War Economy Chapter 7: How Modern Wars Start Without Declarations

The S&P 500 dropped 3.2% on Tuesday. Meanwhile, most Americans didn’t know anything had changed. No declaration of war appeared on CNN. Nevertheless, institutional traders had already repositioned billions based on intelligence that wouldn’t reach public awareness for another 48 hours.

This scenario isn’t hypothetical. Rather, it represents the new reality of modern conflict where wars begin silently, markets react instantaneously, and formal declarations have become historical artefacts. The United States hasn’t formally declared war since World War II, yet it has engaged in dozens of military conflicts. Moreover, this pattern extends globally—Russia never declared war on Ukraine, instead calling it a “special military operation”.

For investors, this creates a dangerous information asymmetry. Financial markets increasingly price in conflicts before the public even knows they’re happening. Consequently, understanding how modern wars begin without declarations isn’t just academic—it’s essential for protecting portfolios and identifying opportunities that others miss.

The Death of War Declarations: Why Modern Conflicts Stay Undeclared

Before examining how markets respond to undeclared wars, we must understand why formal declarations have disappeared. This shift fundamentally changes how conflicts impact economies and investments.

The Constitutional Framework That Nobody Uses Anymore

The U.S. Constitution grants Congress the power to “declare war”, creating clear constitutional authority for initiating hostilities. The Framers intended this as a check on executive power, preventing presidents from unilaterally committing the nation to war.

However, constitutional text and modern practice diverge dramatically. The United States has fought in Korea, Vietnam, Iraq, Afghanistan, Libya, Syria, and numerous other conflicts without formal war declarations. Instead, presidents use various legal justifications: authorisations for use of military force (AUMFs), UN Security Council resolutions, humanitarian interventions, or simple executive authority.

This constitutional workaround matters for markets because undeclared conflicts create legal ambiguity. Are we “at war” or not? The answer affects everything from war powers acts to emergency economic authorities. Moreover, this ambiguity often benefits market insiders who can interpret signals that confuse retail investors.

The Political Calculus of Avoiding Declarations

Formal declarations create political accountability that modern politicians actively avoid. Declaring war requires Congressional votes that create clear records. Members of Congress must publicly support or oppose military action, establishing accountability if conflicts go poorly.

Undeclared wars, conversely, allow political leaders to maintain plausible deniability. Military actions can be portrayed as limited, temporary, or defensive rather than aggressive warfare. If operations succeed, leaders claim credit. If they fail, responsibility becomes diffuse. Therefore, the political incentive structure strongly favours undeclared conflicts.

Additionally, avoiding formal declarations prevents triggering various legal frameworks—international treaties, domestic statutes, and constitutional provisions—that activate upon war declarations. This legal ambiguity provides flexibility but creates uncertainty for markets trying to price risk accurately.

The “Special Military Operation” Euphemism Strategy

Russia’s invasion of Ukraine illustrates modern conflict labelling. Putin never declared war, instead framing the invasion as a “special military operation”. This semantic distinction serves multiple purposes beyond Russian domestic politics.

Internationally, avoiding war declarations maintains legal fictions. Countries can claim they’re not technically “at war” even while conducting full-scale military operations. This affects everything from neutral country obligations to international law applications. Furthermore, it creates confusion that savvy traders exploit while retail investors remain uncertain about the situation’s severity.

China similarly frames potential Taiwan actions as “internal matters” rather than war. Iran conducts proxy conflicts through Hezbollah and Hamas rather than direct military engagement. These euphemisms aren’t just propaganda—they’re strategic choices with concrete economic implications.

Hybrid Warfare: The Modern Conflict Toolkit

Traditional warfare involved armies, navies, and air forces engaging in kinetic combat. Modern conflicts, conversely, employ diverse tools that blur the line between war and peace. Understanding these hybrid warfare components is essential for anticipating market impacts.

Economic Warfare: Sanctions as Weapons

The U.S. Office of Foreign Assets Control (OFAC) administers economic sanctions that function as economic warfare without military engagement. These sanctions can devastate target economies while causing minimal direct impact on the sanctioning country’s economy.

