DoubleLine: Digital Currencies Will End The Dollar's Status As The World's Reserve Currency

 From Zero Hedge

We most recently described the Fed's stealthy plan to deposit digital dollars to "each American" during the next crisis as an unprecedented monetary overhaul, but more importantly, a truly stealthy one: there has barely been any media coverage of what may soon be a money transfer by the Fed - a direct stimulus to any and all Americans - bypassing the entire Legislative branch in an attempt to spark inflation after years of losing the war with deflation.

That's why two weeks ago we we delighted to read that none other than Jeff Gundlach's DoubleLine, one of the highest profile asset managers today, published a paper authored by fixed income portfolio manager Bill Campbell exposing what it called "The Pandora's Box of Central Bank Digital Currencies", in which it echoed our claims, writing that "such a mechanism could open veritable floodgates of liquidity into the consumer economy and accelerate the rate of inflation. While central banks have been trying without success to increase inflation for the past decade, the temptation to put CBDCs into effect might be very strong among policymakers. However, CBDCs would not only inject liquidity into the economy but also could accelerate the velocity of money. That one-two punch could bring about far more inflation than central bankers bargain for."

Alas, that was not enough to bring the topic of central bank digital currencies into the mainstream financial media, which is perhaps understandable for two reasons: i) everyone's attention is glued to the outcome and the implications of the election and ii) most media members think of CBDCs as some useless version of bitcoin, when nothing could be further from the truth.

So perhaps in hopes of attracting much needed attention to just how profound the monetary overhaul that is quietly taking place behind the scenes, Doubleline's resident digital currency expert, Bill Campbell has penned a follow up note to his original report, in which he explains in stark and vivid clarity what is about to happen. In a nutshell, "the world’s central banks and the Bank of International Settlements (BIS) envision a network of multiple cross-border payment systems featuring direct bilateral exchanges in the world’s different currencies. Such a regime would discard the decades-long mediation through the world’s reserve currency, the U.S. dollar." In short, central banks are preparing to launch cross-border payment systems which represent a new global order which poses a "major threat to the dollar and its status as the world’s reserve currency."

Below we republish the full note in whole due to its accurate and succinct assessment of how profoundly CBDCs will change the existing monetary architecture once they are launched in a few years (or earlier):

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Bilateral Digital Currency Payments and the Twilight of the Dollar

by Bill Campbell, fixed income Portfolio Manager at DoubleLine (link)

If launched, central bank digital currencies (CBDCs), as I have recently warned, will put at risk the independence of monetary policy and what little is left of fiscal discipline within their borders of circulation.1 Central banks are not stopping at the replacement of money as we have known it. In conjunction with their developmental work on digital currencies proper, monetary authorities are devising a new structure for electronic payments to sweep aside the decades-long framework for payment settlements, both domestic and international. The world’s central banks and the Bank of International Settlements (BIS) envision a network of multiple cross-border payment systems featuring direct bilateral exchanges in the world’s different currencies. Such a regime would discard the decades-long mediation through the world’s reserve currency, the U.S. dollar. This paper examines implementation plans for cross-border payment systems and the threat this new global order would pose to the dollar and its status as the world’s reserve currency.

King Dollar: A Brief History

The dollar has stood as the world’s reserve currency since taking that crown from the British pound in 1944. In July of that year, delegates from 44 nations met in Bretton Woods, N.H., convening the United Nations Monetary and Financial Conference, where they reached a series of agreements for the post-WWII international monetary system. The dollar formed the monetary linchpin of the new order. Participating nations pegged their currencies to the U.S. dollar and in exchange received the privilege to redeem dollars in gold from the U.S. (the world’s largest holder of gold reserves) at the congressionally set rate of $35 an ounce. This started a period of “exorbitant privilege” for the U.S., to quote former French Presidents Charles de Gaulle and Valéry Giscard d’Estaing. Ever since then, thanks to the dollar’s reserve status, the U.S. can run a balance-of-payments deficit without the need to adjust domestic policy in order to settle its international trade bill. Because most international trade is transacted in dollars, which I explain in more detail below, in the most-extreme cases, the U.S. can print dollars to settle its balance of payment needs.2 All other nations must purchase dollars to fund their imports, and one way to attract foreign capital is with high real interest rates (interest rates above the domestic rate of inflation). On the margin, tighter monetary policy slows growth and compresses imports while attracting foreign capital. The U.S. doesn’t face that trade-off thanks to the dollar’s privileged status as the world’s reserve currency.

