollar.

The last thing you need to understand about a dollar collapse is that no country will be totally immune. The greenback defines the global financial system right now, and its collapse will cause panic and shockwaves around the world, at least in the short-term.

While yes, it would be preferable for Panama to have its own independent currency backed by gold, I would not let Panama’s dollarized economy scare you away.

Roger asks: “Simon, you’ve provided useful information on which countries are the safest to store gold.  Unless I missed it, however, I did not see any suggestions on places to buy gold coins in Singapore or Austria.”

In both countries, you can buy gold at nearly every bank you walk into. Austrian banks sell coins called the ‘Philharmonic’, which is the Austrian equivalent of the Eagle and Maple Leaf. Singapore banks have a wide inventory.

In Singapore, though, precious metals purchases are subject to the GST tax at 7%… which is a bummer. So one of the best things you can do there is open a precious metals bank account (try United Overseas Bank) where the value is denominated in grams instead of dollars.

You can withdraw gold in this way and the transactions are not subject to the tax.

Maria asks: “Dear Simon, It’s easy to forget sometimes that you put valuable information out every day for free on your own dime… so, thank you for all that you do. I’m wondering if you could shed some light on your sustainable community idea in Panama?”

Thanks, that’s a really nice thing to say.

Matt and I are leaning towards doing the sustainable development in Panama. I will circulate an initial concept paper in the next few weeks and put together a special list of prospective residents.

Based on my back-of-the-envelope calculations, I’m thinking that we could offer reasonably sized lots in the range of $25,000 to $50,000 in a secluded community that has its own satellite internet, clean water system, a bit of renewable energy, and a lot of low-maintenance agriculture.

Each lot would have a share of the crop yields, which I envision selling on the open market to generate a dividend for residents in the first few years, at least unless/until things really start to go south.

Also, for the planning and development, I would like to put together a steering committee comprised of experts in areas like security, construction management, organic agriculture, energy independence, etc. to help make it the best community possible.

More to follow on this in the future. Have a fantastic weekend, and get ready for second citizenship and residency discussions next week.

February 17, 2010
Bangkok, Thailand

I couldn’t believe what I was hearing… and I found myself wondering out loud- “Are these people insane??”

Apparently, yes.

I was watching Richard Edelman this morning on Bloomberg Television discussing the latest results of his research and PR firm’s annual “trust survey.”  Edelman takes a scientific poll each year, drawing on a global pool of educated, well-informed people from G20 nations.

The theme is always the same– trust.  Edelman’s research gives an indication of the public’s confidence in the private sector, the banking industry, NGOs, the mainstream media, and of course, the government.

For example, I wasn’t surprised to hear that public trust had fallen for corporations and the financial sector since last year. Edelman’s data suggest that people are more leery of business than in the aftermath of the Enron scandal, and only 29% of respondents trust what a CEO says about his/her company.

Given what has happened with the Goldman/AIG sweetheart deals, the Toyota recall, the socialization of Chrysler and GM, etc., this sentiment is to be expected.

What was shocking to me, though, was that the US public’s trust in their government and political leaders actually increased from last year– 46% of Americans trust in their government to do the right thing, which is more than the French (43%), German (46%), British (38%) and Russian (38%) believe.

What’s more, Americans’ trust in their government increased by over half of 2009′s level– a 53% increase, proportionally, from last year.  Who were they interviewing?? Barack Obama’s kindergarten teacher? The guy who owns a warehouse full of “Real Change We Can Believe In” bumper stickers?

Among major nations, only the Chinese at 74% had more confidence in their government.

Economically, 65% of respondents worldwide, including 61% in the United States, said that they want governments to *increase* control over all industries, and fewer than half of the Americans polled believe that the free market should be allowed to operate without significant government influence.

These indications are really unfortunate, because when the people ask for more government control, they will absolutely get what they deserve.  And once power has been vested to the government by the people, it almost takes a revolution to wrestle it back.

If you’re one of the minority who can properly identify runaway governments as the problem and not the solution, you should really think hard about your options.

Expatriation is often too radical a concept for most people, especially those who find themselves chained to geography by factors like job, money, and family.

Personally I would argue that family is one of the chief reasons to expatriate, and that most people would have more financial success and live a better, cleaner lifestyle overseas.

If fear and uncertainty are preventing you from making a move, I would advise that you at least get your feet wet by internationalizing yourself in baby steps.

For example, definitely consider purchasing foreign property as a first step– buying property is definitely the best way to move money between countries.  It also makes for a great investment, provides you with an emergency landing pad, and frankly gives you a reason to travel from time to time.

Do your research and buy in a free country that has a stable economy and fiscal discipline.

Panama is an excellent example– the country’s debt level is currently a manageable 45% of GDP, and the government is astutely borrowing a bit of very cheap money to make lucrative infrastructure investments that will yield a soundly positive ROI.

Furthermore, as the country continues to experience a solid growth rate and manage its debt levels, Panama’s proportion of external debt to GDP should continue to decline in the foreseeable future.

In fact, Panama is one of just a handful of countries that experienced positive GDP growth last year, and you can see evidence of this on the ground. There are currently some attractive investment opportunities in the property market, as well as fairly straightforward bank financing available.

I promised a few weeks ago to bring you some inside information about Panama’s property market, and I intend on doing that tomorrow. More to follow.

February 12, 2010
Pattaya, Thailand

I’m happy to report that I seem to be in the final throes of my Asian jet lag– I finally managed to go to bed and wake up at a reasonable hour.

I appreciate the emails that I received giving me advice about how to deal with it more effectively… honestly though, I think time is the best remedy for everything.  With jetlag, I take a “sleep when you’re tired, eat when you’re hungry” approach, and it will work itself out eventually.

Anyhow, as I am out the door and headed to the beach in a few minutes, I’d like to spend some time addressing your questions this week:

Kevin asks: “Simon, I want to purchase a round-the-world plane ticket in order to get a sense of which country I would feel most comfortable living in / retiring outside the US.  Do you have any recommendation on how to find an open-ended round-the-world ticket on the cheap?”

“Round the world” fares are a flexible, cost-effective way to explore the world. Each of the major airline alliances (Oneworld, Star, and SkyTeam) has an around the world program, and the rules are generally the same.

You have to establish your route in advance, i.e. start in Vancouver, travel to Tokyo, then Singapore, then Mumbai, then Abu Dhabi, then Istanbul, then Kiev, then Krakow, then Madrid, then Miami, then Los Angeles, and finally back to Vancouver.

The nice part is that the dates for each flight are completely flexible. If you start in Vancouver and fly to Tokyo first, you can spend as much time as you want in Tokyo. When you get tired of it and are ready to move on, you just call the airline and they will book your next leg of the journey (to Singapore).

There are a few rules– the entire journey can only take up to 1-year, and there’s usually a maximum of 16 stops in total.

Now… here’s how you save money: If you live in North America, try to start your journey in South America. Buy a 1-way ticket to Colombia or Brazil, for example, and begin the routing from there. You will save about $1,000.

Peter asks: “Simon, I’m really interested in Panamanian property; given where I see my country headed, Panama seems like a great place to set up, and I want to get out while I can. I bought the Black Paper, and I am considering going to this International Living conference in April. Do you think it’s worth it?”

Yes. I was friends with most of the IL staff in Panama over the last few years, and I knew the conference organizers quite well. They routinely put on informative events, and if you’ve been strongly thinking about buying property in Panama, the conference is a great way to pack a lot of objective exposure into a short period of time.

Incidentally I may be back in Panama by April, in which case I might attend the conference myself to meet with some subscribers and old friends.

Helen asks: “Simon, when can we hear back from you about the sustainable community, and on the second citizenship programs?”

We have about 750 survey responses from subscribers telling me what they would like to see from a sustainable community in Panama. Clearly this is something that needs to be done. My partner Matt and I are digesting the data and strategizing how we would execute this. I will provide details next week.

In regards to second citizenship opportunities– I plan on rolling out quite a bit of information later this month, probably the week of the February 22nd. Stay tuned.

“LookingToLeave” asks: “Simon, do you have any suggestions for someone who plans on possibly using physical gold as a way to move their wealth out of the U.S.?”

Transporting gold is a great way to move wealth– a mere six pounds is over $100,000. There are three things you need to keep in mind:

First, the US government (and Canada too) does not consider gold to be a monetary instrument, so technically it would not be reportable… but be prepared to tap dance in case some Neanderthal government agent becomes suspicious about it.

I say this because in my travels recently, nearly every border guard I’ve come across has wanted to know one thing: “How much money are you carrying?”

Second, don’t forget to check the regulations on your destination country. Some places, like Uruguay, require you to declare gold upon arrival.

Third, do not underestimate security. If you’re confident, you can carry it yourself, but consider engaging a company like ViaMat to securely transport it for you.

Have a great weekend, and we’ll talk again on Monday.

February 3, 2010
Panama City, Panama

Panama is a popular destination for expats, and for good reason. But there are some critical property traps that you should be aware of if you’re looking to buy.

The first trap to watch out for is the tax law; for years, the government stimulated the real estate industry by promising property tax exoneration for up to 20-years. In order to qualify, a project must have been permitted no later than July 1, 2009.