Consider the Russia sanctions following Ukraine’s invasion. The West didn’t send troops, but coordinated economic sanctions attempted to cripple Russia’s economy through:

• SWIFT banking system exclusions
• Asset freezes affecting oligarchs and state entities
• Technology export restrictions
• Energy sector limitations (though inconsistently applied)

These economic weapons create market volatility across multiple sectors. Energy prices spike. Financial institutions with Russian exposure face losses. Companies dependent on Russian commodities scramble for alternatives. Moreover, secondary sanctions threaten countries trading with sanctioned entities, creating global ripple effects.

Tariffs as Economic Battlefield Tools

The WTO defines tariffs as customs duties on imports, but modern tariffs often serve strategic rather than purely economic purposes. The U.S.-China trade war demonstrated how tariffs function as conflict tools.

Unlike traditional wars requiring Congressional declarations, presidents can impose tariffs through executive authority. This unilateral power enables economic warfare that bypasses constitutional war-making constraints. Consequently, tariffs can be deployed rapidly, catching markets off-guard before political opposition coalesces.

Tariff warfare creates specific investment implications:

• Companies with complex supply chains face sudden cost increases
• Exporters lose market access or competitiveness
• Consumers pay higher prices, reducing discretionary spending
• Retaliation creates cascading effects across industries

Furthermore, tariff uncertainty prevents businesses from long-term planning, reducing capital investment and economic growth. Markets hate uncertainty, making tariff threats as damaging as actual implementation.

Cyber Warfare: Silent Destruction

Cyber attacks represent perhaps the most insidious form of hybrid warfare. A sophisticated cyber operation can cripple critical infrastructure, steal intellectual property, or manipulate financial systems—all without a single soldier crossing a border.

The SolarWinds hack exposed how deeply foreign actors can penetrate American systems. Similarly, the Colonial Pipeline ransomware attack demonstrated infrastructure vulnerability. These weren’t traditional military operations, yet their economic impact rivalled conventional attacks.

For investors, cyber warfare creates hidden risks that traditional analysis misses:

• Companies may not know they’ve been compromised for months or years
• Intellectual property theft destroys competitive advantages without visible evidence
• Critical infrastructure attacks can disrupt entire sectors instantly
• Financial system manipulation could trigger market crashes

Moreover, attribution difficulty allows plausible deniability. Even when evidence strongly suggests state actors, definitive proof remains elusive. This ambiguity prevents clear policy responses, leaving markets uncertain about escalation risks.

Proxy Warfare: Conflict Without Fingerprints

Modern powers rarely fight each other directly. Instead, they support proxies who do the actual fighting. This approach provides strategic benefits whileminimisingg domestic political costs.

The Yemen conflict illustrates proxy dynamics perfectly. Iran supports the Houthis. Saudi Arabia leads a coalition against them. The United States provides intelligence and weapons to Saudi Arabia. The conflict is “Yemeni” in name but represents a broader regional power struggle with global implications.

Proxy warfare affects markets through:

• Regional instability impacting commodity flows (especially energy)
• Arms sales benefiting defence contractors
• Humanitarian crises are creating refugee flows
• Potential for proxy conflicts escalating into confrontation

Additionally, proxy warfare creates monitoring challenges. Direct military engagement between major powers triggers an immediate market response. Proxy conflicts, conversely, can escalate gradually with markets slow to recognise the implications until situations deteriorate significantly.

Why Markets React Before Citizens Do: The Information Asymmetry

Perhaps the most frustrating aspect of modern undeclared wars is how quickly markets price in information that the public won’t learn for days or weeks. This information asymmetry isn’t accidental—it’s structural.

Intelligence Communities and Financial Markets

Intelligence agencies monitor global developments continuously. They track troop movements, intercept communications, analyse satellite imagery, and maintain human intelligence networks. This information flows to policymakers immediately.

However, policymakers aren’t the only recipients. Financial institutions with government contracts, defence industry executives, and well-connected investors often receive intelligence briefings or infer developments from policy discussions. Consequently, these actors can position portfolios before information becomes public.

Consider a hypothetical scenario: Satellite imagery shows unusual military activity near a contested border. Intelligence analysts brief senior government officials. Those officials begin quiet consultations with allies. Defence contractors receive preliminary warnings about potential equipment needs.