By the end of the 1960s, rising inflation and a surplus of overseas dollars had made dollar-gold convertibility unsustainable, and President Richard Nixon unilaterally canceled it on Aug. 15, 1971.3 The “closing of the gold window” effectively doomed the system of fixed currency exchange rates elaborated at Bretton Woods. By 1973, the regime of fixed exchange rates gave way to free-floating exchange rates. Despite de facto nullification of Bretton Woods, the U.S. dollar has remained unquestioned as the world’s reserve currency. Most of the world’s trade is transacted in dollars, with the majority of commodities traded in dollars. According to the International Monetary Fund, the dollar plays a dominant role in global invoicing. Through April 2020, the BIS reported, “The US dollar retained its dominant currency status, being on one side of 88% of all trades. The share of trades with the euro on one side expanded somewhat, to 32%.” The Japanese yen ranked third, with the currency being used on one side of 17% of all trades.4

The grumblings of French heads of state and other critics notwithstanding, a reserve currency is useful. (Figure 1) It facilitates global transactions, investments and international debt issuance, and interest payment and repayment by acting as a common denominator accepted by all countries. However, new conditions might be converging to depreciate the dollar in the forex markets and even one day topple its crown as the world’s reserve currency. In that event, the past of the British pound might not be prologue for the dollar. If central banking and the BIS dethrone King Dollar, I suspect no single currency will seize the crown of reserve currency. Instead, cross-border payments would be mediated by a conglomeration of bilateral arrangements.

Admittedly, for countries outside the U.S., such a system offers a very positive, even compelling feature: All countries would be able to settle their import bills in their own currencies, a privilege afforded predominantly to the United States and, to a lesser but noteworthy extent, the 19 countries constituting the eurozone and Japan. Even these countries, however, are obliged to settle payments for certain non-U.S. imports, notably oil and other commodities, in dollars.

SWIFT and Usurpers in the Wings

A key to the longevity of the dollar’s reign as the world’s reserve currency is its occupation as the principal medium of exchange by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the dominant provider of cross-border payment settlements. On May 3, 1973, which is to say, around the time fixed-rate forex regimes gave up the ghost, SWIFT was founded in Brussels with the support of 239 banks in 15 countries. Today, according to its website, the company connects more than 11,000 banks, securities organizations, market infrastructures and corporations in 200 countries. With the propagation of blockchain and cryptocurrency technologies, SWIFT faces fair and inevitable competition from new players in the private sector as well as older competitors in the business of the settlement of cross-border payment orders.5 SWIFT has been updating its infrastructure as well. In January 2017, the company rolled out its global payments innovation (gpi). In 2019, cross-border transfers via gpi exceeded $77 trillion, accounting for 56% of all cross-border payments for that year and 65% of SWIFT’s total cross-border payments, making gpi by far the most-used messaging system for international payment in the world.6

Whatever its resilience or vulnerability to private-sector challengers, SWIFT’s dominance faces a serious threat from outside the private sector – namely, the central banks, coordinated by the BIS. In a recently issued paper, the BIS and cosignatories, including the U.S. Federal Reserve Board of Governors and the European Central Bank, stated, “Central bank innovation is an opportunity for cooperation. Simultaneous research and exploration of CBDC by central banks could inform ways to improve cross-border payments.”7 The BIS has been spearheading research into “faster, cheaper, more transparent and more inclusive cross-border  payment services [which] would deliver widespread benefits for citizens and economies worldwide, supporting economic growth, international trade, global development and financial inclusion.”8 The BIS has acknowledged that, despite technological advances in creating a new cross-border payments infrastructure, some of these central bank initiatives “are still in their design phase and others remain theoretical.”9 In a working paper published by the BIS, authors Raphel Auer, Giulio Cornelli and Jon Frost wrote, “Central banks are considering multiple technological options simultaneously, current proofs-of-concept tend to be based on distributed ledger technology (DLT) rather than a conventional technological infrastructure.”10 However, the landscape is quickly changing as more central banks scale up research into payment systems.