For this reason, you see a lot of empty pits in Panama City where developers were technically within the law and are now frantically trying to pre-sell units.

One of their key sales points is that if you buy their condo, you won’t have to pay property tax for 20-years… what they don’t tell you is the plain and simple truth– in order to qualify for the tax exemption, the building must be completed by December 31, 2011.

The chances of all these new condo developments being completed by December 31, 2011 are slim to none… and slim’s out of town. That will leave new buyers stuck paying extra taxes.

The other thing to keep in mind is that even if a building does qualify, the property tax exemption only applies to the actual construction, not the land value. Condo owners must still pay their share of taxes on the value of the land that the condo tower was built upon.

Ordinarily this would seem like a trivial sum… but many developers are now petitioning the government for a substantially inflated land value; this increases the developer’s cost basis and lowers their income tax while simultaneously increasing the government’s tax revenue at the buyers’ expense.

The second trap to watch out for is title– a lot of the land in Panama has cloudy title, meaning that multiple parties often have claim to a single parcel. These disputes grow from generations of sloppy record keeping, shoddy land surveys, squatters’ rights, and the neighbors’ ever-encroaching fences.

In Panama, possession truly is 9/10 of the law, and judges uphold this standard.

Title insurance companies now operate in Panama, which makes the transaction less risky… but a lot of property for sale is actually untitled, what is known as “Right of Possession” property, or ROP for short.

ROP landholders are not registered with the government, and the buyer is effectively paying for use of the land, not ownership.  A lot of buyers are OK with this distinction, but that will now surely change.

The government has recently stepped in with a new mandate that will effectively stick ROP landholders with an enormous fee for recording ROP as titled ownership. The fee applies to ROP land above 5-hectares and will cost anywhere from $10,000 to $625,000 per hectare.

My guess is that there will be a flood of sellers trying to unload their ROP land to unsuspecting buyers who don’t know about the new law. Don’t be one of them.

The third trap in Panama is unreliable information.  In developed countries, property transactions are a matter of public record. In Panama, however, most sales are kept private.

How? Many properties in Panama are owned not by an individual, but by a Panamanian corporation. When it comes time to sell, the parties exchange shares of the corporation, not title to the property. In other words, the owner of the property is still the corporation, but the corporation’s shareholders have changed.

As there is no public database of shareholders for Panamanian companies, the property transaction is effectively kept private, and no one will ever know how much the property actually closed for.

The lack of reliable information in Panama generally gives rise to unsubstantiated rumors, especially from real estate agents. Naturally, it is in their best interest to spread rumors about how properties are still selling for high prices because there is always a greater fool willing to believe it.

Most Panamanian real estate agents are notorious for this, and if you’re in the market for property I would advise you to exercise extreme caution, regardless of how slick s/he may sound.  As a foreigner, it’s very easy to get steered into overpaying for the wrong deal based on rumor and misinformation.

That’s why I’m going to be introducing you soon, through an audio interview, to one of my most trusted contacts in the business. He’s a savvy investor who understands long-term value and knows the market inside-out.

During our interview, he’ll be discussing these property traps in more detail, as well as the most undervalued properties and foreclosures he’s working on. If you’re interested in Panama property, you won’t want to miss it.

Out of fairness, I will make the interview available exclusively to Black Paper subscribers at first, and then to the rest of the community at a later date.

January 29, 2010
Boquete, Panama

It’s a beautiful day in the Panamanian highlands, and I’m taking the opportunity to explore the countryside for undervalued land deals.  The Chiriqui province of Panama, where I am now, is sort of like the Panamanian version of Texas– fiercely independent and proud… locals consider themselves to be citizens of Chiriqui first, and Panamanians second.

As we’ve discussed in previous letters, I have been sincerely exploring the idea of developing a subscribers-only sustainable community, and Chiriqui is on the short list of locations.

On that note, I really want to thank you for providing me with your feedback about the community concept; over 650 people have filled out the survey so far, and I’m convinced that the idea has tremendous merit. More to follow on that in the future– for now, let me get to some subscriber questions:

From Denise Dale: “Simon- I enjoyed your comparison between Panama & Costa Rica, but I felt you missed an important comparison:  the medical aspects of each country.  I, being 73 years young, would appreciate some statement regarding the medical facilities and medical personnel.  I do intend to move to Central America this year and may even renounce my current citizenship.”

Denise- Thanks for reminding us of such an important lesson… regardless of your situation in life– young, old, rich, poor, employed, jobless, etc., you can always expand your opportunities by looking overseas. Many US citizens are finding that the cost of healthcare is absolutely crippling, and you are sharp to consider opportunities south of the border.

In my opinion, *western* medical facilities and staff in Panama are unquestionably of higher quality than in Costa Rica– the hospitals are better equipped, the doctors are often US trained, and the costs are comparable to Costa Rica.

In regards to holistic and eastern medical practice, however, I would say that Costa Rica still edges out Panama, but this is a sector that is gaining quite quickly in Panama and I would estimate that within a few years it will surpass Costa Rica in its quality and breadth of service.

From Louis: “Simon, I noticed that the Swiss have halted their deal with U.S. authorities to turn over Americans with secret UBS bank accounts.  What do you think? Is this just a battle or has the whole war ended?”

Unfortunately, neither. It’s just a speed bump in the worldwide campaign to end financial privacy. I want to be very clear about this– you cannot rely on privacy with any financial institution in any jurisdiction, period… and do not expect that piling a complex array of bearer share companies and trustees will make the situation any better. It won’t.

Governments can obtain access to your bank and brokerage accounts, they will find out who the beneficial owners are, and they will absolutely demand their ‘share’ of the income. Rest assured, penalties from noncompliance will be severe.

The reasons for going offshore have nothing to do with hiding money, but rather planting multiple flags– diversifying away from a single jurisdiction. If you are a US citizen with all of your money in the US, you will really wish that you had moved some money to a foreign bank account once they impose capital controls.

If you’re tired of giving your hard-earned money to corrupt bureaucrats, and your goal is to cut down on taxes, there are much, much better ways of doing that without taking the risk of ending up in prison.

Use foreign bank accounts for what they’re best purpose: protecting your capital from regulatory, litigation, and administrative risks. If you want to cut down on your taxes and achieve a lucrative deferral benefit, consider what I have discussed in the past about proper offshore and retirement structuring. I will continue to revisit these topics in the future.

Clayton asks: “Hello Simon, I am a new member. Are there any articles on buying foreclosed property in Panama?”

No, I have not yet specifically addressed foreclosures in Panama.  Like most things in life, to get access to foreclosure deals in Panama you have to know someone, usually a senior bank executive. There are a handful of real estate agents in Panama that tout foreclosed condos, but most of the time the deals have been stepped on and marked up so many times they do not even resemble a bargain.

On that note, one of the troubles about Panama’s real estate market is the lack of integrity and competence among the majority of agents. I’ve been operating down here for about 7 years and have burned through hundreds who have shown me their true colors. That’s why I put together the Panama Black Paper, which provides a short list of agents here that I actually trust.

Next week I plan on organizing a call with one of my trusted Panamanian real estate contacts who will discuss the state of the market, foreclosures, and some of the best deals he is working on.   Initially, I will make the call available exclusively to everyone who purchased a Black Paper, and then to the rest of the community.  Stay tuned for more details about that.

Lastly, Ken asks: “Simon, what are your thoughts on Belize?”

I wouldn’t go there. It’s pretty, but so are hundreds of other locations. Belize lacks the freedom that I’m looking for, and one needn’t look any further than their recent ‘amendment #6′ to the Belize Firearms Act.

This recent change to the law is about as draconian as it gets, threatening imprisonment without bail or trial for three months (and up to 5-years) just for being caught in the vicinity of an unregistered handgun. I won’t set foot in the country as long as this law is on the books.

That’s it for today, and I hope you have a great weekend.

Blair is in her early 40s from Southern California.  She’s intelligent, fairly aggressive, and an experienced financial executive at a mid-sized manufacturing company. In total, she has about $250,000 in savings, some of which she used to buy property in Panama.

She is single with no children and has been traveling to Panama to plant flags since 2006. She plans on (semi) retiring there in another 5-years and has unfortunately learned a lot of hard and costly lessons.

At the height of the global property boom, Blair bought a unit in an ocean-view condominium tower in the San Francisco barrio of Panama City. I like San Francisco– it is well located and presents a nice mix of local Panamanians and foreign expats.

At the time, however, San Francisco was put under a building moratorium because the neighborhood was severely overcapacity with its infrastructure.  Waste treatment facilities were overburdened to the point that raw sewage was washing away construction sites, water utilities couldn’t get pressure to higher floors.

Of course, Blair’s real estate agent didn’t mention any of this to her. He cheered her on to make the purchase, encouraging her wise decision-making and investment acumen at every step along the way.  He looked good, sounded good, and had even lived in Miami for a while… sounds like a trustworthy fellow worth his salt, right?

Wrong. Blair was terribly misinformed. Aside from the sewage and the lack of water pressure, even her beloved ocean view was gone before the building was even complete– another building was erected between her bedroom window and the sea, built by (you guessed it) the exact same developers.