At each step, information leaks into financial markets through:

• Defence executives adjusting stock positions
• Institutional investors with intelligence community contacts
• Traders monitoring government bond flows are suggesting policy shifts
• Algorithmic systems detecting unusual trading patterns

By the time the news reaches the public, markets have already moved. Retail investors face a choice: chase performance into moves they don’t understand or stay on the sidelines while others profit.

The Fed’s Information Advantage

Central banks possess unique information about government preparedness for conflict. Federal Reserve officials participate in National Security Council discussions about economic warfare capabilities. They know about sanction planning, contingency preparations, and economic scenario modelling.

This information shapes monetary policy decisions that markets scrutinise. However, the Fed can’t publicly disclose the intelligence driving some policy choices. Consequently, market observers must infer hidden factors from policy actions and cryptic statements.

For example, if the Fed maintains higher rates despite economic softness, it might reflect hidden concerns about needing policy ammunition for potential conflicts. Markets struggle to price this properly because the underlying information remains classified.

Defence Contractor Order Flow as Leading Indicator

Defence contractors receive orders and inquiries before conflicts become public. A sudden request for specific munitions types, medical supplies, or logistics support signals potential military operations.

These companies’ stock movements often precede public awareness of conflicts. Observant investors monitor defence stocks for unusual volume or price action disconnected from public news. Additionally, options markets on defence stocks sometimes show suspicious activity ahead of conflict announcements.

However, this creates an unfair playing field. Retail investors see defence stocks rising but don’t know why. Institutional investors with industry contacts understand the underlying drivers. By the time the public learns about conflicts, the easy profits have been captured.

Satellite Imagery and Private Intelligence

Private companies now operate satellite systems rivalling government capabilities. Firms like Planet Labs, Maxar Technologies, and others provide commercial satellite imagery that institutional investors purchase.

These services identify troop buildups, military equipment movements, and infrastructure changes, suggesting imminent conflict. Furthermore, private intelligence firms synthesise open-source information, creating actionable intelligence that paying clients can access before the public.

This privatisation of intelligence creates a two-tier system. Well-funded institutional investors essentially buy advanced warning of conflicts. Retail investors, conversely, rely on free news sources that publish after markets have already moved.

Silent Escalation Risks: How Wars Intensify Without Notice

Undeclared wars don’t just start silently—they often escalate silently too. This creates portfolio risks that compound over time while investors remain unaware of deteriorating situations.

The Boiling Frog Dynamic

The famous (though scientifically questionable) metaphor of a frog in slowly heating water applies perfectly to modern conflict escalation. Small steps toward war rarely trigger alarm individually. Cumulatively, however, they represent dramatic shifts.

Consider the U.S.-Iran relationship over recent decades:

• Sanctions gradually tighten
• Proxy conflicts intensify in multiple countries
• Occasional direct military exchanges occur
• Cyber attacks increase in frequency and severity
• Rhetoric escalates incrementally

At no single moment did any action constitute an obvious declaration of war. Nevertheless, the cumulative effect represents a state of ongoing conflict with significant economic implications. Markets, focused on quarterly results, often miss this slow-motion escalation until sudden events force recognition.

Commitment Trap Escalation

Once countries commit resources to conflicts, political pressures prevent easy withdrawal. This creates escalation spirals even when rational analysis suggests de-escalation.

Historical analysis of U.S. conflicts shows this pattern repeatedly. Vietnam demonstrated how small initial commitments grew into massive military operations. Afghanistan followed similar dynamics. The political cost of “losing” exceeds the rational cost-benefit analysis of continued commitment.

For investors, this creates path-dependency risks. Initial small-scale operations might seem manageable and unlikely to significantly impact markets. However, once committed, political dynamics often drive escalation regardless of economic considerations. Therefore, even limited initial engagements deserve serious attention as potential precursors to larger conflicts.

Alliance Cascade Risks

Modern conflicts rarely stay bilateral. Alliance structures, treaties, and strategic partnerships create escalation risks through commitment mechanisms.

