New Stock Market Crash is Inevitable

Every stage of production, or any company or other human invention goes through a process called transformation.

Transitions are social transformation processes, which involve at least one generation.
In this article I will use on the basis of such a transition, where we stand with our current society and that a new stock market crash is inevitable.

- It is a structural change in the (world) -maatschappij, or a complex subsystem;

- There is interacting and mutually reinforcing technological, economic, ecological, socio-cultural and institutional changes at different scales;

- It is the result of slow changes (changes in inventories) and fast dynamics (flows).

A transition is not a foregone conclusion, because there is adjust for a change to, learn from, and adapt to new situations. A transition is not dogmatic.

Four transition phases
Looking at the characteristics of the stage of social transformation processes are taking place, might very well that we have now reached the end of the so-called third industrial revolution.

Figure: There are generally four phases in a transition, which allow visualizing the best means of an S curve

In general, describe transitions to distinguish the S-curve and have four transition phases:

1. a development of dynamic equilibrium in which the status quo does not change visible;
2. a "take-off phase in which the change process is initiated, in that begins to shift to the state of the system;
3. an acceleration phase where structural changes made visible by an accumulation of one another that responds socio-cultural, economic, environmental and institutional changes; in the acceleration phase there is collective learning processes, diffusion and processes of embedding;
4. a stabilization phase in which the rate of change in society decreases and all learning is achieved a new dynamic balance.

Also a product lifecycle and a business life cycle describe an S-curve. In this case, there is a fifth phase:. The degeneration phase in which costs are rising by over capacity and the producer will finally withdraw from the market

, if we look back in history, you have in the last two centuries three major transitions ( industrial revolutions)place:

1. The first ^e Industrial Revolution ( 1780 to about 1850); the steam engine

2. The second ^e Industrial Revolution (1870 to circa1930); electricity, oil and car

3. The third ^e Industrial Revolution (1950 ....); computer and microprocessor

The emergence of a bull market
In the development and take-off phase of the industrial revolution creates many new companies. All these companies go through more or less the same cycle simultaneously. During the second ^e Industrial Revolution were the companies in the steel, oil, automotive and electrical industry. During the 3 ^E Industrial Revolution were the companies in the hardware, software, consulting and communications industries. During the acceleration phase of an industrial revolution are many of these new companies are, more or less simultaneously, in the acceleration phase of their life cycle.

Figure: Development of a market development: introduction, growth, flowering and decay

The expected value of the shares of these companies, which come in the acceleration phase of their existence, rises enormously. This is the reason why shares in the acceleration phase of an industrial revolution to be very expensive. The price-earnings ratio of shares between 1920 - 1930, the acceleration phase of the second ^eIndustrial Revolution skyrocketed and between 1990 to 2000, the acceleration phase of the three ^e Industrial Revolution.

Figure: Two industrial revolutions: price-earnings ratio (PE ratio Shiller)

Shares Divisions strengthening stock market boom

The rise in the price-earnings ratio is exacerbated because many companies during the acceleration phase of their existence, decide to split their shares. A share split is desired, as the fair value of a share is too large and thus the marketability is insufficient. Since there are at lower rate more potential investors, a division therefore has a positive effect on the value of the share. Between 1927 - 1929 and 1990 - 2000 there have been many stock splits that have positively influenced the price-earnings ratio.

Table 1: Share Splits for the stock market crash of 1929

Table 2: Share Splits during the period 1990-2000

Stocks Splits let each Dow Jones Index explode

The Dow Jones Index was first published on May 26, 1896. The index is calculated by dividing the sum of the shares by 12:

Dow_12_26_mei_1896 = (a1 + a2 + .......... + a12) / 12

on October 4, 1916 the Dow is extended to 20 companies; 4 companies and 12 new companies coming in.Dow_20_4_okt_1916 = (a1 + a2 + .......... + a20) / 20

Two years before the stock market crash in October 1929, 31 December 1927 were a number of companies for the first split the shares. With every change in the basket of the Dow Jones or a share split, the formula is that the Dow Jones is calculated adjusted. This occurs because the index, the outcome of the two formulas of the two baskets, should yield the same result at the time of change. For those stocks that are split on December 31, 1927, a weighting in the calculation is included. The formula looks like this (American Can is multiplied by six, with four General Electric, etc.).