Like many gringos, Blair found her real estate agent on Google and was initially impressed by his English skills and claims of knowing important people in the country. She admits to being taken as a fool and quite literally is paying the price for it.

(It is exactly for this reason that I put together my Panama Black Paper, released in September and December, which names names of people in Panama to do business with, and people to avoid like the plague.)

Because Blair has such a long-term view, though, she has taken everything in stride.  She feels that, by the time she semi-retires in five years, she will be able to recoup what she invested in the condo.  Meanwhile, as Panama City’s infrastructure improves, she has been able to generate positive rental cashflow on the unit.

She has since wised up to the city life, and these days she is actively searching for a new property outside of Panama City where it is cleaner, quieter, but still accessible.

By the time she is ready to move there, she expects several new multinationals to have relocated to the nearby Panama Pacifica commercial park located just outside of the city.  This commercial park, she believes, will present a lot of opportunity to entrepreneurial-minded people who can provide essential business services.

Because she expects to be generating business income in Panama, she plans on registering a Belize company to conduct the business, thus planting her business flag outside her country of (future) residence.

She told me that she already made this mistake once– two years ago she searched for “Panama companies” on the internet and purchased a corporation from one of the service providers who popped up.

As it turns out, a Panamanian corporation was the exact opposite of what she needed, and the Panamanian lawyer she spoke with had no earthly idea what her US tax implications would be as a result.

Blair has since straightened out her tax situation once she finally found a competent US tax attorney who had expert knowledge of international business structures and was willing to help her out without breaking the bank.

Aside from planting a residency and business flag, Blair has moved some money to a European bank; she feels comfortable in Austria because she does not live there or do business there, so the government has little cause to milk her.

Lastly, she is planning on eventually acquiring second citizenship, possibly through a South American program that I will be discussing next month.

Her ideal vision for the future will be living outside of Panama City as a citizen of a South American country, with her business based in Belize, generating revenue in Panama from multinational firms, and banking her capital in Austria.

Because her foreign business will neither be engaged in US trade nor generating US-source income, her company will not be subject to US corporate income tax. Additionally, as an expatriate, she will be able to pay herself a salary of roughly $90,000/year tax free.

I think one of the key lessons here is that planting multiple flags is not always a do-it-yourself process. As Blair’s story demonstrates, there are potential landmines along the way, though expert advice is available to ensure a smooth journey.

Knowing how critical this expert advice is, in the last few months we provided you with key contacts in the Panama Black Paper, and introduced you to a top international tax attorney.  Next month, we will be discussing South American residency and citizenship programs, so stay tuned for that.

January 27, 2010
El Valle, Panama

For a future expat, there are three places worth seriously considering in Central America– Panama, Nicaragua, and Costa Rica.  Much is written about Panama, and rightfully so; the country is the most stable, economically liberal, and business oriented.

Not to be completely ignored, though, Costa Rica has its own merits that are certainly worth an honorable mention.

First, to understand Costa Rica, you need to get a feel for the country’s life cycle.  The original North American expatriate movement started with Mexico right around the time of US prohibition.  Everything fun in the United States became illegal practically overnight, and Mexican border towns became a rally point for the disillusioned.

Mexico’s expat domination lasted for several decades until finally, around the 1980s, people became dissatisfied with the large number of foreigners living in Mexico, as well as the rising cost of living.  They sought greener pastures further south.

Costa Rica became the obvious choice– Panama was a complete disaster between Torrijos and Noriega, Nicaragua was embroiled in civil war, and Honduras was quietly exterminating its socialists.

Initially there were only a handful of expats living in Costa Rica, but eventually the word got out that living in Costa Rica was cheap, beautiful, and spiritual… it was like the India of the western hemisphere, cheap drugs and all.

For the next two decades, the steady inflow of North American tourists created steady demand, and new developments sprouted up all over the country. In time, the ‘cheap’ cost of living in Costa Rica had risen sharply, rivaling that of Mexico.

That’s when the expatriate market turned its sights on Panama in the early 2000s– the Canal had been turned over to the Panamanians without disaster, and the country had managed to build a stable government and society in the 15-years post-Noriega. At the time, Panama was much, much cheaper than Costa Rica as well.

Today, I find the costs of living in both countries to be comparable, as well as the real estate prices. But I find that, putting the two countries head-to-head, Costa Rica has the following advantages:

1) Costa Rica has no military. Technically Panama has no military either, but with so many national police (green uniforms), tourist police (tan uniforms), and Presidential guard (black uniforms) running around the country with automatic weapons, they might as well be an army, albeit a poorly trained, dysfunctional one.

I doubt that the Panamanian police forces have the capability or iron will to go house-to-house against the locals, but Costa Rica lacks the manpower resources altogether.

2) Environmental sustainability is much more prevalent in Costa Rica– and I’m not necessarily just talking about tree hugging… Costa Rica is simply cleaner, especially compared to Panama City.

Panama City’s boom has come so quickly that the city has experienced significant growing pains– notably with its infrastructure challenges. You see a lot of garbage, sewage, etc. piled up where the city hasn’t figured out how to deal with its problems.

To be fair, it’s not the same outside of Panama City, but head-to-head, I would still say that Costa Rica is cleaner and more pristine.

So what are Costa Rica’s chief flaws compared to Panama?

1) Currency– Panama is dollarized, but Costa Rica has its own currency (the colon); you might think this is a good thing, but the colon is so small and thinly traded that it essentially follows the dollar, without necessarily getting any of the benefits of being the world’s reserve currency.

The bottom line is that the Costa Rican colon (CRC) is essentially the worst of both worlds, and in a currency crisis, the country will likely be hit hard between the eyes.

2) Costa Rica’s main city, San Jose, is small, ugly, and devoid of anything interesting to do. Panama City, on the other hand, is vibrant, exciting, and open for business. This is central to Costa Rica’s personality– it is designed for one thing: eco-tourism. Panama, conversely, is multifaceted with both business and tourism opportunities abundant.

As a consequence of this, Costa Rica is overrun with tourists, week-in, week-out, doing the same zip-line, bird-watching snorkel tour over and over again. Plus, there is a noticeable lack of available products and services in Costa Rica when compared to Panama.

3) Costa Rica is far more bureaucratic. In Panama, obtaining a residency visa, importing household goods, and buying property is a much easier process than in Costa Rica, which usually has much stiffer fees and taxes associated with everything that you do. Just getting the cable turned on in San Jose can be a nightmare.

Based on my experience between the two countries, and given the relative cost comparison, I would definitely recommend Panama over Costa Rica unless your sole priority is environmental purity… in which case you should go to the Maldives.

January 26, 2010

Panama City, Panama

I’ve been on the ground in Panama for a week, and thus far, the majority of my time has been spent investigating the sustainable community concept that I wrote about several weeks ago.

To refresh your memory, the idea is to develop a small, cost-effective, subscribers-only expatriate community in Panama that focuses on sustainability over luxury. Frankly, other developers laugh when I discuss the concept and think I’m crazy for planning on crop fields instead of a golf course… as if breaking from the norm is somehow akin to predicting the apocalypse.

To be clear, I am not preparing for some “2012″, end-of-the-earth scenario. I do believe, however, that it makes good sense to invest in property with agricultural yield that can double as an escape hatch if the world experiences deep, short-term economic calamity.

Overall, I think Panama makes sense as a location for this community for several reasons:

1) Residency is very easy to obtain here, and an investment in this sort of development would likely qualify.
2) “Freedom” is not a lost concept in Panama; most people are left alone to live their life free of interference from the government. As discussed last week, firearm ownership is not a problem.

3) The weather is warm and predictable, and there are few natural disasters to speak of.

4) It is close to North America with multiple airline routes (including 2 to Europe) for easy accessibility.

The initial concept that I am considering is a community with a small residential section, roughly 50-70 home sites of about 1,000 square meters (1/4 acre) each. The preponderance of the property would be set aside for crop production, vegetable patches, fruit trees, and livestock cultivation.

I also believe that water self-sufficiency is of critical importance; a sustainable community needs to be able to feed itself and provide its own water without relying on the local utility. As such, the land should have plentiful, clean groundwater supplies.

Naturally, a self-sufficient community should also have at least a back-up source of electricity that does not rely on the local utility. It may be feasible for the power company to provide a primary source of power, but in the event that the grid becomes too expensive, overburdened, rationed, or controlled by the government, the community will have its own source of power to rely on.

Location, as always, is crucial. I envision the community being near enough to Panama City that its residents have access to commerce, entertainment, and transportation infrastructure… but far enough way that the community is peaceful and secluded.

Security is also an issue to consider for a self-sufficient community.  In my opinion, this goes far beyond a remote controlled entrance gate, though I’m honestly still thinking through what this might look like, so there will definitely be more to follow.

Remember, the central idea of the community is to bring together like-minded people who want to maximize their freedom and minimize reliance on the grid for staples like food, water, power, and security.  Consequently, I would really appreciate your feedback. If you find yourself legitimately interested in this concept, please fill out a short survey so I can better refine the design.

January 19, 2010
Mexico City (DF), Mexico

For such a pale skinned gringo, his Spanish was impeccable. We were both sitting in the business class lounge at the airport, and the fluidity with which he was prattling away in Spanish on his mobile phone caught my attention.