NATO’s Article 5 collective defence provision means that a conflict involving any member potentially involves all members. Similarly, U.S. defence commitments to Taiwan, South Korea, Japan, and other allies create tripwires for broader conflicts. China’s partnerships with Russia and Iran create opposing alliance structures.

These alliance dynamics can transform regional conflicts into global confrontations. Markets struggle to price cascade risks because they depend on political decisions under extreme pressure. Game theory suggests rational de-escalation, but history shows decisions under crisis conditions often deviate from rational models.

Technological Escalation Thresholds

Modern weapons create specific escalation thresholds that markets should monitor. Cyber capabilities, autonomous weapons, and precision strike systems lower barriers to escalation by reducing immediate human costs.

A country might hesitate to send soldiers into combat, knowing that casualties trigger domestic opposition. However, launching cyber attacks, deploying drones, or using precision munitions creates fewer immediate political costs. Consequently, leaders might escalate conflicts through these means when traditional escalation would seem too risky.

This technological enablement of escalation creates portfolio risks. Conflicts that would have remained limited in previous eras might escalate quickly because technology reduces escalation costs. Therefore, investors should monitor not just conflict intensity but also the specific technologies being deployed.

Front-Running by Institutional Algorithms: The New Market Reality

The information asymmetries described above get exploited systematically by sophisticated trading algorithms. Understanding this dynamic is crucial for investors trying to navigate markets during conflict emergence.

How Algorithms Detect Conflict Signals

Modern trading algorithms monitor thousands of data sources continuously, searching for patterns indicating coming market moves. These systems don’t need explicit intelligence briefings—they infer developments from observable signals:

Unusual government bond flows: When central banks or sovereign wealth funds suddenly adjust positions, algorithms detect the pattern even without knowing the underlying cause.

Defence stock order imbalances: Large institutional orders in defence sectors trigger algorithmic attention, prompting broader security analysis.

Options market skew changes: Sudden increases in put buying or call selling in specific sectors signal informed traders positioning for coming events.

Satellite imagery analysis: Some algorithms process commercial satellite data, identifying military buildups automatically.

News sentiment shifts: Natural language processing monitors news, social media, and government statements, detecting subtle tonal shifts suggesting escalating tensions.

Energy commodity patterns: Unusual movements in oil, natural gas, or other strategic commodities often precede conflict acknowledgement.

These algorithms operate at millisecond speeds, positioning ahead of human traders who might notice the same signals hours or days later. Consequently, by the time retail investors learn about emerging conflicts, algorithms have already captured available profits.

The Flash Crash Escalation Risk

Algorithmic dominance creates a specific systemic risk: false signal cascades. If algorithms misinterpret noise as conflict signals, their collective response can create self-fulfilling market panics.

Consider this scenario: A geopolitical risk algorithm detects unusual military communications traffic (perhaps a planned exercise). It begins selling risk assets and buying safe havens. Other algorithms detect this unusual market activity and, lacking context, assume informed trading based on hidden information. They join the selloff.

The cascade accelerates. More algorithms interpret the selling as confirmation of serious developments. Humans monitoring markets see rapid declines without clear catalysts. Some panic sell. Others assume algorithms know something they don’t. The market crashes despite no actual conflict development.

This dynamic has occurred in various contexts. The 2010 Flash Crash demonstrated how algorithmic trading can create rapid, severe dislocations. Similar dynamics could easily occur in conflict contexts, where uncertainty already elevates anxiety.

Information Velocity Creates Winner-Takes-All Dynamics

Modern information flows create winner-takes-all dynamics in conflict-related trading. The first actors to receive and act on information capture available profits. Late arrivals face deteriorated risk-reward ratios or outright losses.

This wasn’t always true. In previous eras, information spread slowly enough that multiple actors could profit from the same developments. War news took days or weeks to travel. Early recipients had advantages, but gaps between fast and slow weren’t insurmountable.

Today’s microsecond information transmission changes everything. The difference between first and second might be milliseconds in algorithmic trading. Human traders can’t compete. Even sophisticated institutional investors without cutting-edge technology infrastructure face severe disadvantages.

Consequently, retail investors must accept that they’ll never be first. The question becomes: how do you invest profitably when knowing you’ll always be late to conflict-related information?