Dow_20_31_dec_1927 = (6.a1 4.a2 + + .......... + a20) / 20

On October 1, 1928 the Dow Jones will be expanded to 30 people aandelen.Omdat still all hand must calculate is the calculation of the index easily.
The weighting of the split shares will disappear and it introduces the Dow Divisor. The index is calculated by dividing the sum of the shares by the Dow Divisor.
Because must not change the index on October 1, 1928, the Dow Divisor is the value 16.67. The index chart of the two time periods must after all be aligned.

Dow_30_1_okt_1928 = (a1 + a2 + .......... + a30) / 16.67

In the fall of 1928 and spring of 1929 8 stock splits which the Dow Divisor drops to 10.77.

Dow_30_25_juni_1929 = (a1 + a2 + .......... + a30) / 10:47

From then supplies a value of 30 stocks index nearly three times as many points than December 31, 1927. In the old formula would be the sum of the shares are divided by 30.

Figure: Dow Jones Index before and after Black Tuesday

The extreme rise in the Dow Jones in the period 1920 - 1929 and especially between 1927 - 1929, was primarily caused because the expected value of the shares of companies in the acceleration phase of come their existence, hugerises . The value of the shares is further enhanced by stock splits and as icing on the cake the value of the shares is again magnified in the Dow Jones Index, because behind the scenes of stock splits, the formula of the Dow Jones is adjusted.
During the acceleration phase of the third industrial revolution, 1990 - 2000, history has repeated itself. During this period there have been back many stock splits, particularly in the years 1997 and 1999.

Table 3: Summary Dow Jones, and Dow Divisor number of divisions between 1990-2000

The formula that was used on January 1, 1990 to calculate the Dow Jones Dow_30_1_jan_1990 = (a1 + a2 + .......... + a30) /

0586

The formula was used on December 31, 1999 to calculate the Dow Jones Dow_30_31_dec_1999 = (a1 + a2 + .......... + a30) /

0.20145268

On December 31, 1999 results in a value of 30 stocks again almost three times as many index points, the same value on January 1, 1990.

Stock market indices are mirages

What does a stock index such as DJIA, S & P 500 and AEX anyway?

The Dow Jones Industrial Average (DJIA) index is the oldest stock index in the United States. A select group of journalists from The Wall Street Journal decides which companies belong to influential stock index in the world.Unlike most other indices, the Dow is a price-weighted index . This means that stocks with high absolute share price have a significant impact on the beweging.De S & P Index is a market value weighted index . The 500 largest US companies as measured by their market capitalization are included in this index, which is compiled by the rating agency Standard & Poor's .

The Amsterdam Exchange Index (AEX) is the main Dutch stock market index . The index displays the image of the price performance of the 25 most traded shares on the Amsterdam stock exchange . From the weighted average of the prices of these shares is calculated the position of the AEX.

In many graphs, the y-axis is a fixed unit, such as kg, meter, or euro liter.

In these index-graphs this also seems to be the case because in the y-axis is the unit in points. Nothing could be further from the truth! An index point ie. Not a fixed unit in time and you should therefore attach no significance to historically.

An index is calculated on the basis of a set of shares. At each index is done according to a certain formula, and the result of the formula yields on a number of points. A big mistake that many people make, that value is attached to these graphs. These charts are very deceptive.

• An index is calculated on the basis of a set of shares. At each index is done according to a certain formula, and as a result you get some points. That basket of shares, however, changed regularly in each index. For the new period, so the value of a basket of equities measured. It is of course strange that you project the different buckets as the same unit.
• It gets even stranger as with any transition baskets also consider the formula for calculating the index changes. This occurs because the index, the outcome of the two formulas of the two baskets, should yield the same result at the time of change. The index chart of the two time periods must after all be aligned. When the Dow Jones for example, all the prices of the thirty Dow stocks are added together and then divided by a number. Due to changes in the basket and the divisor is changed each time by stock splits. The denominator the divisor currently stands at 0.15, while in 1985 it was more than one. One index point in one period is thus calculated in a very different way than in any other period.
• The strange thing is, of course, the ever-changing composition of the basket. In general, it is true that at the change of the basket, companies that are in a stabilization phase or the degeneration phase of their cycle, are taken out of the basket. Companies that are added are in the take-off phase or acceleration phase of their cycle. The probability that the index after the change of the basket and the formula rises, of course, is many times greater than the index's decline. Since you do not have probabilities to let go, especially if this method is used in the acceleration phase of a transition. From 1980 7 ICT companies (3M, AT & T, Cisco, HP, IBM, Intel, Microsoft), the engines of the last revolution added to the Dow Jones and five financial cial institutions play an important role in any transition.

