Rotation vs Concentration: Michael Germano on Cyclicals, Commodities, and the AI Risk Trade

In this episode of Lead-Lag Live, I sit down with Michael Germano, Founder and Wealth Manager at Key Sage Wealth, to discuss whether markets are entering a major rotation after years of mega-cap tech dominance.

From signs of mean reversion and passive-driven distortions to the case for a commodity supercycle and a weakening U.S. dollar, Germano explains why investors may want to rethink concentration risk and reassess exposure to AI-driven valuations.

In this episode:
– Why mega-cap tech may be “long in the tooth”
– How passive flows have created market inefficiencies
– The case for a structural commodity supercycle
– What a weaker dollar means for portfolios
– How wealthy investors compound capital using lending strategies

Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.

#MarketRotation #Commodities #AI #AssetAllocation #WealthManagement

Transcript

Setting The Commodity Supercycle Case

SPEAKER_01 0:00

We're at the beginning of a commodity supercycling. What's happening? I mean, there's at least four or five things that are happening. I mean, the first thing that's happened is there's been this decades-long underinvestment in mining, transporting, exploring all these critical minerals. And then we have these uh long-term themes happening like reshoring, deglobalization, electrification of the grid, AI, cloud, and data center growth. You know, you put all these things together and you start to see that, you know, there are a lot of reasons why commodities are likely going to come back in in a very robust way.

Market Breadth Widens In 2026

Cycles, Mean Reversion, And Tech’s Run

SPEAKER_00 0:53

So it's my birthday, and this year I'm celebrating by giving a special gift away to one of you. And to officially wish a happy my birthday to you, I've had this note with a few surprises from our signature T-Cood merch portfolio. And it's not just random merch. Instead, you'll find some items that really signal you know exactly what you're doing in these mergers. And this note, well, it won't have your portfolio, but it will make you look smarter than anyone pretending they know what risk common means at the grocery store. If you want it, here's what you need to do. Follow Lead Leg Report on app. Follow Mela underscore schaefer on at. Subscribe to Lead Leg Media on YouTube and like and share this video. Only one person gets the tote, but since everyone gets our content, it's really a happy my birthday to all of you. I'm your host, Melanie Schaefer. Welcome to Lead Leg Live. Now, markets are starting 2026 with a shift in tone. After years of narrow leadership, we're seeing broader participation, renewed interest in cyclicals and commodities, and a growing debate over whether HASA flows and AI enthusiasm have pushed parts of the market too far. My guest today is Michael Germano, founder and wealth manager at Keysage Wealth. Michael, it's so great to have you with me today.

SPEAKER_01 2:13

Likewise, pleasure, Melanie. You know, I'm I'm a student of history, and it's been my experience that in all aspects of life we see cyclicality and mean reversion. And just think of it, you know, if I were to use a sports analogy, think of how maybe historically some uh a baseball player might hit one home run a month and then he hits 10 in a month, right? Like that would be an example of where we see kind of outside outsized performance. And then at some point, he'll probably go back to that one a month. And with the markets, we see similar things. And fascinatingly, uh historically, what we find is the longer a particular cycle or season in the market persists, and the greater the outperformance or underperformance, then we tend to see the inverse happen at some point. So if we go back to March of 2009, post-global financial crisis, since then, megacap US technology has really just blown everything else out of the water and is probably getting a little bit long in the tooth. Now, there are some amazing companies, and there there were some amazing companies during the tech bubble, too. And a lot of them survived after going down 80% with the NASDAQ during that tech media telecom bubble. But they went down 80%, many of them. Some of them didn't make it, and some of the and many of the ones that did make it, it took 15 or even 20 years to get to that same level of valuation. So I do see some rhyming going on. The timing of how things will play out, when they'll play out, you know, we'll we won't know until until we know, right? So, but there's definitely a lot of rhyming going on in the AI space, especially, we see these circular deals, which again rhymes a lot with what we saw in the tech media telecom days. We see uh the tech companies, many of them went from massive free cash flows to today having negative free cash flow, or predicted for 2026, 2027 to have negative free cash flows. So there's definitely uh, it's definitely a prudent time to be really thinking about all right, how comfortable am I with these valuations and the growth potential? And where might there be some better opportunities as well?

SPEAKER_00 4:57

Yeah, Michael, and speaking uh about timing, uh, which you mentioned, passive investing has grown enormously over the last decade or so. Do you think those flows are now creating better conditions for active managers? And if so, where in particular?