The Liquidity Mirage During Escalation

Markets appear liquid during normal times. Buy and sell orders match efficiently. Spreads remain tight. Investors assume they can exit positions quickly if needed.

Conflict emergence, however, often reveals this liquidity as illusory. When everyone simultaneously tries to de-risk, buyers disappear. Bid-ask spreads widen dramatically. Market orders execute at terrible prices. Stop losses trigger cascades as automated selling hits markets without buyers.

Algorithms exacerbate this dynamic. They’re programmed to withdraw liquidity during uncertainty, precisely when human traders need it most. Furthermore, many algorithms simultaneously identify the same risk signals, creating one-sided markets where everyone wants to sell and nobody wants to buy.

This liquidity evaporation creates severe losses even for investors who correctly anticipated conflicts. You might have predicted escalation, but still suffer losses because you couldn’t exit positions at reasonable prices. Therefore, conflict risk management requires attention to position liquidity, not just directional accuracy.

Investment Strategies for Navigating Undeclared Wars

Given these challenges, how should investors position portfolios for a world where wars start without warning, and markets react before public awareness? Several strategies can help manage these risks.

The Permanent Hedge Approach

Rather than trying to predict specific conflicts, maintain permanent hedges against tail-risk events. This approach accepts paying ongoing insurance costs in exchange for protection when surprises occur.

Effective permanent hedges include:

Out-of-the-money put options: Buying 10-20% out-of-the-money puts on major indices provides cheap insurance against sudden market declines. These options cost little during calm periods but pay off dramatically during shocks.

Gold allocation: A 5-10% portfolio allocation to gold provides conflict hedging without requiring timing skills. Gold typically rises during geopolitical stress.

Volatility positions: VIX call options or volatility ETFs profit from fear spikes, though their time decay makes them expensive for long-term holds.

Treasury bonds: Maintaining some allocation to long-duration government bonds provides defensive positioning. These typically rise when risk assets fall during conflicts.

The permanent hedge approach costs money during peaceful periods. Nevertheless, it prevents catastrophic losses during conflict emergence while eliminating the need to predict specific events.

The Geopolitical Awareness Portfolio

Rather than reacting to conflicts, build portfolios resilient to various geopolitical scenarios. This proactive approach considers how different conflict types would affect holdings.

Energy sector diversification: Don’t just own domestic energy companies. Include international producers, renewable energy, and energy efficiency plays. Different conflicts affect each person differently.

Supply chain analysis: Evaluate holdings based on supply chain dependencies. Companies relying heavily on single-country inputs face more geopolitical risk than diversified supply chains.

Defence exposure: Some allocation to defence contractors provides natural hedging. These companies often benefit from conflicts that hurt broader markets.

Geographic diversification: Don’t concentrate holdings in single regions. Spread across North America, Europe, and Asia to prevent single-conflict devastation.

Currency hedging: Consider currency exposure in international holdings. Conflicts often trigger currency volatility, affecting returns.

The Contrarian Opportunity Approach

If you can’t front-run conflicts, look for opportunities after markets overreact. Algorithmic panic often creates mispricings that patient investors can exploit.

Indicators of algorithmic overreaction:

Indiscriminate selling: When quality companies unrelated to conflicts drop significantly, overreaction may have occurred.

Volatility spikes without fundamental deterioration: If VIX explodes but actual conflict impact seems limited, mean reversion opportunities exist.

Correlation breakdown: Usually, uncorrelated assets moving in tandem suggest emotional selling rather than fundamental reassessment.

Credit spread widening: Corporate bond spreads sometimes widen excessively during geopolitical stress, creating entry points.

This contrarian approach requires patience and strong conviction. You’re betting markets overreacted and will eventually recognise the overreaction. However, it avoids trying to predict conflicts while still profiting from conflict-induced volatility.

The Sector Rotation Strategy

Different conflicts affect sectors differently. Understanding these patterns enables tactical repositioning as conflict types become clear.

