The Dow Jones Index is the Greatest of All Ponzi Schemes

Beware: The Dow 30’s Performance is Being Manipulated!

Guest post by Wim Grommen. Mr. Grommen was a teacher in mathematics and physics for eight years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 18 years as trainer for Transfer Solutions in the Netherlands.

The last 15 years he studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines / sites in The Netherlands and Belgium.

The paper “The present crisis, a pattern: current problems associated with the end of the third industrial revolution” was accepted for an International Symposium in Valencia: The Economic Crisis: Time for a paradigm shift, Towards a systems approach.

On January 25 2013, during the symposium in Valencia he presented his paper to scientists.

The Dow Jones Industrial Average (DJIA) Index – the oldest stock exchange in the U.S. and most influential in the world – consists of 30 companies and has an extremely interesting and distressing history regarding its beginnings, transformation and structural development which has all the trappings of what is commonly referred to as pyramid or Ponzi scheme.

The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.

While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow.

Companies Go Through 5 Transition Phases

On one hand, generally speaking, the companies that are removed from the index are in either the stabilization or degeneration transition phases of which there are five, namely:

1. the pre-development phase in which the present status does not visibly change.

2. the take-off phase in which the process of change starts because of changes to the system

3. the acceleration phase in which visible structural changes – social, cultural, economical, ecological, institutional – influence each other

4. the stabilization phase in which the speed of sociological change slows down and a new dynamic is achieved through learning.

5. the degeneration phase in which costs rise because of over-capacity leading to the producing company finally withdrawing from the market.

The Dow Index is a Pyramid Scheme

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

The False Appreciation of the Dow Explained

On October 1st, 1928, when the Dow was enlarged to 30 constituents, the calculation formula for the index was changed to take into account the fact that the shares of companies in the Index split on occasion. It was determined that, to allow the value of the Index to remain constant, the sum total of the share values of the 30 constituent companies would be divided by 16.67 ( called the Dow Divisor) as opposed to the previous 30.

On October 1st, 1928 the sum value of the shares of the 30 constituents of the Dow 30 was $3,984 which was then divided by 16.67 rather than 30 thereby generating an index value of 239 (3984 divided by 16.67) instead of 132.8 (3984 divided by 30) representing an increase of 80% overnight!! This action had the affect of putting dramatically more importance on the absolute dollar changes of those shares with the greatest price changes. But it didn’t stop there!

On September, 1929 the Dow divisor was adjusted yet again. This time it was reduced even further down to 10.47 as a way of better accounting for the change in the deletion and addition of constituents back in October, 1928 which, in effect, increased the October 1st, 1928 index value to 380.5 from the original 132.8 for a paper increase of 186.5%!!! From September, 1929 onwards (at least for a while) this “adjustment” had the affect – and I repeat myself – of putting even that much more importance on the absolute dollar changes of those shares with the greatest changes.

How the Dow Divisor Contributed to the Crash of ‘29

From the above analyses/explanation it is evident that the dramatic “adjustments” to the Dow Divisor (coupled with the addition/deletion of constituent companies according to which transition phase they were in) were major contributors to the dramatic increase in the Dow from 1920 until October 1929 and the following dramatic decrease in the Dow 30 from then until 1932 notwithstanding the economic conditions of the time as well.

Exponential Rise in the Dow 30 is Revealed

The 1980s and ‘90s saw a continuation of the undermining of the true value of the Dow 30. Yes – you guessed correctly –further “adjustments” in the Dow Divisor kept coming and coming! As the set of constituents of the Dow changed over the years (almost all of them) and many shares were split the Dow Divisor kept changing. By 1985 it was only 1.116 and today it is only 0.132129493. Indeed, a rise of $1 in share value of the 30 constituents actually results in 8.446 more index points than in 1985 (1.116 divided by 0.132129493). Had it not been for this dramatic decrease in the Dow Divisor the Nov.3/10 Dow 30 index value of 12,215 (sum total of the current prices of the 30 constituent shares of $1481.85 divided by 0.132129493) would only be 1327.82 ($1481.85 divided by 1.116) in 1985 terms. Were we still using the original formula the Dow 30 would actually be only 49.395 ($1481.85 divided by 30)!

