ONE BIG THING

Exclusive: Fed's Goolsbee worries AI may cause ‘aggregate overheating’ in the economy

Speaking exclusively to Fortune’s Ellie Pringle, Federal Reserve Bank of Chicago President and CEO Austan Goolsbee told us how he thinks AI affects inflation. The demand for products and services to build AI data centers may be crowding out money from other sectors, he said. 

"I would characterize the expansion of the data centers as very hot, but largely shoving other parts of the economy down,” he said.

"The rise has been stepping on others—they're competing for the resources. When I'm touring around the Seventh district, people [are] saying: 'We're having to scale back our plans because getting construction workers is too expensive, you can't get HVAC,' etc. That implies a sector rebalance that is different from an aggregate overheating, [but] that said, we're not far from that turning into aggregate overheating."

• Read the whole thing here.

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THE POLITICS OF AI

‘Toxic’ data centers may hurt Republicans in the midterms

President Donald Trump came out in favor of AI data centers on Monday—or at least strongly against the AI-haters. “The only reason that communities throughout the U.S.A. should not want Data Centers is if they want to end up being backwards and poor,” he said on Truth Social.

It’s not clear that Republicans fighting for midterm congressional seats will appreciate his sentiment. The job-killing, water-guzzling, electric-bill-inflating potential of AI has made the industry a poison among voters. In fact, a recent “leaked” memo from the National Republican Senatorial Committee, worrying about the possibility of Democrat Sherrod Brown beating Republican Jon Husted in the Ohio Senate race, called AI a “toxic brand.”

“Brown has made his opposition to [data centers] the centerpiece of his campaign against Husted. Brown is using it because it works. More than any other thing in this race, data centers are the anchor hanging around Husted’s neck,” the letter said.

Pimco Head of Public Policy Libby Cantrill believes the letter was likely leaked deliberately to get the attention of Republicans who don’t yet understand how their support for AI data centers may lose them races. 

“The politics of AI are getting worse,” she said in an email. “The speed at which it is becoming even more of a wedge issue speaks to the speed at which the development of AI is going. In many ways, AI in general has become the new boogeyman—replacing China—on the campaign trail.”

This cycle will be close—and closely Googled

Cantrill is right about the “getting worse” aspect. As this chart from Bespoke Investment Group shows, Google searches for “midterm election” begin to spike about now, and as the years have gone by, those spikes have gotten bigger. “Discussion of midterm elections was especially extreme in the last two cycles, and if you think that was bad, the current cycle could even exceed those extremes. That’s because for the month of August, searches for ‘midterm election’ have been at least 2.5 times greater than any other August since 2004,” the group said.

But without AI, there would be fewer jobs and lower GDP growth

The problem for Trump and the Republicans is that corporate capex going into AI is so massive it’s actually creating a ton of jobs and GDP growth. As this chart from Pantheon Macroneconomics shows, without AI capex the contribution of corporate investment to GDP would be roughly half what it is now, wiping more than half a percentage point off GDP growth.

Capex is juicing stock valuations outside the tech sector, too

And that spending is showing up in sectors outside AI, according to Ed Yardeni and Elias Griepentrog of Yardeni Research. In S&P 500 sectors directly tied to AI, such as Information Technology, forward earnings projections on their stocks are up 81.9% year on year. “That’s more than double the 36.0% gain for the S&P 500 as a whole. Other sectors tied to the AI buildout (including Industrials, Materials, and Communication Services) are showing robust growth too,” they said via email.

The growth of AI capex will peak in Q4, Wells Fargo predicts

All this may be coming to an end soon. Ohsung Kwon and his team at Wells Fargo believe we’re mere weeks away from “peak” AI capex growth, which will happen in Q4 2026, as this next chart predicts. The slowdown in capex growth follows increasing news coverage that uses the word “moratorium” in relation to AI, the team believes. (Note that even though that line drops off precipitously, it’s showing growth—so as long as it remains above zero, the sector is still growing, just more slowly.)

THE GULF

Iran, U.S. ramp up strikes in ‘tanker for tanker’ war

The price of Brent crude oil hit $95 per barrel this morning—a level it has not seen since July—after it became clear that both Iran and the U.S. intended to escalate their war in the Gulf region.

Iran launched a wave of attacks today against U.S. sites and targets in Gulf-area allies, including Erbil in Iraq, Kuwait, the UAE, Jordan, and Bahrain. The Islamic Revolutionary Guard Corps also confirmed that two tankers hit mines in the Strait of Hormuz after they attempted to navigate the passage without Iran’s permission, Al Jazeera reported. An Iranian military official said the U.S. should expect attacks to continue “as a lesson for them until they come to regret their acts of aggression," the FARS News Agency said.

