Good morning. On Fortune’s radar today:
- The high price of war.
- Could Iran tank the market?
- Stocks down as bond yields enter “new era.”
- AI models often don’t know what time it is.
- What if “temporary” inflation is permanent?
- 63% of religious books on Amazon are AI slop, a study finds.
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ONE BIG THING
The price of war: $33 billion and climbing
The war with Iran cost U.S. taxpayers $33.4 billion through June, according to a new report from the Pentagon’s Lead Inspector General. “Iranian strikes damaged and destroyed hundreds of buildings and structures at U.S. bases in Kuwait, Bahrain, Qatar, UAE, Saudi Arabia, Iraq, Oman, and Jordan during the conflict,” the report states. “In addition, dozens of U.S. aircraft were destroyed or damaged during OEF [Operation Epic Fury].” The conflict also “resulted in strategic inventory shortfalls [of weapons] and revealed industrial base bottlenecks for munitions resupply,” it said. Fourteen members of the U.S. armed forces have lost their lives in the conflict.
Posting on Truth Social, President Donald Trump said: “I’ve just received a Report that the United States is producing more Exquisite and Elite Weapons than at any time in our History. They are being delivered on a daily basis to our Forces in the Middle East, and beyond. Our Defense Company Factories are moving 24/7.”
He also blamed former President Joe Biden for the high price of oil and said Iran “wants to make a deal, quickly and badly.”
MORE FROM FORTUNE
Why ChatGTP’s Founder Wants to Pump the Brakes on AI | Fortune Daily
Trump’s ‘largest deregulatory action ever’ in the power sector will keep old coal plants online longer to fuel the AI boom - Jordan Blum
China has too much green energy. Experts think AI can fix that - Angelica Ang
The American Dream isn’t what you think it is - Nick Lichtenberg
Kate Dohaney says AI demands a different type of leadership—“I’m not a CEO sitting back saying cut, cut, cut.” - Kamal Ahmed
Trump tells Americans not to ‘kill the golden goose’ rejecting voters’ turn against AI and data centers - Eva Roytburg
Trump’s ‘largest deregulatory action ever’ in the power sector will keep old coal plants online longer to fuel the AI boom - Jordan Blum
THE DOOM-MONGER CASE
Trump’s war in Iran could crash the stock market, some analysts fear
Some Wall Street analysts are wondering whether the war with Iran could tank the stock market. Here’s how that logic works: The war has driven the price of oil to more than $100 per barrel, and that’s fueling inflation in the U.S. In fact, inflation expectations—which drive up inflation as sellers raise their prices in anticipation of inflation that has not happened yet—are on the increase too, as this chart from Nancy R. Lazar and her team at Piper Sandler shows:
When inflation stays high—and it has been above the Fed’s 2% target for five straight years—the bond market usually reacts by increasing the risk premium on long-dated bonds. (You need a greater reward to hold bonds if your rewards are being eaten by inflation.)
High inflation also pressures the Fed to reduce the money supply by increasing interest rates, making cheap credit harder to get. That’s bad for stocks because it means future rounds of new money will be more scarce and expensive.
“Rising bond yields driven by unchecked inflation can potentially put pressure on the stock market. Stocks are likely to react unfavorably if the 10-year Treasury yield rises above 5.25%,” according to Richard Saperstein, chief investment officer at Treasury Partners, an investment firm with $16 billion in assets under management.
The increased interest rates will eventually feed through into the corporate credit market, where AI hyperscalers have obtained the capex they need to build out their data centers. Increased rates will lower the supply of that debt, because companies will be more reluctant to spend their cash on higher interest payments.
And if that happens, then the whole AI capex cycle—estimated at $1 trillion in total spending this year—comes into question, hence the potential for a correction in the stock market.
THE MARKETS
Global selloff continues as bond market enters ‘new era’
Global stock markets continued their decline today as bond yields continued to rise, as investors worried that U.S. government debt is becoming increasingly risky. The 10-year Treasury yield was 5.03% this morning. The 30-year was at 5.39%, a level it has not seen since 2023. The WSJ called it a “new era” and the FT quoted Cresset Wealth Advisors chief investment strategist Jack Ablin saying, “this is a moment to pay attention to.”
