Recessions, and depressions for that matter, are not events where GDP heads south in a consistent and straightforward fashion. More important, the stock market definitely does not exhibit this sort of behavior.

Let’s look at the Great Depression. Everyone marks the Great Depression’s beginning with the collapse of the stock market in the fall of 1929. The stock market would fall by close to 90% between 1929-1932. But a major factor that people forget is that the market had some major rallies in between 1929-32, most specifically in 1930. Check out this chart of the Dow between 1928-1932.

Notice something in early 1930? The Dow rallied from about 200 up to close to 300, about a 50% increase. Not too shabby. People became bullish on the future. This was said in May of 1930: “While the crash only took place six months ago, I am convinced we have now passed through the worst — and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us,” courtery of the president of the time, Herbert Hoover.

Am I saying that the stock market will collapse again like it did in the early 30’s? Not necessarily. I just think just because the official unemployment rate is slowing (which doesn’t take into account the undermployed and the discouraged workers) and the stock market is up does not mean we are out of the woods yet. Remember, unemployment is still at 9.5% (a low figure because it doesn’t count the underemployed), oil is over $70 a barrel as the dollar falls, and we are staring at future tax increases and more governmental beaurocracy. We’re in a very fragile state, but people believe nothing worse can happen. This is a recipe for exactly what happened in the 1930’s. Remember, if we are essentially in May of 1930 right now, it is another 15 years before we are out of the woods.

History repeats itself, but never in the same way. I don’t think we’ll have a crash over the next few years, then government New Deal projects, and then a world war. Things just don’t happen like that. You can learn from history, but you can’t look at it as a pure playbook.

What I think we can learn is that people over-react in both ways to a crisis. There is a surge of pessimism and optimism. Right now, I believe the optimists are overwhelming the media, thanks largely to the rally in the stock market. This is helping to spur New Deal II type legislation, which will just drown us in inefficiency and slwo growth, much like it did in the 1930’s.

Remember people, just because the market hit its low in 1932, the economy did not itself rebound until 1945. We also had another market crash in 1937-1938 thanks to FDR’s tax hikes and the depression within a depression. Unemployment in the 30’s, even with FDR’s make-work programs, never was below 10% and averaged closer to 15%.

With epic deficits, a falling dollar, the private sector and the consumer on their knees, and new taxes looming, the five year picture does not look good. Yes, the rate of destruction is down, but beware of falling into the Hoover trap of thinking we are out of woods just yet.