The crucial questions today are:

1. Is the current underlying economy strong enough to keep the Dow 30 at its present level?

2. Will the 30 constituents of the Dow remain robust or evolve into the stabilization and degeneration phases?

3. Will there be enough new companies to act as new “up-lifters” of the Dow?

4. When will the Dow Divisor change – yet again??

The Dow 30 is the Greatest of All Ponzi Schemes

I call on the financial community to take a critical look at the Dow Divisor. If it is retained societies will continue to be deceived with every new transition from one phase to another and the greatest of all Ponzi schemes will have major financial consequences for every investor.

A version of this article, entitled “Beurskrach 1929, mysterie ontrafeld?”, was first published in Dutch in the January 2010 issue of “Technische en Kwantitatieve Analyse” magazine which is a monthly publication of Beleggers Belangen  (Investment Interests) in the Netherlands and on several sites there including: Beurskrach 1929 mysterie ontrafeld? op Historiek.net (English version Stock Market Crash 1929, Mystery Unraveled?

Wim Grommen is a guest contributor to http://www.FinancialArticleSummariesToday.com, “A site/sight for sore eyes and inquisitive minds”, and www.munKNEE.com, “It’s all about MONEY” of which Lorimer Wilson is editor.

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  • mmckinl

    There is a difference between a Ponzi Scheme and a scam or deception. There is a tangible underlying value in real assets in Dow stocks. The measurement changes in the Dow are indeed deception at the least and a scam at worst. And to correlate the Dow with the real economy in regards to actual performance over these changes in very deceptive indeed … but this is not a Ponzi Scheme.

    • Dee

      The DOW isn’t a measure of the overall economy.. I don’t think it ever claimed to be. It is a measure of the DOW, how it is calculated is not a secret. If you are investing, knowing this stuff is simple due diligence and an individual responsibility, it is your money, your risk, your reward. If you think it is somehow being deceptively rigged, then don’t invest in the DOW, buy or invest in individual Stocks like most people do, or exploit the fact that it is rigged to always go up, if you believe that to be the case and invest in the appropriate “Spider” ETF.
      I won’t argue that a lot of people don’t have a clue, don’t manage their investments based on due diligence or risk management principles, I think there are stats out there that say the average investor spends more time choosing from a restaurant menu than they do picking stocks, and that folks believe a lot of totally untrue and even wacko myths about the market and still invest. But it Is their money, their risk, and their reward, not mine and not yours.
      But like I said, if how the DOW or any market indices or average is calculated bothers you in the least.. just buy individual stocks .. and know your transaction costs.. same for mutual funds.
      It is simply crazy for anybody to look at a exchange or market average and assume that means anything in relationship to an individual stock, the economy, or , unless it is a Chinese Tea ETF, the price of tea in China.

      • Yentrader2

        Not a secret- ask ten people who invest in stocks- the adding of companies and the manipulation of the divisor ARE SECRETS!!

        And why is the Fed pumping up the market with QE for the past 6 years???
        Because they believe that it is, to the casual observer, a general gauge of the economy. I know people with less than a penny to invest will use the DJIA as an example of the economy improving!! Real People collecting government assistance pointing to the stock market- go figure.

        • Dee

          The Divisor and any changes of Companies on the Dow is posted daily in the Wall Street Journal and on the Wall Street Journal’s web site http://wsj.com/mdc/public/page/2_3022-djiahourly.html

          The Formula for calculating it is public knowledge and on Wikipedia

          http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

          It is the Investors responsibility to do their own due diligence before investing there are all sorts of websites with tons of information

          http://www.investopedia.com/
          https://www.khanacademy.org/better-money-habits

          You have free financial classes at Edx.org and Coursera.org and other MOOC sites http://en.wikipedia.org/wiki/Massive_open_online_course

          heck the whole first year of a MBA from Wharton is free online http://blog.coursera.org/post/60889088289/the-wharton-foundation-series
          There is no excuse and there are no secrets in this regard.. but you have to take the responsibility to do your own due diligence.
          You can’t make money work for you if you do not understand how money works.
          Look, understanding how money and investing really works doesn’t mean you can’t still believe it should work differently.. it just means you can live more comfortably and donate more to worthy causes while you work to shape the world in your own image and stick it to the man.
          but it isn’t a secret, and all the resources I linked to are free including all the course work if you have an internet connection. and if not, you can use the computers at the library.