Ordinarily, given his very light complexion and European fashion sense, I would have guessed that he was Argentine; his accent, however, was devoid of the traditional telltale Argentine indicators– the “sh” and “zh” sounds, use of the ‘vos’ for the second person, etc.

I was a bit puzzled and had plenty of time to kill thanks to an incomprehensible flight delay, so when he finished his conversation, I asked him (in Spanish) where he was from.

“I’m originally from Britain, ‘mate.” He must have noticed my surprise at hearing the Queen’s English, so he followed that up with “but I’ve been living in Caracas for over 20-years.”

Needless to say, this sparked a lengthy conversation between us about the politics of Hugo, the real situation on the ground in Venezuela, and what he’s doing to protect himself. I’ll call him Baldwin.

First, a bit of background is required– it’s important to know where a person is coming from to get a better understanding of his decisions.

In Baldwin’s case, he is an engineer by training and had originally come to Venezuela in the late 80s to help design and build a new manufacturing facility for a large European company. He spent a few years on the ground, and when an opportunity came up to start his own firm, he jumped all over it.

For the past two decades, Baldwin has built up a Latin America focused construction and design firm that specializes in working with western firms who have unique design challenges– clean manufacturing rooms, hazardous material, etc.

His business, based in Caracas, has been successful. He still lives in the city with his beautiful Venezuelan wife, and they have several children and grandchildren.

The family, he quipped, is his anchor… his reason for staying in Caracas despite Hugo Chavez’s daily plundering.

By Baldwin’s description, Chavez seems bent on turning Venezuela into Cuba– absolutely everything larger than a bicycle and more profitable than a lemonade stand owned or controlled by the government.

Before Chavez, Baldwin described Caracas as near paradise, even despite the occasional political uprising or economic instability.

“In the early 90s,” he said, “the instability was at least predictable… you could plan for it. Today, nobody knows what this guy [Chavez] is going to do next… least of all him. A few years ago I became afraid for my business.”

So what does a successful British-born entrepreneur living in rapidly decline socialist empire do?

The first thing he did the second that Chavez came to power was move his money out of the country… and it was a great move, because a short time later the government imposed severe exchange controls.

Today, Baldwin maintains a small emergency cash hoard of dollars and gold coins, plus enough money in the local banks to pay the bills each month.

Because he is an expatriate Brit and doesn’t need to worry about paying taxes to the Queen, he planted a few banking flags in Switzerland and Chile, and generally denominates his accounts in US dollars.

Yes, he realizes that the dollar has been on a terrible slide, but it’s the hard currency of choice in Venezuela.

In the early 2000s, after the failed CIA-instigated coup against Chavez, Baldwin began aggressively expanding his business and opened a satellite office in Chile. This office serves as his business’s escape hatch, so that if the worst should occur in Caracas, he will seamlessly be able to move to Chile.

Structurally, his business is registered in Venezuela… this is less than ideal for him– he would prefer to have a Panamanian company conducting business in Venezuela, but Chavez makes it very difficult for foreign companies to do business there without a local enterprise.

Personally, he maintains his postal and email addresses in Switzerland. For any physical mail, the company will scan and email, or forward upon request, every item that he receives.

He and his wife also own a personal escape hatch on the Spanish coast where they intend to go, and bring the family, if things become much worse in Caracas.

“What’s your breaking point?” I said, “What would make you hit the eject button?”

Without hesitation he replied, “With a physical invasion of my home by the government, we’d be on the next flight. I know, we should probably leave before that even happens, but like I said, my extended family is my anchor… so I’m putting up with it all for now.”

Baldwin was certainly an interesting person, and I think his example illustrates two important points– timing is critical, as is preparedness.

He moved his money out of the country at the first sign of trouble, and thus he was able to safeguard his wealth. And with escape hatches for both his business and family, he is secure knowing that his life and livelihood are not under the control of a socialist dictator.

If I have been too subtle in the past, let me be absolutely clear this afternoon: the time to do something, the time to take action to safeguard your future and your families livelihood, is NOW.

I’m more impassioned than usual this morning… and with reason.  Reluctantly, I tuned in to Team Obama’s press briefing last night about the ongoing saga of the Nigerian underwear bomber.  Obama’s is clearly trying to cultivate a fear of al-qaeda while simultaneously building blind trust in his government.

After the President’s remarks, his Homeland Security Secretary and Deputy National Security Advisor took the stage to unveil a series of proposals to ‘improve security.’

I’ll spare you the details as you have probably already heard them, but the bottom line is simply more government– a bureaucrat’s ultimate and only solution. This means more TSA, more air marshals, more undercover agents, more gun-toting soldiers, more pat-downs, more scanners, more searches, more scrutiny, more suspicion, etc.

How do you spell police state?

I’m ordinarily laid back about this sort of thing. I can afford to be since I’m a safe distance from all of that stupidity… but in this case I looked down to find that my knuckles were turning white, clenched around my glass of 2005 priorato.

I set my wine down and remarked to my friends who were watching with me, “What is it going to take for people to wake up and get the hell out of town? Do they need legions of storm troopers marching down the street before they realize it’s time to go??”

I was positively exacerbated.  The US is turning into a police state, and I’m not even saying this specifically to Americans living there. Many countries around the world are following close order behind Uncle Sam.

Once again, the time to act is now.  So what should you do?

First, make sure you have access to funds outside of your home country. This is one of the most important flags that you can plant.  You should open a foreign bank account (like I discussed in the Panama Black Paper), and/or consider storing precious metals in a private storage facility overseas.

Later this quarter, I plan on releasing a new Black Paper that contains actionable information to open an account at safe foreign banks that still take US customers.  You haven’t heard of most of them, and would probably never hear about them because it’s actually illegal for foreign bank to advertise in the United States in most cases.

Stay tuned for that.

Second, you should really be thinking hard about foreign property. Why? Because it can be a great investment; it’s an easy, non-reportable way to move money overseas; and it can be your escape hatch when you’re finally ready to hit the eject button.

Remember, I’m not talking about a 50 million euro villa in Monaco; you can pick up cheap land in Latin America for less than $50 per acre, and I’m pretty sure that everyone reading this letter has at least 50 bucks to spare.

Also, as I’ve discussed in the past, you can buy foreign property using your tax-deferred retirement savings, and I plan on revisiting this topic in short order because it is an absolute no-brainer.

Additionally, if there’s interest, I may also explore the idea of building a small, cost-effective, subscribers-only development.  It would likely be on the outskirts of Panama City and include self-sustaining fresh water and agricultural resources. Since this article was posted me and my business partners have signed a deal for a large property in Chile, complete with a running farm operation.

Third, if you have the means, you should really consider obtaining second (or third, fourth, etc.) citizenship. Second citizenship can be the ultimate emergency exit if things get really bad, and it effectively serves as the most comprehensive insurance policy you could even have.

I have a lot of contacts in this field, and my colleagues and I are currently experimenting with a few options that I plan on bringing to you soon.  I won’t bring you a passport program unless one of us has gone through the process ourselves, so give me some time while we play guinea pig.

Fourth, give serious consideration to your finances; unless you are already independently wealthy or have sustainable income streams, think about what you would do to earn money if you lost your job today.

Think about what skills you have– what problems can you solve that other people are willing to pay you for? What opportunities to you see around you that can be quickly and profitably exploited?

I guarantee you that there is opportunity everywhere around you. For example, a friend of mine is an intelligent, 22-year old girl who lives in Minsk, Belarus– the last bastion of the Iron Curtain.  While Belarus is not the totalitarian state it once was under the Soviet Empire, it’s pretty close.

And yet, despite living under a tyrannical yolk, my friend has become quite a successful entrepreneur, launching a successful brick-and-mortar company and several profitable web sites just within the last few months.

I raise this simply to point out that if an inexperienced but intelligent and energetic young girl can find opportunity in a place like Belarus, then I would wager that there is a plethora of opportunity out there in places like Panama, Abu Dhabi, Chile, China, Angola, Thailand, Bulgaria, and even the US/Europe.

In fact, I know this to be true because I see so much of this opportunity when I travel.

So those are the top four things I would recommend you do in making your own personal preparations. I clearly have a lot of work to do between the real estate, the citizenship programs, and the banking Black Paper… but after seeing the writing on the wall so plainly last night, I will be refocusing my efforts to get these moving quickly for you.

In the meantime, let me know your thoughts– I’m frankly curious to know what you would like to see in a real estate development, and at what, if anything, it would take for you to hit the eject button.

January 6, 2010

Reporting from: Estepona, Spain

I’m sitting now in lovely Estepona, Spain– a coastal town on the Mediterranean that experienced a massive property boom over the last decade.

The community I’m in is anchored by a five-star Ritz Carlton golf resort, and surrounded on all sides by the mountains or the ocean.  Ancient military tacticians marveled at the defensibility of such a position and likely did not envision it being turned into a holiday hot-spot.

As the coastal region here is generally dry, warm, and nestled in the mountains, it’s ideally suited for me. I prefer clean places that are reasonably priced with great weather, access to major transportation, vibrant culture, and yes, a single’s scene.  Coastal Spain is all of these… but to buy now I would be overpaying. Here’s why:

When the credit bubble got underway earlier in this century, coastal Spain was overrun with foreign property buyers, and their easy credit inflated home prices.   Like other parts of the world, property values in Spain are now upside down in equity– the home is worth less than the mortgage balance.

