New York (HedgeCo.net) – Bloomberg Television’s Jon Erlichman spoke to Paolo Pellegrini, who formerly worked with hedge fund titan John Paulson.  Pelligrini says that bonds are trading at ridiculous levels and talks about what he has been concerned about most in the past year.

This interview took place at the Bloomberg Hedge Fund conference at the Guggenheim Museum in NYC yesterday.

Pellegrini said, “I think that this year essentially I was concerned about the unresolved issue of what I call a demand deficit. The United States is still over ¼ of world GDP and world demand. Europe is another 25% plus. So you can’t have a situation where all of a sudden you lose these streams of demand that was generated by increasing leverage over time and not have some consequences.

“It was interesting today there was some piece about Iceland and the fact that Iceland, after all—after being a sort of disaster story early on because it took some difficult steps and did not try to bail out a failed private banking sector—is now in effect doing better than Ireland, which instead used something that is much more similar to the American approach and now they are going to have to pay for that. My concern was that the demand deficit would come into play. It seems that we are going through a very determined effort by the Federal Reserve to target us at prices.

“It seems to be some of the conclusion from various conferences and others—Goldman Sachs came up with a view that the level of the stock market is the best level of the financial condition. So if you look at that and then you see, what are we going to do—we can buy bonds, we can’t buy stocks, so we buy enough bonds so that the stock market reaches some sort of an acceptable level.

“To me all of that is the reality and it’s difficult to fight the reality. Everybody says, ‘Don’t fight the Fed.’ Of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis. That is very difficult, though, to predict. In terms of the way I manage my portfolio at this point, and it’s really part of why I thought it was important to take a break in terms of managing outside money, is that I’ve gone from a situation where I was suggesting that I would be able to profit from high levels of volatility and large market moves, to one where I say this is a very difficult situation—let’s try to figure out a strategy to figure out the real purchasing power of my capital.”

Pellegrini also commented on his current strategy, “I’m stepping back, I’m trying to put together a more stable team, focusing on more quantitative types of disciplines. I think that there is so much arbitrary input in the investment process at this point, given all of the regulatory and central bank actions, that it is difficult to have a linear process of thinking about the world and how to make money. It’s sort of more complicated than that—there is a lot of unpredictable externality from decisions that are a combination of personal ideology of different players and political realities of different points of time.”

Editing by Alex Akesson