Hiding in plain sight
The purpose of camouflage is easy to understand – if you cannot be seen, then you cannot be shot at, or at a minimum, your chances of survival are improved. This principle is well established in the natural world, and there are many examples of camouflage in mammals, marine life, insects and birds. In fact, almost any living creature that has a natural enemy will have developed some form of camouflage to survive. Natural camouflage has evolved over many generations and, in some cases, many thousands of years.
Humans also use camouflage but compared to nature we are amateurs, having only used it for the past 120 years or so. Today, camouflage is an essential survivability tool but in the early days of warfare, camouflage was not necessary. When weapons were short-range clubs, swords and pikes, combatants were necessarily close to each other. Even when longer-range bows and arrows, pistols and rifles were developed, camouflage was unnecessary because the weapon was inaccurate and the chances of being hit were quite low. Indeed, it was considered more important to project power and strength by being highly visible. Hence, the resplendent, if impractical, uniforms worn by the Redcoats.
When weapons became more powerful, more accurate and with longer range, the usefulness of ‘hiding in plain sight’ became apparent. Primitive camouflage was employed during the First World War with equipment such as helmets painted with random, earth-shade patterns, intended to disguise the shape of an unnatural object. During World War II, camouflage progressed to both an art and a science. Indeed, artists were invaluable in contributing their knowledge of colour perception and pattern to materials and technologies to reduce visibility. Fast forward to today and modern warfare is highly dynamic and soldiers and vehicles must be able to move rapidly. This means the background will also change quickly, so camouflage optimised for one background will be futile, or worse, actually revealing in another. Inspired by the chameleon, scientists are developing adaptive camouflage, which can change colour and pattern in (almost) real time.
Some things are more obvious than others
At first glance you might wonder why we have included a photograph of a rocky quarry. On closer inspection a camouflaged soldier should emerge, top left, in keeping with our theme. Once you can see the soldier, he or she becomes very clear and a common reaction is to wonder how you missed the person in the first place.
The highly acclaimed psychologist, Daniel Kahneman, is particularly known for his work in behavioural economics and the psychology of judgment and decision-making. He writes that we are predictably blind to the obvious, meaning that we often miss crucial and sometimes clearly important information, simply because we do not look for it, do not recognise it for what it is, or simply fill in gaps with intuition. Equally noteworthy is his observation we are not even aware of the things we are blind to; we are literally blind to our blindness. As we reflect on this past quarter and the behaviour of financial markets, our observation is the global investment community did not see information that was hiding in plain sight.
Trump did not attempt to hide anything
At the beginning of April financial markets fell precipitously following Trump’s now infamous ‘Liberation Day’ announcement regarding proposed reciprocal tariffs to be applied to all countries trading with the US. There has, of course, been much written and said about this and we do not propose to add anything further. What is noteworthy, in this context, is how Trump clearly telegraphed this approach during his presidential campaign. He described the word “tariff” to be “the most beautiful word in the dictionary”, and regularly suggested using tariffs to raise federal revenue and to bring back jobs to the US. In terms of levels, in August 2024 he proposed “10 to 20% tariffs on foreign countries that have been ripping us off for years.” And on China specifically, when asked in a Fox Business appearance as far back as February 2024, about suggestions he would impose a 60% tariff on imports from China, he said, “No, I would say maybe it’s going to be more than that.”
Indeed, Trump has publicly favoured much the same policy agenda since at least 1987. In September of that year he paid to publish full page adverts in the Washington Post and other US newspapers, pushing for lower taxes and higher tariffs, with the latter used to make other countries pay for their own defence:
Image Source: The Washington Post
Keeping our eyes wide open
Jumping back to the present, we believe global financial markets stand at a critical inflection point — with profound structural shifts fundamentally redefining investment paradigms. The confluence of geopolitical tensions, technological disruption, and macroeconomic realignments creates a landscape where conventional wisdom and established portfolio strategies are challenged. As always, this will create both opportunities and risks, as volatility and transformations historically tend to. Successful investors through this period will need to have a keen understanding of a fast-evolving backdrop as well as modern market dynamics and structure.
This is something the investment team at Ruffer have been increasingly focused on; particularly the role derivatives, structured products, passive flows and leverage are having on correlations and volatility at individual stock and index levels. A thought piece they published on this theme recently, including the following infographic:
Source: The Ruffer Review
Their conclusion? ‘Markets are being driven by flows and feedback loops, more than by fundamentals. And [the above] illustrates nicely one of the mechanics behind the expression hyper-financialisation – that is, a financial system where prices drive fundamentals, rather than vice versa’.
The extreme market moves we witnessed in August 2024 – when the Japanese stock market gapped decidedly lower and the VIX hit intraday levels not seen since the Global Financial Crisis – shone a light on these myriad interconnections.
Implication for portfolios
In a world that appears more complex than ever and an investment environment which is as complicated as it has ever been, we remain guided by our core principles. We believe some key rules of thumb around valuation and keeping things simple are valuable guard rails at times like these. Additionally, it is equally important to spend time thinking about what can go right, rather than to focus only on the things that could go wrong.
For example, as this quarter has drawn to an end, NATO nations agreed to spend 5% of GDP on defence, folding to pressure from the US President. Notwithstanding the moral implications of this, both US and European defence companies continue to rally hard. Looking beyond this initial reaction, given the changing nature of modern warfare this huge spending increase is also likely to buoy the commodities complex, as well as companies providing critical infrastructure, including cybersecurity. History guides us that cold wars are periods when innovation accelerates, and allocations to the tech sector will also remain a must.
EU GDP is 10x that of Russia, while Europe’s population is 3x bigger than the Motherland. Could this mean, with the EU finally ramping up their commitments, a resolution to the Russia and Ukraine conflict has shifted nearer? Taking this forward, Russian energy becoming more widely accessible once again would put further downward pressure on oil and gas prices, a potential boost for global growth, profit margins and prosperity. If we add to this framework a US trade deal with China; Europe’s decision not to tax America’s tech companies; a more tempered suite of tariffs applied by the White House; and the fiscal boost which would follow a successful passing of Trump’s ‘One Big Beautiful Bill Act’, we could potentially enter a phase of ‘full steam ahead’ for the global economy.
While acknowledging the theoretical ‘blue sky case’ above, we also move forward with our core principles firmly in mind, especially when it comes to underlying valuations. For US equities, after the V-shaped rebound, these are once again stretched. All things considered, we are invested at just below our baseline risk levels, enabling us to prudently participate if recent momentum continues across the second half of the year, without being ‘over our skis’ if fresh dangers come into view.
Sources; Institute of Minerals & Mining
Russell Waite and Jon Proudfoot
Affinity Private Wealth is a trading name for APW Investors Limited, which is regulated by the Jersey Financial Services Commission. Registered office 27 Esplanade, St Helier, Jersey JE4 9XJ.