- S&P 500 futures were down 0.59% this morning. The index lost 0.48% yesterday.
- In Europe, the Stoxx 600 was down 0.84% in early trading and the U.K.’s FTSE 100 was down 0.68% before lunch.
- Asia: South Korea’s KOSPI was down 0.85%. Japan’s Nikkei 225 was flat. India’s Nifty 50 was down 0.94%. China’s CSI 300 was down 0.67%.
- Brent crude was $107 per barrel this morning after touching $109 yesterday.
- Bitcoin was at $76,884.
CHART OF THE DAY
AI struggles to tell the time correctly
One benchmark test for AI models is to show the model a clockface—which might have Roman numerals or be partially occluded—and ask it what time the clock says. Surprisingly, AI is bad at this. Even the best models only get the question right about 50% of the time, according to this chart from Adrian Cox at Deutsche Bank. Humans, however, can tell the time with greater than 90% accuracy.
AI has a “jagged frontier,” Cox says. “AI makes hard things look easy, and easy things look hard.”
THE FED
What if the Fed is grappling with the ‘wrong’ type of inflation?
If the Fed delivers an interest rate increase of 25 basis points tomorrow, that would be a mistake, according to Goldman Sachs’ chief U.S. economist David Mericle. The factors driving inflation—oil, tariffs, etc.—are all temporary, he says.
“We do not see a strong economic case for raising the funds rate,” he said in a note this week. “We estimate that all of the overshoot of the 2% [inflation] target can be attributed to one-time factors whose impact is likely to fade, and we see the improvement in core PCE inflation from June through August to an annualized pace of around 2.5%, inclusive of the likely impact of the upcoming methodological revisions, as early evidence of this.” (The bank’s official position is that a rate hike will actually happen.)
Mericle’s position is part of a behind-the-scenes debate about whether inflation is “transitory” and based on temporary moves in “relative prices,” or a more structural feature of the U.S. economy. The classic position, expressed by Milton Friedman in 1963, is that inflation is only ever caused by the government printing too much money: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
The challenge to that idea is that financial restrictions on imports and reductions in the supply of oil are real things that lead to real increases in prices, which in turn force other market actors to raise their prices in order to claw back their losses.
So the Fed's dilemma is this: Is inflation really inflation if it's caused by supply shocks and not money printing?
The CME FedWatch futures market thinks that Friedman and Mericle have already lost this debate: The index is pricing a 95% probability of a 0.25% hike this week.
NUMBER OF THE DAY: Low on gas
21% full
The level of stored gas that Europe will have left by the end of this coming winter due to the war with Iran. David Lewis, a liquid natural gas analyst at Wood Mackenzie, told Fortune in an email: "The combination of Hormuz supply disruptions and below-average storage leaves Europe with very little room for error this winter.”
THE FRONT PAGES TODAY
Russian businessman bankrolls Donald Trump Jr’s Bahamas wedding after-party - FT
Trump's $5,000 checks get chilly Senate GOP reception - Axios
Nvidia CEO Puts Trump on Phone While Downplaying AI Risks - Bloomberg
China’s Top Spy Chief Warns A.I. Is a Threat to Party Rule - NYT
ONE MORE THING
AI is ruining the book business
Of more than 2,000 books on religion published on Amazon over the last 12 months, 1,272 titles, or 63%, were flagged as being likely written by large language models, Fortune’s Sasha Rogelberg reports.
And a separate Stony Brook University-led study found that of 14,419 self-published genre-fiction books sold on Amazon between 2023 and 2026 and run through AI-detection software Pangram, 2,880 (about 20%) had “substantial” AI text, meaning more than 25% of the book’s prose was flagged as AI-generated. Additionally, 2,168 had more than 50% of its prose AI-generated. Nearly 1,000 novels were more than 90% AI-generated.
The flood of AI books is lowering per-book revenue. Over a period of three years, the number of books with observed sales in a quarter increased 19.2-fold, but quarterly revenue increased only 8.9-fold, indicating decreased revenue per book sold.
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