Energy/Materials: Rise during supply disruption conflicts (Middle East, Russia sanctions) Defence: Benefit from any sustained military operations Technology: Vulnerable to cyber warfare, supply chain disruptions Financials: Exposed to sanctions, payment system exclusions Consumer Discretionary: Suffer during recessions caused by conflict Utilities/Staples: Defensive during uncertainty

Rather than trying to predict conflicts, this strategy focuses on quickly identifying conflict types once they emerge, then rotating into sectors likely to outperform given that specific conflict’s characteristics.

The Bottom Line: Adapting to Warfare Without Declarations

We live in an era where the formal declaration of war has become a historical curiosity. Modern conflicts begin through sanctions, cyber attacks, proxy operations, and incremental escalations rather than dramatic announcements. Moreover, this silent warfare begins to create severe challenges for investors trying to protect and grow portfolios.

What’s definitely true:

• Formal war declarations have become extremely rare globally
• Markets react to conflicts before public awareness through multiple information channels
• Algorithmic trading exploits information asymmetries at speeds humans can’t match
• Traditional portfolio construction often fails to account for silent conflict escalation

What’s highly probable:

• Information asymmetries between institutional and retail investors will widen further
• Technological capabilities will continue to enable conflict escalation without traditional warning signs
• Economic warfare through sanctions and tariffs will remain preferred over kinetic military operations
• Alliance structures create cascade risks that could transform regionalconflicts  into global ones

What’s uncertain but possible:

• Cyber capabilities might eventually trigger Article 5 collective defence provisions
• Algorithmic trading could create false-positive conflict panics, causing severe market dislocations
• The accumulation of undeclared conflicts might eventually force a return to formal declaration requirements
• Information privatisation could reach extremes where only the ultra-wealthy have access to critical conflict intelligence.

Strategic imperatives for investors:

Accept information disadvantage: You will not be the first to know about emerging conflicts. Design strategies assuming late information.

Build resilient portfolios: Construct holdings able to survive multiple conflict scenarios rather than optimising for peaceful continuation.

Maintain permanent hedges: Some portfolio allocation should permanently protect against tail risks, accepting the insurance cost.

Study patterns, not predictions: Focus on understanding how markets respond to different conflict types rather than trying to predict specific events.

Watch leading indicators: Defence stocks, energy prices, bond markets, and VIX often signal emerging conflicts before explicit acknowledgement.

The uncomfortable reality is that wars will continue, even starting without declarations. Financial markets will continue pricing these conflicts before citizens realise they’re happening. Algorithms will continue exploiting information asymmetries at speeds retail investors cannot match.

Success in this environment requires abandoning the assumption of fair information access and instead building strategies that work despite being systematically late. The investors who thrive won’t be those who predict conflicts first—they’ll be those who build portfolios resilient to surprises they can’t foresee.

Modern warfare happens in shadows. Your portfolio strategy must account for that reality.

Spend some time for your future. 

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Disclaimer: This chapter provides an analysis of geopolitical and economic trends for educational purposes. It does not constitute investment advice, recommendations to buy or sell securities, or predictions about specific conflicts. Geopolitical events involve extreme uncertainty and can develop in ways that defy historical patterns. The strategies discussed may not be appropriate for all investors and involve substantial risk of loss. War and conflict create humanitarian costs that far exceed any financial considerations. Always consult with qualified financial and geopolitical advisors before making investment decisions based on conflict scenarios. Past market responses to conflicts do not guarantee similar future responses.

References

1. The Times of India. “Wars without declarations: The American way.” Retrieved from https://timesofindia.indiatimes.com/world/us/wars-without-declarations-the-american-way/articleshow/126451347.cms
2. National Constitution Centre. “Interpretation: Declare War Clause.” Retrieved from https://constitutioncenter.org/the-constitution/articles/article-i/clauses/753
3. Institute for Economics & Peace. “Economic Consequences of War on the U.S. Economy.” Retrieved from https://www.economicsandpeace.org/wp-content/uploads/2015/06/The-Economic-Consequences-of-War-on-US-Economy_0.pdf
4. Congress.gov. “U.S. Periods of War and Dates of Recent Conflicts.” Retrieved from https://www.congress.gov/crs-product/RS21405
5. Hoover Institution. “What Happened To Declarations Of War And Treaties Of Peace?” Retrieved from https://www.hoover.org/research/what-happened-declarations-war-and-treaties-peace