After a period of 25 years, the value of a basket of apples is compared with the value of a basket pears.There are currently only 6 of the 30 original companies in the Dow Jones in comparison with the time (1979) that started the acceleration phase of the last revolution.

Dow1985 = (x1 + x2 + ........ + x30) / 1

Dow2015 = (x1 + x2 + ........ + x30) / 0.15

In the 90s of the last century there have been many stock splits. In order to keep the fracture as it is changed both the numerator and the denominator of the fraction. so a price increase of one dollar of the basket in 2015 provides de facto 7.5 more index points than in 1985. Because in the 90s have been a lot of stock splits, this is the reason why the Dow Jones during this period is almost exponentially increased.

Currently, the Dow at 16300. In applying the formula of 1985, the index would now stand at 2186.

In principle there is a pyramid created ë erd. This is fine as long as there are companies that are in the take-off phase or acceleration phase of their cycle, are added. At the end of a transition, however, will be less and less this there. The last 18 years have been replaced 21 companies in the Dow Jones, a rate of 70%.

Overview Dow Jones changes from 1997:

21 winners in it - 21 losers out (70%)

March 19, 2015: Apple will replace AT & T. In order to make it suitable for Apple's share of the Dow Jones, on June 9, 2014, there was still a cleavage of the Apple 7 share for the first place.

September 23, 2013: Hewlett - Packard Co., Bank of America Inc. and Alcoa Inc. be replaced by Goldman Sachs Group Inc., Nike Inc. and Visa Inc. Alcoa of $ 40 dropped to $ 8.08 in 2007. Hewlett-Packard Co. is $ 50 dropped to $ 22.36 in 2010. Bank of America is $ 50 dropped to $ 14.48 in 2007. But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. in 2013 are respectively 25%, 27%, and increased 18%.

September 20 2012: UnitedHealth Group Inc. (UNH) will replace Kraft Foods Inc. Kraft Foods Inc. was split into two companies and was therefore considered less representative and therefore no longer suitable for the Dow.The value of the shares of UnitedHealth Group Inc. was for two years for inclusion in the Dow rose by 53%.

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors. Citigroup and General Motors have billions of dollars of US government received in order to survive and were not representative of the Dow.

September 22, 2008: Kraft Foods Inc. replacing American International Group. American International Group was replaced after the decision of the government to take a stake of 79.9% in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International. Altria was split into two companies and was no longer considered suitable for the Dow. Honeywell was removed from the Dow because the role of the industrial companies in the US stock market had declined in recent years and Honeywell smallest revenue and profit was among the participants in the Dow.

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc replace AT & T Corp. Eastman Kodak Co. and International Paper. AIG shares had risen more than 387% in the last decade and Pfizer had an increase of over 675% behind it. Shares of AT & T and Kodak, by contrast, were in the last decade, dropped more than 40% and were therefore removed from the Dow.

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications, and Home Depot Incorporated replace Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

17 March 1997: Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replace Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.

Figure: Changes in the Dow Jones over the last two industrial revolutions.

Figure:. The price development of the Dow Jones over the last two industrial revolutions
Since 1990, the price increase in items ended up in a huge gear.

Stock market indices will fall further?

Determining the market index values ​​as described above and the display of indexes in historical graphs are useful indicators to indicate in which phase an industrial ë Revolution is located.

The third industrial revolution is clearly in the saturation and degeneration phase. This phase is characterized in that the market is saturated and competition increases. Only the strongest companies can compete with or take over the competition (think of the acquisitions that Oracle and Microsoft have done in recent years). Under the hood is in ICT country relatively little technical news more under the sun, although the marketing machines from America we want to believe otherwise.

In the development and take-off phase of a transition creates many new companies. It is a diverging process.Especially financial institutions play an important role. It takes a lot of funding at this stage, after all. The salaries of the financial sector chart also shows the same s-curves if either ind. revolutions.

Figure: History salaries in the financial ë le sector

Investors are euphoric at the hearing of mergers and acquisitions. In fact, mergers and acquisitions give the converging processes again at the end of a transition. Objectively speaking, any merger or takeover a reduction in economic activity. This is obvious when we look at the unemployment rates of various societies.