Passive Flows And Active Opportunity

Building The Commodity Supercycle Thesis

SPEAKER_01 5:12

Yeah, yeah. So again, going back to cyclicality and mean reversion, you know, the passive train, if you will, which really exacerbated in part because of quantitative easing post-global financial crisis, has really uh created a lot of market inefficiencies. And it's fascinating because if we look at, you know, if we look at passive flows, right, they're they're agnostically buying regardless of the price. And it's almost like the more persistent they are, the more persistent they become. So in other words, there's market cap weighted, right, and then there's equal weighted. And the equal weighted, you know, the methodology is that based on the particular uh number of stocks in that particular index, say they're 50, then 2% would go to each. So work similarly, but just a little bit different methodology. But the outcome is the same. They're agnostically buying regardless of fundamentals. And the longer that persists, which, you know, again, has been happening since March of 2009, uh, is continuing to create these inefficiencies. And my strong belief, based on historical precedent and also just fundamentals eventually will need to matter again, is that things will shift. And when they shift, they're likely going to shift in a way so that it's no longer US megacap technology, but it's probably a combination of small, mid-cap, non-US, non-technology sectors like materials, industrials, healthcare, financials that in many ways have underperformed. Not to say that some technology, megacap U.S. companies won't do well. But again, the odds are that there are a lot better opportunities and there'll be a lot more winners in those buckets of underperf of companies that have underperformed for the last decade and a half plus.

SPEAKER_00 7:24

Yeah, and that's sort of what I was gonna ask about next, because I I mean energy and materials especially are some of you know the commodities that have started to regain attention. Of course, do you believe we're entering an emerging commodity supercycle? Or is this more tactical than structural?

Processing Bottlenecks And Supply Chains

Dollar Dynamics And Reserve Shifts

SPEAKER_01 7:43

Yeah, yeah, Melanie, great question. And I I agree that we're at the beginning of a commodity supercycle. And you know, if we if we look at what's happening, I mean, there's at least four or five things that are happening. I mean, the first thing that's happened is there's been this decades-long underinvestment in mining, uh transporting, uh, exploring all these critical minerals. And then we have these uh long-term themes happening like reshoring, uh deglobalization, electrification of the grid. Uh we have um infrastructure upgrades, we have AI, cloud, and data center growth. And you know, you put all these things together and you start to see that, hey, there are a lot of uh, you know, there are a lot of reasons why commodities are likely going to come back in a very in a in a very robust way. And then if we look at not just the commodities themselves, but how the commodities are being processed, you know, then things get even a little bit more complicated. Because even for a country like the United States, who that has all of these needs for these important commodities, they we have to ship most of them outside the United States for processing for various reasons, including environmental reasons, including economic reasons. Uh so you know, we're in this position now where you look at some commodities like um gallium is almost 100% processed outside the United States. Uh gallium is for radar, 5G, next gen semiconductors. Aluminum, over half of the smelting happens outside the United States. Copper, over 60% happens outside the US. And you pick almost any commodity, and then you know, it's uh it's not a bright picture unless you're a commodity investor.

SPEAKER_00 9:58

Speaking of, you know, the different facets and and strategies involved in in investing in portfolio uh construction, I wanted to ask you about the US dollar next. And you know, with fiscal policy and deficits, rate expectations all coming into play. How do you see the dollar evolving from here? And and what does that mean for asset management?

SPEAKER_01 10:20

Yeah, yeah. It's very fascinating because if we look at the administration, and in particular, if we look at the economic advisors for the president, Stephen Morant, Scott Bessent, they uh they've been very vocal. They even wrote a paper uh called uh Muara-a-Lago Accord, which I'm sure a lot of people have heard about. And it they basically came to the conclusion that the dollar has persistently been overvalued because of our reserve status and the effects of the overvalued dollar are number one, it de-industrialized and hollowed out the manufacturing capacity of the United States. And two, it's created these persistent and growing fiscal deficits. So uh it's not surprising to see that the dollar has weakened, and that's probably going to stabilize at some point. Where it stabilizes, who knows? But uh it's not surprising to see some of the things that have been happening, right? Commodities are generally priced in dollars, commodities have gone up, not just because of a supply-demand imbalance, but also because the dollar's been weakening, precious metals have gone parabolic in many ways, in part because the dollar has weakened, in part because sovereigns are now looking to change their composition of reserve assets to include other alternatives, including gold.