This is bad news for banks, bad news for owners, but great news for cash buyers… as long as there is legitimate value.

Appraisers generally use three ways to value a property.

The first is the ‘replacement cost’ method, in which the appraiser estimates what it would cost to construct the unit from scratch.  Between 2003-2006, the industry was booming… most contractors were booked solid, and demand for materials and labor pushed up construction costs.

Today is a different story altogether; most contractors haven’t seen a payday in months, and material prices have plummeted alongside housing demand. You could now build one of these spacious 2-bedroom villas for around 100,000 euros, not including the land cost.

The second method is the market approach, in which a property is appraised at a similar price point to where comparable properties are selling. If a 2-bedroom villa with an ocean view recently closed at 400,000 euro, then your 2-bedroom villa with ocean view can likely sell for around the same… in theory.

The problem with the market valuation is that it is highly susceptible to the irrational exuberance of the market’s participants.  Remember, at the end of the day, markets are simply comprised of emotionally charged individuals… they experience fear, euphoria, anxiety, and impatience, and these emotions skew market valuations.

Throughout history, markets have historically proven that they are terrible indicators of value: loss-making tech stocks traded at infinite valuations, small shacks in California sold for millions of dollars, and debt-free mining companies were valued at less than the cash they had in the bank.

None of these passed the common sense test.

Furthermore, here in Spain, the property market has essentially dried up.  Most of the owners have adopted a ‘wait and see’ approach, foolishly believing that if they wait around long enough, price will eventually return to their highs.

This idea is totally absurd. Japanese equity investors are still waiting for the Nikkei to return to its 1989 high of 39,000. Today the Nikkei is still shy of 11,000… so I guess those investors will just have to keep waiting.

Home prices here in Spain won’t start appreciating until the prices are cheap enough to entice buyers.  There is no magical timeframe that will suddenly turn around home prices; if sellers refuse to sell, and buyers refuse to buy, then the market can theoretically remain in a stalemate forever… which leads me to…

The third valuation approach is the income method. For an investor, this is the only thing that counts: What is the investment return I can achieve with this property, and is that investment return adequate for the level of risk that I am taking?

As an example, when I was in Southern Italy over the holiday, I went scrounging around my local family’s neighborhood looking at property.  I found that the going rate for a modest 2-bedroom home was 220,000 euros.

Then I found out that the same home can be rented for about 450 euro per month.

Some quick, back-of-the-envelope math suggests that, after deducting reasonable amounts for vacancy, maintenance, insurance, and utilities (Berlusconi eliminated property taxes), the net operating income would be around 4,200 euro per year.

If the home is bought with cash, that amounts to a whopping 1.9% yield, roughly the same as a much lower risk Certificate of Deposit.  The risk adjusted return on these properties is clearly unreasonable.

I’m seeing the same thing in Spain right now– villas rent for a pittance, but property owners are stubbornly sitting on their asking price, not budging.

Eventually, external pressures will force sellers to capitulate– most won’t be able to continue making their mortgage payments, and others will be so desperate to raise cash they will finally slash prices.

When this happens, prices will drop and yields will rise. I think the time to jump in is when yields comfortably reach double digits and outpace less risky asset classes by a wide margin.

Buying foreign property makes a lot of sense; maybe Spain is for you, maybe it’s not… but you should strongly consider planting an overseas flag, and I recommend using this valuation method to determine your entry point.

If he keeps this up, they might start calling it Panama, Inc.

Panamanian President Ricardo Martinelli has been in office less than 6-months, yet to the extent that it is politically possible, he seems bent on running Panama with the same vision as when he ran the chain of supermarkets that made him one of the country’s wealthiest men.

Step 1– eliminate corruption in the government. All side deals and back room handshakes that were entered into under previous administrations are now off the table.  Martinelli has been leading from the front, personally strong-arming several businessmen who had been paying off bureaucrats for years.

His efforts seem to be working. In the past, anyone in the government beyond the level of basic peon used to be Old Faithful when it came time to accept ‘expedite fees.’ Not anymore. People are actually focused on doing their jobs and playing by the rules.

Martinelli is also keen on business and tax reforms.  He proposed a flat tax during the campaign and will likely push for relaxing Panama’s strict labor code to make it easier for entrepreneurs to hire and fire employees.

He is also taking advantage of historically low interest rates to make some much needed investments in the country’s infrastructure; as a business owner, he would do the same thing– capitalize on cheap money to invest in positive NPV projects that will generate a return for shareholders.

As such, the Panamanian government recently issued $1 billion in 10-year notes, yielding 5.224%.  This is about 1.8% higher than the US 10-year yield. The issuance coincided with S&P’s very enthusiastic upgrade of Panama’s credit rating, which is now one level below investment-grade.

$1 billion is a lot of money in Panama, roughly 6% of GDP. It would be like the United States issuing $1 trillion in debt, all at one time… it’s an enormous amount of money, but Panama’s dollarized economy can handle the inflows.

With so many capital-intensive public projects like highway construction, the Canal expansion, airport renovations, etc., the money will likely be spent quickly. But considering the direction that Panama is headed, Martinelli will likely come away looking very smart for making these investments with a cost of capital at only 5.224%.

At the moment, he has popular support as well.  His approval ratings are just about the highest in the western hemisphere at over 90%, compared with Barrack Obama’s 53%, Hugo Chavez at 46%, and Argentina’s Cristina Kirchner at a laughable 20%.

So what does all of this mean for banking and real estate?

Panama still has banking secrecy and will likely be, along with Hong Kong, the last holdouts that will buckle to the OECD’s offshore witch hunt. But that’s not necessarily the reason you want to consider Panama for international banking.

Panama’s banking system is very mature and offers a variety of unique products and services– online wire transfers to anywhere in the world, debit/credit cards, and personal attention from a private banker. Furthermore, it is actually possible to obtain a loan in Panama, which is next to impossible in many other jurisdictions.

Most importantly, though, Panamanian banks are well capitalized; they largely dodged the meltdown that wrecked havoc in North America and Europe, and their balance sheets remain strong.

Regarding real estate, I have been very vocal about my thoughts on Panama’s future; it is not without its problems, but given the maturing economic growth engines and massive infrastructure development that is underway, the country is clearly on an upward trajectory.

Martinelli’s actions are keeping Panama on the right track, and I believe the country will remain a safe long-term bet for investors and residents, as long as you don’t end up with the wrong people.

Like any boomtown, Panama has attracted its share of shady characters. You see the same types of folks in Dubai, New York, and even here in Bangkok.

The problem is that many gringos rely solely on Google for their ‘due diligence’; they do a search for “Panama Property” and the first presentable looking, English speaking bloke who pops up becomes ‘their guy’.

This sort of thing is truly dangerous, yet it happens all the time. I personally have burned through dozens of bankers, lawyers, and real estate agents in Panama who didn’t measure up, either lacking competence, character, or both.

The fact is, some Panamanians have made a science out of taking advantage of gringos coming down to Panama.   These guys look good, sound good, but absolutely cannot be trusted.

Over time, I assembled a list of the most intelligent, honest people that I have worked with in the country, as well as a list of people who should be avoided like the plague. The whole thing was packaged together in what I called the “Panama Black Paper.”

Initially, I released only 25 copies because I did not want to inundate my trusted contacts.  I know that many subscribers were not able to get in on the first release, so after clearing it with many of my contacts, I’ve decided to release another 25 copies of the Panama Black Paper.

I plan on doing this on Tuesday, December 1st at a cost of $297.  I fully expect all 25 to sell very quickly again, so if you’re interested in getting access to my personal Panama rolodex, I suggest you fill out the following Pre-Notification Form.

By signing up for the early notification, I’ll email you a special purchase link at least two hours before The Panama Black Paper officially launches. 12/1/2009 update: We received a lot of feedback from subscribers around the world in ‘inconvenient’ time zones that would be unavailable for the pre-notification launch… I understand this more than most people– 12pm on the east coast is the middle of the night in Sydney. Consequently, we are sending out a public notification on December 1st will keep it open for 24-hours.

First of all, thanks to all the well-wishers (especially Dusty) after my accident… your concern is much appreciated, and I’m feeling a lot better.

Today I want to talk about real estate in Thailand, and particularly here in Pattaya.  I’ve spent the last few days scouting property, and talking to agents, developers, and buyers.  Overall, some aspects of the market are reasonably attractive in the long-term, but I need to give you a bit of background first.

In general, I dislike countries that place restrictions on foreign ownership… buying property in Panama, for example, is great. Foreign ownership is allowed and protected to the same extent as a local Panamanian’s. Plus, buying property can often lead to residency.

Thailand is completely different.  Foreign ownership is limited by law, and this is a big negative to me. For people that are interested in moving here, though, the private sector has found a few ways around these restrictions.

First, a foreigner can establish a Thai company and buy property through that company. S/he would be the largest individual shareholder, but have to give up at least 51% of the company in order for the transaction to be legitimate. Usually a team of attorneys would be the remaining shareholders.

