Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

“In short, it comes down to a simple bet: Either markets are correct, policy easing will prove to be ineffectual and we are looking at a deflationary depression (in which case a broad spectrum of economic thinking is wrong—from Keynes to Friedman). Or markets are wrong; the reflationary policies of the world’s financial leaders will mitigate the credit crisis and put the global economy on the road to recovery (by mid-2009 if past indicators are correct). Our readers know that we bet on the latter.

“However, that does not necessarily mean that we advocate piling into stocks. There is simply so much money to be made in the credit markets that the risk/reward scenario in equities cannot compete. Indeed, in credit markets you do not even have to bet whether we are facing a deflationary bust or not—you just have to believe these companies can repay their debt. And, excluding financials, there are still a lot companies that remain cash-flow positive with strong balance sheets and whose likelihood of bankruptcy is very small.”

-GaveKal

As the astute GaveKal organization notes: “Either markets are correct, policy easing will prove to be ineffectual and we are looking at a deflationary depression, or markets are wrong (and) the reflationary policies of the world’s financial leaders will mitigate the credit crisis and put the global economy on the road to recovery. Our readers know that we bet on the latter.”

Obviously, I agree with GaveKal’s views, and while there is no question that the current financial fiasco is likely the most serious since the Great Depression, this is NOT the Great Depression. To be sure, the economy is nowhere near as impaired as it was back in the 1930s, as the following quip from Merrill Lynch makes clear:

“This is not the 1930s all over again. The government and the central banks are not sitting idly by as banks fail this time around. We have automatic stabilizers in place like welfare and unemployment insurance. Back in the 1930s, 40% of Americans lived in rural areas – a dust bowl today wouldn’t exactly have the same impact on today’s highly urban economy. Today’s labor market is far more flexible and productive.

Back in the ‘30s, GDP plunged 27%, real private investment collapsed 87%, consumer spending contracted by 41%, industrial production plunged 54%, personal income fell 25%, the unemployment rate soared to 30%, and half the nation’s homeowners defaulted (not 10%), and 10,000 banks failed; and as over-saturated as we may be today, we don’t have that degree of excess capacity in the financial sector. Not that we are trying to sugar-coat the situation, but we need to put the current situation, which is an outlier, into perspective. It may be something more than just a garden-variety recession, but it is not the Great Depression.”