🥛 The leverage wash-out continues 🌊

GM. This is Milk Road, the newsletter that regrets to inform you that it’s probably best for your mental health not to check your portfolio for a little while.

Here’s what we’ve got for you today:

✍️ The risk-off regime continues.
✍️ Can Bitcoin hold on?
🎙️ The Milk Road Show: Only Two Outcomes Matter for Bitcoin Now - $100K or $70K.
🍪 Jamie Coutts’ big portfolio shift.

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THE RISK-OFF REGIME CONTINUES

Alright, let’s start with the obvious. Last week was tough for all asset markets.

As we’ve been saying, macro has been a headwind for a while. It seems like that’s finally caught up with the market. This is likely temporary, but it is also acutely painful if you’re an investor.

Our Milk Road Macro Index score fell from -0.93 to -1.51 this week. That puts us deeper into CASH mode, which means 0% exposure to risk assets. The economy is still holding up. The markets aren’t.

What moved

Our dashboard has two halves. One tracks how markets are behaving, and the other tracks how the real economy is doing.

All of this week’s drop came from the market side:

Market momentum fell from -0.68 to -1.26. That -0.58 slide accounts for the entire decline in the overall score.
The economy’s cushion, which we call the “macro buffer,” held steady at +0.50.
Our stress score stayed flat at +0.00.

Last week we were watching two things. Both went the wrong way:

1. Stocks finally got nervous: For a while, the bond market’s fear gauge (the MOVE index) had been flashing warnings while the stock market’s fear gauge (the VIX) stayed calm. That gap closed this week, but not because bonds calmed down. Stocks sold off instead. The VIX jumped from 14.84 to 19.99 as stock investors caught up with what bond investors had been signaling.

2. Inflation didn’t cool: In September, core inflation (which leaves out food and energy) rose 0.3% for the month. That’s the second hot reading in a row. It wiped out the shaky support we flagged last week, and a December Fed rate hike now looks close to certain. Financial conditions, which measure how easy it is for businesses and investors to borrow, tightened as a result. That score fell from -0.79 to -1.38.

The AI debt problem is spreading

At the same time, cracks in AI-related lending started showing up across the tech supply chain:

Growth signals collapsed from -0.44 to -1.39. Stress in AI debt hit three of our inputs at once: borrowing costs for riskier companies, which sectors money is moving into, and shipping activity.
Breadth, which measures how many stocks are actually rising, fell to -1.02. Instead of spreading across the market, money ran into safe corners like energy and consumer staples.

On top of that, the IMF warned that the AI build-out’s “circular” debt could spread into a broader credit crisis. “Circular” here means AI companies funding each other’s spending, often with borrowed money. That matters because it’s the one scenario where trouble in markets starts dragging down the real economy too.

The economy is still holding, but the cushion is thinner

The good news:

Jobless claims stayed below 200,000 for the fourth straight week, so the job market is still solid.
The macro buffer is at +0.50 and the stress score is at +0.00.

The not-so-good news: our inflation trend reading moved from -0.10 to +0.00. In plain English, the six-month stretch of inflation slowing down is over.

What to watch: One more hot monthly core inflation reading (three in a row) would push that reading into positive territory. For this measure, positive is bad, because it means inflation is heading back up. Add the slow slide in our real economy score, and the macro buffer would start to wear down. That buffer has been the only thing anchoring the dashboard through this stretch.

What could turn this around

The big near-term event is the Fed meeting on October 27–28.

Markets now put the odds of a December rate hike at 84%. The best realistic outcome is the Fed signaling that inflation hasn’t yet cleared the bar for a December hike. That would give bond-market fear room to fall for real and start loosening financial conditions.

We’d need that, or signs that AI debt stress is staying contained before it spreads into the wider junk bond market. Without one of them, there’s no clear path for our score to climb from -1.51 back up to CAUTION, the next level above cash.

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CAN BITCOIN HOLD ON?

The Big BTC slipped toward the $80k support level over the weekend, following a brutal derivative flush that cleared out over $815M in crypto long positions, reported on TradingView.

Derivatives leverage tracked across major exchanges on CoinGlass has dropped back to multi-week lows as traders continue to de-risk.

The backdrop is still against risk: Bitcoin and crypto tend to trade like the riskiest part of the market. They usually move with tech stocks and with how easy or expensive it is to borrow money.

Interest rates matter most: Crypto does best when money is cheap and getting cheaper. Right now markets lean toward a rate hike by December, not a cut. Higher rates tend to strengthen the dollar and pull money out of speculative bets. Rising oil feeds inflation, and inflation raises the odds of a hike, so oil prices matter for crypto too right now.

Short-term dollar strength and stubborn domestic yields are forcing speculative capital into capital-preservation mode. That doesn’t necessarily mean Bitcoin will crash, but it’s going to be hard to break out to new highs until something changes.

The upside case: if the Fed sounds patient, Big Tech reassures investors and oil cools off, the market side of the model could improve quickly. When investors start taking risk again, crypto often moves first and moves furthest.

The downside case: a hot inflation reading or new strikes on Iran would likely hit crypto harder than stocks. Crypto trades 24/7, so it’s often where geopolitical news shows up first, including over weekends.

Bottom line: this is a big week of events that could break either way. Expect crypto to swing around Wednesday’s Fed decision and Thursday’s inflation data. A real change in direction probably needs both rates and oil to settle down.

The question heading into this week is whether spot buyers will step up to defend the round $80k line in the sand, or if we’re going to go test the 50-week moving average.

The ultimate question, though, is simple: where will Bitcoin find support?

If $80k holds through Tuesday's trading, this pullback looks like a textbook pre-meeting positioning reset.

If it breaks, market makers are already eyeing the $77k liquidity pocket as the next major demand zone.

Personally, I like Bitcoin here.

I think we will find our footing sooner than later, and recover to new highs in Q4. Unless the bears can break $75.5K and Bitcoin loses this range it’s been in for the last few months, the bias for me remains to the upside.

Despite the macro headwinds, for the moment, the bulls remain in control of Bitcoin.

If you want to see how the other Milk Road PRO analysts and I are navigating this in our portfolios, sign up for Milk Road PRO today for just a buck!

Stay safe, stay educated, and stay bullish!