          • Yentrader2

            Shocked that the government would manipulate data? Are you just out of school, I make a living in the markets, IN SPITE OF THE CORRUPTION OF THE MARKETS AND THE MANIPULATION OF THE DATA, I see it every day.

            You sound niave, are you an instructor in higher education, or you work for the banksters, I’ve done bothand your post has a familiar ring.

            As far as being able to find and reference the information, it’s out there and I bet90% of people in the market don’t know the divisor has not been consistent, and doesn’t only change to factor in splits.

            As for asking the government why they do what they do? Do you think for a minute you’d get the truth- I doubt it.

          • Dee

            Somebody never saw Casablanca.
            Everybody tries to manipulate the market.. folks who short, folks who buy and hold, every transaction has an effect on the market. The Government has it’s hand in skewing things and it has it’s hand in regulating things trying to keep things “fair” on the one hand with the SEC and then printing trillions on the other hand and playing with laws and incentives that affect availability of wheat and gold and every other basic commodity, put a road here or put a road there, playing with interest rates by Fiat instead of free market discovery. A Subsidy here and tax there. Forex has way more to worry about than Government manipulation.. banks been playing games with that, foreign policy or lack of it.
            You SN mentions the YEN is it some secret that abenomics is based on weakening the YEN, that China’s Yuan is pegged to the dollar, That the swiss franc has a floor on the Euro? That is all manipulation, all of it.. it is all manipulation Central banks flat out say which way they want their currency to go and take major steps to send it that way, does it always work? Do governments have some perfect record of making markets and currencies do what they wish? What do you think the pundits and talking heads aredoing when they talk their book or some activist investor starts some whisper campaign after setting up some major short action or the Gold Bugs start talking about PM’s going to the moon OMG buy now before gold is at 10K per ounce.
            Come on, everybody is trying to manipulate the market, the exchange rate, the interest rate, the tax rate , the business subsidies to fit their own agenda , national “needs”, boost the economy, increase the competitive advantage of a nations industry in world markets.. Anybody particularly successful for any length of time? Abenomics getting the job done in Japan? QE stimulating the economy and saving the middle class?
            Sure they are trying, yes it has an effect, but it is just another factor to base your personal analysis on, Governments are much better at getting unanticipated consequences than the results they want. Think all the noise and wishes of Governments and Central banks prevent Warren Buffet from making a profit?.. think HFT impacts the long term buy and hold value investor? Think volatility affects the day trader the way it affects somebody doing dollar cost averaging?
            Know your area of investing, the tricks , the laws, the principles, the managers, the business , the market, in your little area or expertise and understand risk/reward. and know what you are trying to accomplish.
            Some folks blame their losses on conspiracies and manipulations and some folks try and figure out what mistakes they personally made or what data they personally misread or misinterpreted, and try not to repeat the same mistakes. Some folks catch a good run and break the bank or make a killing and then spend the next 5 or 10 years losing their shirt trying to replicate what they did right. Even experienced talking heads on CNBC or Bloomberg .. when the market is going down, get all alarmed that the market is going to crash, a week later when it is going up are all bubbles and going to the moon. It’s been the end of the dollar now since the 1980′s until it is preservation of wealth and Gold is a Barbarian relic, until it is a safe haven, Bonds are a total disappointment until you just want to be sure you can get your principle back and the stock market is the only way to keep up with and beat inflation until the bottom drops out. Oh… Chicken Little is always right until he is always wrong.
            And yeah.. 90%, or more even, don’t know this stuff, invest on wishes and hope instead of risk v reward, those are personal choices.
            if you want to better your returns and improve your ROI .. you improve your understanding or get an understanding of what you are doing in the first place. And no, I am neither a banker nor an educator.. my background is engineering and I am a small time private investor that invests my own way with money I can afford to risk, and not a penny more, and only in areas I believe I truly understand.

  • http://bigdanblogger.blogspot.com/ Big Dan

    How about on the biggest propaganda, bar none, in which there is no record/archive of btw, THE RADIO NEWS BRIEFS tell us every top and bottom of the hour what THE DOW is. As if 99% of us care, but yet they lead with this information 24×7 on THE RADIO NEWS BRIEFS. What…the…F*CK??????

  • BellsNwhistles

    The ownership of the corp. chosen are all the same, board members serve on multiple boards and the corps use the same few banks. No competition really exists in the marketplace for the corps. used by the DOW.

  • abinico

    Capitalism is a Ponzi scheme.

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