The strikes came in retaliation for a wave of bombings on Iranian military targets by the U.S. yesterday, which killed 18 Iranians, including four guests at a wedding, Al Jazeera said. They included hits on two Iranian tankers as part of a new “tanker for tanker” policy that the U.S. hopes will teach Iran not to harass ships in the Strait, Axios reported. 

President Trump yesterday warned Iran that if it responded militarily, “they will be hit again at a much harder and higher level.” That warning appears to have been ignored.

• Russia secretly helping Iran develop supersonic cruise missiles - FT

THE MARKETS

Global selloff in stocks and bonds continues as hopes for peace with Iran recede

The S&P 500 notched its second-straight losing session yesterday, and U.S. futures are pointing to another down day prior to the open in New York this morning.

Global markets are a sea of red today: All major indexes in Europe and Asia were down. That was in reaction to increasing tensions in the Middle East, the rising price of oil, and the declining value of government bonds. The risk premium on the U.S. 30-year Treasury hit 5.29%, the U.K.’s 30-year gilt reached 5.92%, and the German 30-year bund rose to 3.85%—numbers we last saw in the 1990s and mid-2000s.

• S&P 500 futures were down 0.23% this morning. The index lost 0.71% yesterday. 
• In Europe, the Stoxx 600 was down 0.4% in early trading, and the U.K.’s FTSE 100 was down 0.56% before lunch.
• Asia: South Korea’s KOSPI was down 3.99%. Japan’s Nikkei 225 was down 2.85%. India’s Nifty 50 was down 0.76%. China’s CSI 300 was down 1.38%. 
• Brent crude was $95 per barrel this morning.
• Bitcoin was at $76,780.

In August, the krazy KOSPI was the winning asset class

South Korea’s KOSPI index has been the subject of controversy this year because it is dominated by two large tech stocks—Samsung and SK Hynix—and retail traders have used leveraged ETFs to magnify their wins and losses within it. The index rose 111% by June before crashing 38% through July—an insane ride. But the KOSPI was nonetheless the best-performing asset class in August, according to Deutsche Bank's tracked indices, and it’s the best year-to-date, too (it’s still up 52% in U.S. dollars, despite its troubles).

Even when the S&P 500 is down, it’s still up

As this chart from Ben Carlson at Ritholtz Wealth Management shows, time in the market beats timing the market. It shows rolling 30-year annual returns since 1926. The worst 30-year return of all-time was 7.8% per year, on average.

“It’s kind of amazing to think that the worst 30-year return over the past 100 years was a gain of nearly 850% in total,” Carlson says.

QUOTE OF THE DAY

“We'll worry about the government's debt when the Bond Vigilantes do. If a debt crisis is coming, we should make as much money as we can in stocks and sell just before the crisis hits.”

—Ed Yardeni & Elias Griepentrog of Yardeni Research.

NUMBER OF THE DAY: iPhones 

3.1 billion

The number of iPhones shipped under CEO Tim Cook’s 15-year reign at Apple. There are 2.5 billion active Apple devices on the planet right now, the FT reported.

THE FRONT PAGES TODAY

China’s Xi keeps Iranian president at arm’s length weeks ahead of Trump summit - CNBC

Tim Cook handed $47mn pay deal as Apple’s executive chair - FT

Apple joins Google in renaming Lake Ontario to "Lake America" - Axios

The Island Paradise That Is a Secret Hub for Russian Sanctions Evasion - WSJ

AI Data Center Spending to Reach $32 Trillion by 2050, PwC Says - Bloomberg

Allies Grumble That U.S. Is Hindering Global Economic Growth - NYT

‘Rich Dad Poor Dad’ self-help author Robert Kiyosaki is $1.2 billion in debt: report - NY Post

ONE MORE THING

Pabst Blue Ribbon offers reward for return of 33,984 cans of stolen beer

Sometimes, there’s nothing better than an ice-cold beer in the summer heat. Other times, there’s nothing more anxiety-inducing than trying to drink 4,496.33 gallons of beer before the police come knocking.

That’s the dilemma facing thieves this week after Pabst Blue Ribbon asked the public for help finding two truckloads of beer stolen from a distribution center in Montclair, Calif., according to Fortune’s Catherina Gioino. “STOLEN—40,000 lbs of beer,” it posted on Instagram. “We don’t fault you for wanting to brag to your friends how much PBR you have, we just wish you obtained it the honorable way.”

The company gave the thieves a deadline of “18 days and 44 minutes” to return the beer with “no questions asked,” likely a nod to the brand’s 1844 founding. It also said it would offer a reward.

PBR put the tally of stolen goods at 1,602 cases containing 33,984 cans of beer, including 860 cases of 25-ounce PBR cans at 15 per pack, and 546 cases of 12-ounce cans at 30 per pack, plus 196 cases of nonalcoholic Old Milwaukee.

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