Highlights of the week of November 25, 2013

netherlands_flagfrom AAA to AA+

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of November 25, 2013.

  • The price of digital currency bitcoin soared above US$ 1,000.00 for the first time on Wednesday, November 27, 2013
  • On Friday, November 29, 2013, Credit Rating Agency, Standard & Poor’s downgrade the Netherlands from AAA to AA+.
  • India reported stronger Q3-2013, GDP growth, on Friday, November 29, 2013.


About Bitcoin:
Bitcoin is an open source peer-to-peer electronic money and payment network introduced in 2009 by pseudonymous developer “Satoshi Nakamoto”


The process of generating Bitcoins is known as ‘mine’, a term that refers to the mining of precious metals. Bitcoins mining is the process that generates the ‘blocks’ (or transactions that have taken place in bitcoins) of a ‘chain’ (public list of these transactions) whose purpose is to verify the legitimacy of the last conducted such operations. Adding a new block to the chain is a difficult process that requires a lot of computing power, and this work is devoted primarily by Craig virtual enterprise.

On Wednesday, November 27th, 2013, speculators have bid-up Bitcoin above US$1,000 for the first time, pushing the mania for the experimental virtual currency into a new phase.

The price for a single Bitcoin on the Mt.Gox exchange hit US$1,044 last Wednesday, double its level of one week ago and 80 times the prevailing price at the start of the year, to close the week and the month at an all-time high of US$ 1,208 as can be seen from below chart.


The Netherlands became the latest country to be stripped of its coveted triple-A credit rating on Friday, after Standard & Poor’s downgraded the country to “AA+,” citing weakening growth prospects.

In a statement S&P said:

We do not anticipate that real economic output will surpass 2008 levels before 2017, and believe that the strong contribution of net exports to growth has not been enough to offset a weak domestic economy

The downgrade reflects our opinion that The Netherlands’ growth prospects are now weaker than we had previously anticipated, and the real GDP per capita trend growth rate is persistently lower than that of peers.

The other two credit rating agencies; Moody’s and Fitch still rate the Netherlands as AAA, but with a negative outlook.

After the downgrade from the Netherlands by S&P, it means that GermanyLuxembourg and Finland are the only countries of the Eurozone left with a AAA rating with the ‘Big Three agencies.

India’s gross domestic product (GDP) grew 4.8 percent in the three months through September, or the second quarter of 2013-14 fiscal year, said Central Statistical Office (CSO) on Friday, November 2013.

This is in line with most economists’ expectations. GDP for the first quarter of the fiscal year had been reported at 4.4 percent. The GDP growth for the April-September period now stands at 4.6 percent.

This is the fourth successive quarter of economic growth below 5 percent, far below the desired 8 percent Indian government needs to revive the nation.

According to released data, the manufacturing sector of the economy grew merely at 1 percent, while the services sector grew at 5.9 percent.

The overall GDP growth was pulled up by a strong performance in agriculture at 4.6 percent, followed by good showing in construction at 4.3 percent. Financing, insurance, real estate and business services grew 10 percent.

Trade, hotels, transport and communication grew 4 percent during the quarter.

Policymakers are confident that the Indian economy will grow 5- 5.5 percent in the current fiscal year.


Virtual cryptic currencies like “Bitcoin” are right now in a gigantic bubble in the making, and can be seen as a nice speculative instrument, but for sure NOT a storage of wealth. Any asset that goes up and down with 10-20 percent per day is for sure nothing you want to hold (very risky and extremely volatile) and is for sure not classified as a currency not even in the future!

One of a currency’s main properties is day to day stability! People holding any currency want to know, if it buys the same amount of “stuff” day over day and don’t want to go to the supermarket and find out that today 1 loaf of bread costs 1 bitcoin, tomorrow 2.5 bitcoin and the day after 0.5 bitcoin.  That is a world nobody wants to live in.

Second big problem with these currencies is that there is and will be a lot of competition which in the end will kill this thing. Next to Bitcoin there are already a lot of other virtual digital currencies and there will be many more in the future as the hype continues.

Some speculators went that far in their greed that they have called bitcoin, Gold 2.0

In below video, Mr. Peter Schiff, chairman of Euro Pacific Precious Metals, explains clearly the differences between bitcoin and real money, like Gold, Silver and other precious metals.

With even a relatively modest imbalance of aggressive buyers, any asset which is relatively ‘illiquid’ (i.e. hard to acquire in significant quantities) can rise quickly. Meanwhile, the underlying value of bitcoin has been ostensibly underpinned by the complex maths required to “mine” new BTC as the necessary processing power becomes increasingly expensive.

It doesn’t take a renaissance genius to notice that the difference between a mining ‘floor’ of say 150 dollars and a market price of 1,000 is rather wide. Market bubbles cool at best or simply burst at worst.

Parallel to the remarkable rise of BTC, the NASDAQ stock index recently broke through 4000 for the first time since the heady internet bubble at the turn of the millennium. Here there may be a message for BTC. Cryptocurrency prices may rocket upwards for weeks to come, or they might dive within days. Likewise in 2000, internet stocks were going stratospheric with investors fixated on a dotcom future. However, when it became apparent that the infant web was a poor proxy for commerce, the dotcom bubble burst spectacularly.

Last but not least, the fact the closing price of bitcoin on November, 29, 2013, was near to the closing price of one Troy Ounce of Fine-Gold, on the same date, should be seen as a warning sign,  that bitcoin is currently in a bubble and that Gold is undervalued.

Downgrade of the Netherlands:
The downgrade nevertheless underscores the weak state of the Dutch economy, which according to estimates by the European Commission will grow by only 0.2% in 2014. The Netherlands will be the weakest performer in the currency bloc after the troubled economies of Cyprus and Slovenia, according to the Commission.

While the export-oriented country is considered one of the most competitive economies in Europe—with a current-account surplus even larger than Germany’s—it struggles with severe problems at home.

While Dutch exports continue to grow, the key factor in the weak performance of the economy is the fall in household consumption due to the country’s mortgage debt pile. Dutch households are among the most indebted in Europe and are suffering from a slump in the housing market. House prices have fallen by more than 20% since their 2008 peak, leaving around one in four Dutch households “underwater,” causing private consumption to plummet.

Government austerity measures, mostly comprising of tax increases, are further dragging on domestic demand.

While credit rating agencies remain discredited in some quarters following their failure to spot the financial crisis bubbling away, the downgrade will still be a blow to the Netherlands’ government. It is pushing austerity measures through in the face of weak consumer spending and a house price crash.

The Netherlands’ loss of triple-A status stems from weaker growth, but property prices are bottoming, debt is low and reform is underway. Other euro zone members are bigger worries, based on this we can consider the downgrade of the Netherlands as a lagging indicator.


The recent decline in real GDP growth for India is shown in the following graph. The growth rates are percent annual rates.

India-GDP-Growth 2010 - 2013

While the country’s GDP growth is declining, inflation in India remains stubbornly high, inflation numbers of October show, that the Consumer Price Index accelerated to 10.09% in October from 9.84% in September.

Until Next Time

Eric Panneflek

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