In this case, a buyer would clearly need to have a high degree of trust in the attorneys who are the legitimate controlling shareholders of the company and property.

Second, a foreigner can buy a property for a domestic company or individual, then lease it back from them.  The lease term is capped at 30-years, then renewable for another 30-years. This is known as the “2×30″ scheme.

For example, you pay $100,000 for a property, and then deed the property to a local Thai.  You would then ‘rent’ the property for a nominal fee for 30-years, renewable for another 30-years.  At the end of 60-years, unless they change the law, you/your heirs will lose access to the property.

In this case, you need to have an iron-clad rental agreement that ensures you cannot be evicted from your own property over the two 30-year periods, plus provisions for your estate.

Frankly, I find both of these options to be rather risky and unappealing.  There is an attractive loophole for condominium projects, though, which stipulates that up to 40% (or 49% in some cases) of the project can be owned directly by foreigners.

For this reason, you frequently see condo listings advertise “Foreign Owned,” which means that buying the property will have no effect on the building’s foreign ownership quota.

Mid-range condo prices in Pattaya average between $900 and $1,500 per square meter, while high-end condo projects can cost upwards of $2,500 per square meter.

At the moment, though, there is excess inventory on the market.  Developers started too many projects in the last 24-months, and the volume of buyers has decreased dramatically from the peak.

It’s the same story around the world, and Thailand’s foreign ownership restrictions make things even worse. 

To boost sales, developers have started offering financing in this traditionally ‘cash-only’ market. Financing incentives consist of a 10% to 20% down payment, followed by fixed payments for 5 to 10-years.

Other developers have come up with other gimmicks, like giving away free Toyota SUV to buyers, or even a Thai wife.  As you can imagine, these are generally signs of a real estate market that is wallowing near the bottom. 

My assessment is that developer financing will probably kick start an increase in sales.  Given the erosion of wealth that has occurred around the world, many people simply do not have $100,000 for a condominium in Thailand… many more, however, have $20,000 for a down payment and $600/month to pay the note.

This includes North American and European retirees, as well as another key market in Pattaya– Russians.

Pattaya is crawling with Russians, and their influence is omnipresent– there are signs and billboards everywhere written in Russian Cyrillic, and Thai musicians have even learned Russian songs that they play on the streets and in the local bars.

Many real estate agencies cater specifically to Russian customers, and at a fraction of the price of Dubrovnik, Pattaya is an attractive location for them.

One final note about property in Thailand– unlike many other countries, a large purchase in Thailand does not guarantee residency. Many people who have lived here for years still have to do a periodic ‘visa run’ to neighboring Laos or Cambodia to reset their visas for another 30 to 90 days.

You should strongly consider this if you are thinking about moving to Thailand; there’s no place in the world quite like it, but you really have to want to be here to go through the hassle and bureaucracy of the visa.

For the right person, Thailand is paradise. You can test it out on the cheap– a nice, clean property rental is about $500/month.

For other people, there may be much better locations where property purchase and residency go hand-in-hand, like Malaysia’s “My Second Home” program. More on that in a future letter.

I need to start off today’s missive with an important update. Last month I wrote a few articles about something that I believe is an absolute no-brainer if you have retirement savings– setting up a self-directed IRA.

Most retirement savings plans are locked in to a handful of investment options– employees are forced to make a selection among four or five choices, most of which are poorly managed funds run by the same institutions that clearly demonstrated their incompetence last autumn.

A self-directed IRA provides a mechanism for an individual to allocate his retirement savings in whatever way he chooses– whether his own portfolio of equities, physical gold, foreign real estate, overseas bank accounts, private placements, etc.

With a self-directed IRA you can take control of your retirement savings to ensure that some bumbling moron at a bankrupt financial institution doesn’t lose it all investing in Fannie Mae. More importantly, you can ship your savings offshore in a perfectly transparent, legitimate way.

I believe in this approach so much that I went through the trouble of negotiating a subscriber discount with Checkbook IRA, the same service providers that set me up with my self-directed IRA structure a few years ago. These guys are an honest, efficient, highly competent family operation, and I was grateful that they extended a $500 discount to subscribers.

I am writing about this again today for two reasons. First, I’ve exchanged a few emails with Jordan Sheppard at Checkbook IRA, and due to the amount of volume they are receiving and limited capacity within the shop, the discount will be discontinued effective next Friday, October 16th.

Second, and perhaps more importantly, I’m concerned about the direction that the market is going to take. There are a lot of people whose retirement savings are literally trapped in some blue chip index fund.

These are the same people who probably had a bad feeling last August that things were about to get really bad. They watched with horror as their positions took a 70% nosedive.

Fortunately, the last six months has been a period of irrational exuberance, and markets have recovered 50% from their lows. As markets tend to be forward-looking, though, can we realistically say that near-term prospects for the US economy are rosy?

Not by a long-shot. The Dow hovering near 10,000 makes about as much sense as lipstick on a pig.

Top line corporate revenue growth is weak at best, and there are numerous long-term factors which hamper earnings growth, namely: baby boomer retirees pulling their capital out of the market; costly health care regulation; increased corporate taxes; capital flows to emerging markets; etc.

Each of these factors has a negative bearing on long-term equity valuations. It is difficult to predict what will happen over the next few months, but given the carnage that we all experienced last year, it is probably more sensible to make low risk investments that mirror our economic outlooks.

To me, this means companies that are trading a steep discount to net asset value, precious metals and certain commodities, Asian currencies, foreign real estate, and carefully selected private placements.

This is why it is so important to unlock your retirement savings– with a self-directed IRA, your money will be protected from idiotic fund managers if the market takes another leg down.

If you currently have a retirement account that boxes you in to limited investment options, or keeps all of your savings within the United States, I’d highly encourage you to find someone that can set you up with a self-directed structure.

I’m comfortable recommending Checkbook IRA since I have worked with them in the past, and they understand unique needs like using a retirement account to buy physical gold and store it overseas.

If you give them a call, make sure you mention the Sovereign Man discount, which is good until October 16th.

I’ve received a few questions recently about a piece of legislation recently passed in Panama known as Resolution 52.

A bit of background– the construction boom and ensuing real estate bubble for Panama City condominiums lasted from 2003 until approximately 2007.  Tens of thousands of units were designed and sold off-plan to speculators, usually months before the developers broke ground.

Speculators were buying up pre-construction units so quickly that developers were encouraged to design and sell more condo towers– and to keep raising prices. In the 4-year boom, sales prices for Panama City condos more than tripled from $800 per square meter to over $2,500 per square meter.

The first of these condo towers were completed and delivered prior to the start of the global slowdown, so early speculators were able to ‘flip’ their units to end-user buyers and make a tidy profit.  Today is a different story.

The global economic slowdown has impacted Panama City’s condominium market in the same way as other real estate markets around the world– tighter demand coupled with reduced credit availability has created downward price pressure.  In addition to reduced demand, however, there has also been an increase in the supply of condominiums as more towers are completed.

Consequently, most condo speculators whose buildings were delivered in the last twelve months have recently found out that they didn’t have chair once the music stopped– the pool of potential buyers is simply too shallow.

Despite what is happening in the condo market, however, Panama’s economic fundamentals are strong. Unemployment remains relatively low, and a spate of capital-intensive projects like the Panama Canal expansion assure bustling economic activity for the next several years.

Additionally, several multinationals are relocating regional headquarters or major operations facilities to Panama.  Thus, in aggregate, the city remains a popular destination for foreign business travelers who are involved with these projects.

Due to swelling tourism statistics and this growing segment of business travelers, hotel occupancy rates in Panama have traditionally been quite high; it was not uncommon in the last few years for hotels to be operating at full capacity for several months at a time.

And so, given this stable market for transient visitors, smart property investors put 2 and 2 together– if there is no longer a market for them to sell their condos, perhaps they can still generate a return by competing with hotels in the short-stay rental market.

The idea is a popular one with travelers– why pay $150/night for a hotel when you can pay $100/night for a 2 bedroom apartment? It makes sense, and the idea took off in Panama.  The local Panama craigslist.org website became packed full of apartment listings, and a few real estate agents started specializing in property management.

Over the last few months, however, a couple of do-good politicians noticed that this market was not being taxed and regulated appropriately… landlords were reaping huge profits, and the government wasn’t getting its fair share.

And so, in a politically typical ‘shoot first, ask questions never’ approach, Panama’s National Assembly recently passed “Resolution 52.”  The intent of the resolution was to ensure that the government has a mechanism to collect taxes on transient rental income, in the same way that they tax hotels…

… except that’s not exactly what was written in the legislation.  What Resolution 52 actually does is make it illegal for anyone to rent his/her property for a period of less than one year.

HUGE DISCONNECT. But again, this is typical of Panama’s National Assembly– a few years ago they did something similar with their visa policy: at the time there were a lot of gringos who were residing in Panama full time on a 90-day tourist visa, without ever applying for residency.

In its efforts to fix what was not actually broken, the government (under then Tourism Minister and salsa extraordinaire Ruben Blades) decided that American tourists would only be granted a non-renewable 30-day tourist visa.