SPEAKER_00 11:51

Yeah, and uh, you know, to sort of round out uh the the conversation, I wanted to ask next about AI. You know, we talked about commodity supercycle. There's also talk about an AI bubble risk. How should investors separate real innovation from excess? And where do you think expectations may be getting ahead of the fundamentals?

Lending, Credit, And Tax-Efficient Liquidity

SPEAKER_01 12:11

Yeah, again, just going back to historical precedent, right? If we look at the railroads, the over 90% of the railroad companies ended up going bankrupt. Uh I mean, it was close, it was actually closer to 100%, but 90% of the capacity ended up being used, which was great for the nation and great for Europe too. Uh we look at the automobile, you know, the development of the automobile, and there were over 1,500 automobile companies. And what happened over time, very quickly, actually, we saw that it whittled down to a handful in the US, actually, only a couple in the U.S. in the beginning that survived, and a couple in Europe. And uh, you know, here we are over 100 years later, and we still have you know little more than uh a handful of successful US and non and European and Asian manufacturers. And I think we're gonna see a similar the likelihood is that we're gonna see similar things play out related to AI. So for example, uh there are a lot the the hyperscalers and some of the biggest mega tech uh tech companies are likely gonna survive, right? What what I keep reminding investors though is just like what happened in the tech media telecom bubble, you know, I don't want to be that person who buys at the high and then has to wait 20 years after a 50, 60, potentially 80 or 90 percent correction to get back to baseline. Right. So uh there are probably hundreds or thousands of these AI and AI-related companies that are not gonna make it. And there are probably gonna be a a handful of really big winners, and then there'll be a lot of smaller winners too. But uh at this stage, I think it's really people need to be extra discerning about their expectations, and they need to figure out how much of their portfolio they want in the space, because if I'm right and we see this mean reversion, and we start to see non-tech, small, mid-cap, non-US, uh outperform, right? Like I'd rather be there and have a margin of safety and have a lot more upside instead of buying something that's already run up to multiples of its original value and needs a lot of work just to arguably get to its current valuation, let alone double or 10 times from where they currently are.

SPEAKER_00 15:07

Yeah, and I talking a little bit more, I want to focus a little bit more on your methodology. You you focus on how wealthy investors compound capital through lending and credit strategies. How does that work in practice and why is it particularly relevant right now, do you think?

Connect With Keysage And Closing

SPEAKER_01 15:23

Yeah, yeah, great question, Melanie. And it's fascinating because uh I mean, i if we look at uh you know who pays the most amount of taxes and where that tax revenue comes from, right? A lot of it comes from capital gains taxes. And if we look at some of uh the wealthiest people in the world, many of them don't even have a salary, right? They elect to just take stock uh or have some other bonus compensation that's not wages. And as a result, you know, they don't have much in the way of wage income, but they do have access to liquidity. And, you know, one of the secrets uh that uh these wealthiest people take advantage of is they utilize their assets to borrow against it in a very tax-efficient way, right? Because it's a loan, they don't have to worry about selling, right? So can it continue to appreciate, or if the value has gone down, they don't have to sell it at a loss. And most importantly, they don't end up paying taxes on it. So a lot of people utilize something like a generic term, we might call it a securities-based line of credit or securities-based lending facility, which allows people to leverage their portfolio without selling it and without incurring taxes.

SPEAKER_00 16:50

Yeah, it it's it's important to definitely for people to be looking into for everyone else who's watching and and for those who want to learn more about your work and what your approach is at Keysage Wealth, where's the best place for them uh to go to learn more about you and uh to connect with you and your team?

SPEAKER_01 17:07

Yeah, we've primarily been utilizing LinkedIn. And one of the things that I consistently do is usually two or three, sometimes four times a month, I'll put out a video on something financially or sometimes not financially related. And I keep it, you know, uh I put a lot of variety into it. So sometimes it might just be a quote to get people thinking, or other times it might be something related to financial planning or taxation, or perhaps the market. So a good place would always be to just look us up on LinkedIn. You can see some of these videos. And obviously, feel free to uh on all the videos, we also have a link to schedule a time to speak.

SPEAKER_00 17:55

Perfect, fantastic. Well, Michael, thanks so much for joining me. And thanks to everyone for watching. Be sure to like, share, and subscribe for more episodes of Lead Like Live.