We have already started to see movement on these initiatives. China and Russia have already rolled out competing settlement systems to SWIFT, and both are looking into more bilateral settlement capabilities with their trading partners. In 2014, Russia implemented an alternative to SWIFT called the System for Transfer of Financial Messages (SPFS). SPFS was seen as a response to the U.S. using its dominance in the global financial system to implement sanctions on Russia, its companies and individuals. In 2015, China launched its Cross-Border Interbank Payments System (CIPS). Stung like Moscow by U.S. financial sanctions, Beijing is encouraging its financial sector to make the switch from SWIFT. As more central banks work on their own settlement systems, Russia and China have shown that implementation can be a realistic goal.

“Uneasy lies the head that wears a crown.”

I foresee several big implications of the implementation of a new global payments system based on the bilateral regimes, all of which would put structural pressure on the dollar.

First, such a decentralized global payments system would take the world a big step toward removing the need for the dollar, or for that matter any other currency, to remain as the world’s reserve currency. Cross-border counterparties would settle payments in bilateral transactions in their own currencies, bypassing the dollar as an intermediary. The U.S. imports much more than it exports. These large current-account deficits create the need to have foreigners put their excess savings into U.S. assets to help stabilize the dollar. If foreign savings cease flowing into the U.S., the dollar will depreciate unless the import-export imbalance is corrected. (Figure 2)

Second, global central banks would no longer need to stockpile dollars and instead could diversify their foreign exchange (FX) reserves to a mix more commensurate with the countries with which they trade and conduct financial transactions. Dollar debt remains a large source of financing for many countries around the globe, but sovereign, corporate and other institutional borrowers have already begun to move some of this external financing into other denominations such as the euro and the yen.

Third, disintermediation of the dollar in cross-border payments could erode the greenback’s central role in pricing commodities and invoicing global trade. This would reduce a structural buyer of dollars. Outside the U.S., central banks have been forced to build up their dollar FX reserves in order to prevent a disorderly sell-off if exporters do not repatriate their dollar profits. In addition, in a reversal of norms in place since Bretton Woods, non-U.S. central banks might look to increase their holdings of gold relative to their dollar reserves.11 Central banks might increase the portion of their reserves allocated to gold, whose finite supply could help reduce debasement fears with respect to infinitely creatable CBDCs.

The End of a Single World Reserve Currency?

With the exception of two world wars in the first half of the 20th century, the world’s financial systems since 1815 have calibrated their international payments and banking reserves to a single reserve currency, first the British pound and the U.S. dollar since 1944. The nearly 80-year absence of viable alternatives has left Americans complacent about the dollar’s perpetuity as the world’s reserve currency. Outside the U.S., however, central banks and governments appear to foresee a future untethered from the dollar. The technology for such a delinking is here or soon will be. Central banks will possess the infrastructure to match their FX reserves to the currency mix and weightings of their balance of payments – and one day displace the dollar without the need to crown a new reserve currency.

Policymakers continue to steer intently into the uncharted waters of central bank digital currencies and decentralized global payment systems. Despite most of these initiatives still being in their theoretical design phase, global coordination among central banks will speed up their development and potential implementation. Armed with these currency and payment technologies, the world could rescind the exorbitant privilege the U.S. has enjoyed as printer of the world’s reserve currency and place structural pressure on the dollar to depreciate.

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Citations:

1    Bill   Campbell,   “The   Pandora’s   Box   of   Central   Bank   Digital   Currencies,”   DoubleLine.com,  Oct.  6,  2020.  https://doubleline.com/dl/wp-content/uploads/The-Pandoras-Box-of-CB-Dig…

2  The balance of payments includes all transactions made between entities in one country and the rest of the world over a defined period of time.

3    “Foreigners’  liquid  gold  claims  on  US  dollars  increased  tenfold  from  around  $7 billion in 1953 to around $70 billion in 1971. Over the same period US gold reserves  fell  from  over  $22  billion  to  less  than  $11  billion.  The  inescapable  decision facing the US authorities was taken on 15 August 1971 when the convertibility of the dollar at the fixed price of $35 per ounce of gold was ended,”  Glyn  Davies,  A  History  of  Money (4th edition: revised by Duncan Connors; 2016), pp. 465-466. University of Wales Press

4  Triennial Central Bank Survey, p. 3, Monetary and Economic Department, Bank for International Settlements (BIS), Sept. 16, 2020. https://www.bis.org/statistics/rpfx19_fx.pdf