The decision did not have its desired effect– real estate sales and tourism numbers dropped, and within months, the government reversed its policy in favor of the original 90-day visa.

Undoubtedly, the same thing will happen with Resolution 52: the government will reverse its decision.

I’m very bullish on Panama’s future as the capital of Latin America, and there are definitely some undervalued opportunities in the city. My inside contacts there frequently pass me interesting deals, and frankly I wish I had the time to capitalize on more of them.

The bottom line is that if you were considering real estate in Panama, you should not let this ruling affect your decision.

Roughly $100 billion.

Even in today’s world where politicians throw out the word ‘trillion’ as if it were a casual dinner garnish, $100 billion is still a lot of money… especially when you’re desperate to sustain glimmers of economic growth and trying to plug a budget shortfall that amounts to 13% of GDP.

And yet, roughly $100 billion is exactly what got sucked out of the United States in July by foreigners: “Net capital outflows” increased to $97.5 billion for the month of July, according to recent data released by the Treasury department. Meanwhile, net long-term capital inflows fell to a paltry $15.3 billion in July, an 80% decline from June’s $90.2 billion capital inflow.

What do these numbers mean?

Foreigners are continuing to lose confidence in the US economy at a record pace and are finding better places for their money. This would certainly support the US Dollar Index’s dramatic 3.5% decline in July– though the dollar index only tells a partial story. “DXY” as it is known, though, only tells part of the story.

The dollar index measures the value of the dollar only relative to a small basket of currencies– euro, pound, Canadian dollar, Swedish koruna, yen, and Swiss franc. Powerful Asian nations like the Gulf, China, Singapore, etc. are conspicuously missing. And yet, DXY still dropped 3.5% in July.

Conclusion? If these ‘relatively harmless’ countries that comprise the US Dollar Index are losing confidence in the greenback, you can be sure that China and the Middle East are knocking over women and children on their way to the emergency exit.

Telling you that the dollar will be continually worth less until it is ultimately worthless is nothing new. So if you would indulge me a moment, I’d like to prognosticate on the greater implications.

As the pace of these outflows picks up steam, you can be sure that a group of out-of-touch politicians are monitoring the data and thinking to themselves, “we need to regulate this before it gets out of hand!” And this sentiment is exactly what spawns capital controls.

Capital controls by design are intended to regulate the flow of capital in and out of a currency; in times of uncertainty, shaken politicians always pull this oldie-but-goody out of the playbook… it happened in Iceland, and it’s been discussed around the world recently– Russia, India, Brazil, the Baltics, Poland, Czech Republic, Kazakhstan, etc.

Not to mention, a world largely free of capital controls is a relatively new phenomenon. We can look to history for a recent example of a world superpower turning to capital controls for ‘stability’:

In the mid 1970s after the collapse of the Bretton-Woods system, the British economy was in serious trouble. GDP was contracting, unemployment rising, investment falling, and the government was drowning in red ink, all while social obligations were climbing.

Financial markets responded by turning their backs on Britain’s Pound Sterling, and the currency was crushed. The Wall Street Journal advised investors to ditch the British pound, running headlines “Good-bye Great Britain.” And the government came under intense pressure to ‘do something.’

The first thing the UK did was go to the international community with hat in hand to prop up the currency with loans and bonds. This is already happening in the United States as Tim Geithner attempts to woo China and Middle East into buying US Treasuries.

Subsequently, the British government imposed a slate of capital controls that essentially penalized investors for moving capital out of the country and requiring that all investment transactions go through ‘authorized dealers’ who were charged with enforcing this policy.

The penalty ranged from a 10% to 30% premium on the dollar/Pound spot rate at the time– essentially the same tactic that the Cuban government is employing today.

Frankly I can see the same thing happening in the United States, perhaps starting off with a penalty in the Treasury markets where there is the biggest sucking sound… imposing a sort of ‘restocking fee’ for foreign investors who don’t roll over to new issuances upon maturity.

Eventually, though, you can be sure that the government will impose controls at the consumer level as well– requiring a certain allocation of bank deposits to be held in US Treasuries, restricting foreign remittances, and mandating scrutinous approval for overseas wire transfers above a certain amount.

Naturally, US politicians would never call such measures ‘capital controls,’ because the world’s reserve currency must be freely convertible. They will likely wrap up these policies in the ‘anti-terrorism,’ ‘money-laundering,’ or ‘tax evasion’ blankets, and simultaneously wage a PR war against evil gold and currency speculators.

So what can you do? As I’ve mentioned before, buying foreign real estate is the single best way to move money overseas where it cannot be forcibly repatriated. Physical gold stored overseas is an excellent option as well– there are no reporting requirements for either.

I’ve also strongly suggested buying up such assets with tax-deferred retirement savings. In my opinion, there’s no better way to stay within the letter of the law than to buy foreign investment property and physical gold through a self-directed IRA… I am such a strong believer in this tactic that I negotiated a special discount with a trusted service provider who can set this up for you.

As I conclude this missive today, I see that the “world’s leaders” are gathered in Pittsburgh to listen to the sound of their own voices. Nothing will be accomplished, and they will emerge from their summit with nothing but sound-bytes, empty promises, and a continued fervor to exact tighter control over the markets.

Each of us has the ability to either plan for it, or dismiss reality and do nothing.

Right now, your retirement funds are probably locked up and being managed by a handful of bureaucratic monkeys– the same ones who thought the US real estate market would always go up and the Dow would hit 20,000.

But there’s an easy way to take control of your financial destiny– to invest your retirement funds in whatever you like, wherever you like, including foreign real estate.

I’ve long believed that buying property overseas is the single best way to move money out of the country, protecting your capital from a depreciating currency, exchange controls, and government scrutiny. Foreign property is not reportable, and it’s a hell of an insurance policy in case things get really bad.

You probably have the money to buy foreign property sitting right in your retirement account… but you can’t use it because you had to park your funds into one of six paltry mutual funds.

Taking control is critical.  If you have an IRA or a retirement plan and are not taking advantage of this simple self-directed structure, you could be making a huge mistake.

So… given the extreme volume of questions that I have received on the subject, I once again turned to my friend and partner Matt to help find the answers.  Matt, who is a very astute investor and entrepreneur, went straight to the source– Steve Sheppard, the founder of CheckBookIRA, a company that sets up these self-directed IRA structures.

Matt got Steve on the phone to explain a little more about how the program works– the interview could be the most informative 23 minutes you’ll have this year.   You’ll love how Steve’s wife uses her IRA to make 35% a year (tax free)  in the cattle business.   Near the end Steve says some really great things about our subscribers and mentions the discount that we negotiated specifically for our subscribers.

Do yourself a huge favor… Grab a pen and paper, go to a distraction free environment and set aside the next 23 minutes to listen to this interview.

Click here to download the mp3 file:

http://media.libsyn.com/media/withoutborders/Skype_20090901_1807.mp3

I can barely type today… I’m actually one-handing it this morning. Why? Because my other hand is thrust victoriously in the air celebrating the renomination of Comrade Bernanke to his post at the Federal Reserve.

Yes, the man who has overseen the most unprecedented expansion of the central bank’s balance sheet in history is going to get a few more years in the saddle.

As you know, I normally don’t comment too much about what’s going on in the United States.  Frankly I don’t really care. I occasionally follow the insipid perorations of the Obama administration as if watching silverback gorillas mate at a local zoo… neither impacts my life, and both are curiously amusing.

In this case, though, I am forced to pause and consider the greater implications on my investment portfolio and determine if there is (a) any money to be made, or (b) any money to be rescued.  I think both.

Recent budget figures released by the federal government indicate a ‘higher than expected’ deficit over the next several years… just like the ‘higher than expected’ death toll in Iraq, and ‘higher than expected’ unemployment figures. Clearly these monkeys never get anything right (no offense to monkeys).

With trillions of dollars looming in the administration’s budget shortfall, you can be sure that taxes are going to rise. It is an absolute certainty. Obama may somehow be able to keep his promise to not raise income taxes on ‘the middle class,’ but they will make up for it in other ways.

Namely, I am afraid for people’s retirement accounts.

Pensions, 401(k)’s, and IRAs represent an enormous, untapped pot of wealth for the US government. Rules allowing for tax-deferred contributions are on the books, which means that the government won’t be seeing most of this money for several years… until they change the rules.

In my assessment, US politicians are going to hatch a scheme to levy a one-time tax on retirement accounts, or require that a certain percentage be invested in the great ponzi scheme of US treasury securities.  Either way, you can be sure that your on-shore retirement savings will be beaten senselessly.

So how to save your savings? One idea that may be worthy of your consideration is to park retirement funds in overseas property.  Internal Revenue Code allows you to invest IRA assets in property, and there is absolutely no geographic restriction whatsoever, so that bungaow in Belize or mountain cabin in Boquete are on the table.

Like other IRA assets, the property purchase must be for investment purposes, not personal use; this would include both rental income as well as speculation for capital appreciation.

There are a couple of key benefits to this plan.

First, retirement funds would no longer be on shore and subject to political control.  This is critical if you want to maximize your financial freedom and keep your money away from politicians.

Second, in most cases, buying property in a foreign country will diversify retirement funds out of the dollar. This will protect savings as the world moves away from the dollar as the world’s reserve currency.