New industrial revolutions caused by new ideas, inventions and discoveries, or new knowledge or insights. Here too we have as humanity reaches a saturation point. There will be fewer and fewer companies are the take-off phase or acceleration phase that can be replaced in the index basket companies in the stabilization phase or the decline phase.

In a (threatening) recession, the central bank is trying to stimulate the economy by lowering interest rates.Loans will be cheaper by citizens and companies usually pay more. In the event of sharply rising unemployment and falling prices, however, does this significantly less. This is also the case, as the official interest rates are lower, or even to fall to virtually zero. Regardless of the interest rate will not (big) loans are closed and expensive purchases will be delayed. Further rate cuts or even an interest rate of zero or may not lead to an increase in economic activity and falling demand leads to further price declines (deflation). The central bank may decide in that case the money supply (quantitative easing or quantitative easing ) to enlarge. A larger money supply indeed leads to price increases and disruption of the deflationary spiral. Earlier would do so on the printing press are turned on but are now buying the central bank bonds, mortgage bonds and other bonds and finance these transactions by increasing their balance sheet. So there are no physical banknotes reprinted. The mechanism works so that central banks buy in the market or directly from banks, bonds, which are settled through banks. Banks are credited with the purchase amount in the accounts they hold with the central bank. In this way their banks liquidity. Against these cash banks can then provide new loans.

increases

Figure: The quantitative easing policy of the Fed (US central bank) and its impact on the S & P 500

Figure: Two industrial revolutions: price-earnings ratio (PE ratio Shiller)

Both the interest rate policy and quantitative easing by central banks has since 2008 a lot of money flowed into the stock markets and is in fact created a new, fictional beurshause. This is evident in the price-earnings ratio chart (Shiller PE ratio), which since 2008 has risen again. However, the central banks have already faded ammunition to break the deflationary spiral. At the end of the 2nd Industrial Revolution in 1932 dropped the PE ratio to 5. Currently, this ratio, partly due to the behavior of the central banks, 23. The rates remain therefore could decline by a factor of four.

History repeats itself

Humanity is currently facing the same problems as at the end of the second ^e Industrial Revolution, as declining stock indexes, rising unemployment, skyrocketing debt of companies and governments, and the poor financial position of banks.

Figure: Two industrial revolutions and the debt of America

Transitions are initiated by inventions and discoveries, therefore, the knowledge of the man. New knowledge has an impact on the four other components in a society. There are currently done little new inventions or discoveries. So the chance of a new industrial revolution is not very big. History has shown that five pillars are indispensable for a stable society.

Figure: The five pillars for a stable society

At the end of each transition, the pillar being in the danger. This we have seen after every industrial revolution.The pillar "WELFARE" of a society once again threatens to fall. The history has shown that the collapse of the pillar "WELFARE" always leads to revolution. Due to the high unemployment after the 2nd industrial revolution has initiated a new transition by many societies, ie. Creating a war economy. The economy flourished particularly in the period 1940-1945.

Societies will once again have to choose which transition will be deployed.

Source:

• Geschiedeniswerkplaats Site Wolters Noordhoff
• wikipedia
• Prof. J. Rotman et al (2000), "Transitions and Transition management: the case of a low-emission energy supply '
• Dow Jones Industrial Average Historical Components, S & P Dow Jones Indices McGraw Hill Financial
• Dow Jones Industrial Average Historical Divisor Changes, S & P Dow Jones Indices McGraw Hill Financial
• W. Snarling, (November 2007), "New stock market crash, a matter of time?", Technical and Quantitative Analysis (20-22)
• W. Snarling, (January 2010), "Stock market crash in 1929, mystery unraveled?", Technical and Quantitative Analysis (22-24)
• W. Snarling, (March 2011), "Current crisis, a law?", Hermes, 49 (52-58)
• W. Snarling, (January 2013), Paper "The present crisis, a pattern" presented at International Symposium "The Economic Crisis: Time For A Paradigm Shift" Valencia
• W. Snarling, (November 2014), "The Dow Jones Industrial Average, A Fata Morgana" TRADERS 'Magazine, (14-18)
• W. Snarling, (April 2015), "Splitting And The Stock Market Crash 1929" Value Walk
• W. Snarling, (August 2015), "Stock Market Boom and Crash, the Cause and Effect of Extreme Market Movements" TRADERS 'Magazine, (28-30)

Wim Growling
For US Markets

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