The fact that Bernanke is going to be at the helm for another several years buying the Treasury’s debt almost assures the dollar’s demise.  Carefully selected overseas property investments can mitigate this financial disaster, at least for retirement savings.

Talk to your tax adviser to see if this makes sense for you, and let me know if you want more information on the topic.

It was a nice enough place… about 1500 square feet, 3 bedrooms, nicely furnished, and even had a sliver of an ocean view. Best of all, it wasn’t in gringo-ville.

“How much rent are they asking?” I posed to the real estate agent who was fawning closely on my heels. He reeked of tobacco and his alligator skin shoes still seemed to breathing.

Pausing for a moment to review his mental inventory, he said “Oh… I think about fifteen hundred… you know, it used to rent for $2,000 per month.”

“Yeah? Well I used to be 25 years old… but I’m not anymore. We’re done here.”

My reply was terse but I have little patience for pie-in-the-sky valuations. $1500 / month for a class 2 neighborhood in Panama is not good value compared to just about everywhere else on the planet.

I have been coming here for about 7 years and remember the days of $50,000 condos that rented for $350/month. It wasn’t that long ago.

As I wrote on Tuesday, I am intensely bullish on the future of Panama as Latin America’s de facto capital city. But in the most recent 2004-2006 boom, real estate prices appreciated far too quickly… and while the rest of the world has given back most of those gains, prices have not capitulated in Panama, at least publicly.

Here’s the situation–

A few years ago, waves of gringos were signing contracts for off-plan condominium projects, and just about everyone bought several units at a time.

Financed with a seemingly endless supply of Colombian and Venezuelan money sitting in the banks, Panamanian developers built tower after tower, and contract prices were bid up to dizzying heights.

As the first waves of condo towers were nearing completion, though, the market was already starting to fall. Simply, there were not enough end users wanting to purchase a finished condo in Panama to fill all the available supply.

A couple of things happened as a result:

1) Once the buildings’ occupancy permits were issued, condo developers started demanding final payment. Many of the original contract buyers couldn’t come up with the money to close and had to walk away from their down payments.

2) Those who could come up with the money to close took possession of the unit and immediately put it up for sale or rent, flooding the market with excess inventory.

As there is no centralized multiple listing service in Panama, there are no statistics to tell if inventory is actually selling, and at what price. If you ask a real estate agent, most of them will tell you that everything is great and business is booming.

This is utter nonsense.

The reality is that, in most cases, Panama is a buyer’s market. Sellers and agents, however, have not yet capitulated on advertised asking prices in the way that we have seen in other markets around the world– Punta del Este, London, Auckland.

They think there is always going to be some stupid gringo who is willing to pay full price, or thinks he is getting a good deal by negotiating a 10% discount.

This is why I am constantly probing the market, looking at properties like the one above and making lowball offers to see how far off the asking price a seller/owner is willing to come.

The buildings are now finished, but mostly empty...

Patience is the name of the game. I usually put my offer on the table and say “call me when you’re interested.” They always call. It’s simply a matter of when. Sometimes it takes them a few weeks to realize that no one else is knocking, but they eventually realize it.

My results indicate that a 33% haircut off the top is achievable if you’re willing to wait.

I’ll tell you why Honduras is really starting to trouble me… I have a few friends left at Joint Task Force- Bravo stationed at Soto Cano Air Base about 50 miles from the capital city of Tegucigalpa, and the situation appears quite tense.

Officially the 500+ US military forces on the ground have been ordered back onto the base and to stay out of sight for the time being… SOUTHCOM, the military command that oversees troops in Honduras, is concerned that the slightest hint of US aggression or influence could result in yet another prolonged conflict.

But while the generals understand that US military forces are sapped and strained, politicians can see a silver lining in the political chaos: finding a reason to invade is a great excuse to raise taxes, dump money into the private sector to support the war, and create another US-friendly state beacon in the region to buffer against Chavez, Ortega, and Correa.

It sounds too perverted for reality, but this is the mindset of policy wonks who are itching to take their PhD dissertations for a test spin in the real world. I’m watching very carefully for signs of a troop buildup at Soto Cano in the hopes that Honduras doesn’t turn into the next Cuba.

(as an aside, I do not expect the situation in Honduras to have any adverse affect on Panama; in fact, it probably makes Panama’s stock rise as the country continues to be a beacon of stability in an otherwise nuttier region.)

My guess is that there’s probably a lot of Hondurans right now who wish they had a lifeboat strategy… remorse is a terrible emotion. There were probably a lot of Rwandans in 1994 and Japanese-Americans in 1942 who thought the same thing.  Being prepared is never about pessimism of fear-mongering, but rather the rejection of the blissfully ignorant notion that ‘it could never happen here.’

It can. And it just might.

I’m not of the camp that geopolitical and economic calamity will get so bad that the entire world will look like a sequel to Mad Max: Beyond Thunderdome… perhaps I have more faith in my species and the free market.  But I am open to a variety of possibilities, and more conspicuously the ‘unknown unknowns,’ to quote the potentially-soon-to-be-late Donald Rumsfeld.  Consequently, I structure my life in a way that allows for maximum freedom and flexibility.

Based on my own experiences, I would suggest the following:

* Find at least one (and preferably several) places outside of your home country to escape to. Strongly consider buying property there.

* Consider a second citizenship program; at a minimum, set up residency in another country.

* Store physical and paper assets outside of your home country, and outside of the electronic banking system.

* Demand privacy.

* Keep some investment capital at the ready so that you can jump on phenomenal deals as they arise

* Look for opportunities for additional income that are not constrained by your geography

More on all of these topics in future issues; after all, that’s what this letter is all about– achieving freedom, and I sincerely hope that this content can help.  On that note, I was really overwhelmed at the responses and positive feedback from Friday’s suggestion to buy Mark Nestmann’s book ‘The Lifeboat Strategy’.  Again, I highly recommend that everyone read it, it’s one of the best ‘starter guides’ to internationalization that I have read.

You can find it at MarkNestmann.com; based on popular demand, I’ve contacted Mark to request a short interview and to answer some of your questions in a public forum. More to follow.

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.

Argentina is still doomed.

If you don’t know Argentine politics well, I’ll give you a quick history: the country has vast natural resource wealth and was once one of the richest in the world. It has been serially run by a group of incompetents ever since the Perons first came to power after World War II.  After years of military dictatorship, several revolutions,  and a crippling financial crisis, Argentina has never regained its status as a stable, developed nation.

The current president of Argentina is Cristina Fernandez Kirchner, wife of her predecessor Nestor Kirchner.  The couple has been in power since 2003 and has been extraordinarily effective at consolidating power at the federal executive level.  They are among the most anti-market leaders in the world whose policies have continued to waste and squander Argentina’s natural wealth.

This past weekend, Argentines took to the polls (which, by the way, is cumpulsory for Argentine elections).  Similar to the US mid-term elections in 1994 and 2006, the people grew tired of the ruling party and cast them out.  Cristina’s party was soundly defeated– even her husband, a former president, lost his bid for a congressional seat.

While Argentines clearly voiced their dissatisfcation, nothing will change.

The problem with Argentina is not the Kirchners, or even the long history of criminals who ran the country before them.  The problem with Argentina is Argentines.

I have spent a great deal of time there and agree wholeheartedly with Governor Mark Sanford– the women are beautiful and it is full of natural splendor… great place to visit. But I’m worried about the future of Argentina, so with few exceptions, I don’t think it is a great place to live permanently– especially considering the nearby alternatives that I will be discussing in future letters.

While there are certainly plenty of individual exceptions, Argentines as a collective are fatalistic and inefficient. More importantly, though, they are unwilling to take personal responsibility for problems and blame the government for negative outcomes. This is perhaps human nature but is more acute in Argentina, and in Buenos Aires in particular.

Argentines have revolution flowing in their blood; they are intolerant of their politicians and in years past installed a new leader every other Tuesday. They think it nothing to take to the streets and demand resignation, revolution, or just plain ole’ handouts (real change is spare change, after all)… and yet each president was more incompetent than the previous.

Sure, the Argentine government is terrible– but it is the great scapegoat of the Argentine people; rather than take personal responsibility to change their own behavior and improve their own lot, Argentines as a culture will collectively bemoan government policy.  Naturally, the situation never improves because the people never look inward.

What makes a country great, wealthy, and competitive is not related to its government, but to its people.  Despite its communist, centralized government, China prospers because its people are industrious and thrifty. They work hard and save their money.  Argentines don’t come to work when it’s raining outside.

I’m convinced that Argentina is going to experience another revolution, and this will affect mostly Buenos Aires province.  Their economy will likely continue to deteriorate, and I doubt Cristina has the capacity to survive.  Unlike Honduras where the present coup is political in nature, Argentina’s will be economic and likely result in substantial instability in Buenos Aires… remember, these are the people who set the trains on fire last year because they weren’t running on time.

Bottom line, regardless of a change in political parties, I would not invest in Buenos Aires at this time; Argentine bonds have surged in recent days, and I consider this to be ignorant optimism and worthy of a short position.

I’d like to find out from readers who have been to Argentina– what are your thoughts on the government and future instability? Add your comments.