5  See, for example, Martin Arnold, “Ripple and Swift slug it out over cross-border  payments,”  Financial  Times,  June  5,  2018.  https://www.ft.com/content/631af8cc-47cc-11e8-8c77-ff51caedcde6

6  “SWIFT gpi Transferred Over $77T In 2019,” Global Payments, February 11, 2020. https://www.pymnts.com/news/international/global-payments/2020/swift-gp…

7  “Central bank digital currencies: foundational principles and core features,” Oct. 9, 2020, p. 3. Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors Federal Reserve System and the Bank for International Settlements. https://www.bis.org/publ/othp33.pdf

8  “Enhancing cross-border payments: building blocks of a global roadmap,” Committee on Payments and Market Structures, BIS, July 2020. https://www.bis.org/cpmi/publ/d193.pdf

9  Ibid, page 4.

10  Raphael Auer, Giulio Cornelli and Jon Frost, “Rise of the central bank digital currencies: drivers, approaches and technologies,” BIS, August 2020, p. 5. https://www.bis.org/publ/work880.pdf

11   See  Bill  Campbell,  “The  Pandora’s  Box  of  Central  Bank  Digital  Currencies,”  DoubleLine.com,  Oct.  6,  2020.  https://doubleline.com/dl/wp-content/uploads/The-Pandoras-Box-of-CB-Dig…

QLess Courts Retailers With Line Management Software

From https://preiposwap.com/qless-courts-retailers-with-line-management-software/

Pasadena-based QLess, which develops software to help manage lines and appointments, is courting retailers as they look to how to best adapt to the COVID-19 era. The company said its software eliminates the need for physical lineups, enabling mobile or home waiting for retailers. The company says it enables virtual check-ins through a dedicated online portal with real-time SMS updates about wait times and placements in line. The company is led by CEO Kevin Grauman. The company said last month that it has been  seeing new customer wins as a result of the pandemic.

More info on this company from Crunchbase

QLess is the world's first Mobile, Remote and Interactive Queueing, FlexAppointments, Analytics, Real-Time CRM & Marketing platform. QLess sends voice calls and text messages to your customers' cell phones, so they're free to roam as far as their cell coverage will take them. QLess also lets customers opt-in to SMS promotions from the merchant, and lets merchants easily build an SMS marketing channel.

QLess is an award-winning wireless solution that has saved more than ten million users from more than 250 straight years standing in line at DMVs, restaurants, retail stores for Fortune 100 companies, shopping malls, doctors' offices, colleges and hundreds of other locations across four continents, as featured in The New York Times, WSJ, TechCrunch, CNET, Mashable, Fortune, PCWorld, NBC, ABC, Fox and many other leading news outlets.

QLess was the winner of six 2013 International Business Awards including: IT Executive of the Year, Innovator of the Year, Company of the Year – Computer Services, Most Innovative Company of the Year in Canada and the US, Company of the Year – Computer Software, and Executive of the Year – Computer Software, the Best Overall Business Services Company of the Year Under 100 Employees by the American Business Awards in 2010, named one of the Best Business Innovations of the year by the 2009 American Business Awards, one of the ten most promising new technology companies by Vator & The Funded.

QLess partners include BT, Alcatel Lucent and Telefonica, and clients include Vodafone, the states of TX, MI, KS, the Universities of CA & TX, the largest community college districts in the nation, Cleveland Clinic and many others.

Investors include the California Institute of Technology (Caltech) and successful entrepreneurs.

Elon Musk's Aggregate Compensation Reaches $11.8 Billion After Hitting "Adjusted EBITDA" Milestones

 From Zero Hedge:

Elon Musk, whose company is valued at around $400 billion as a result of what continues to appear to be interesting options activity and continued quarterly profits due to EV credit sales, growing accounts receivable and other interesting accounting anomalies, has now become the world's fourth richest person.

It's a fitting development for a capital market system that has, thanks to the Federal Reserve and a lack of action by the SEC, turned into nothing more than a running joke. 

Musk's aggregate compensation from a pay plan put into place only about three years ago has been $11.8 billion. Musk's latest award comes as a result of Tesla reaching milestones for "adjusted EBITDA" (yes, there was a multi-billion dollar compensation plan award for an adjusted number) and market cap. 

Musk's total fortune has more than quadrupled this year, to over $100 billion. 

As a reminder, the pay plan that has netted Musk more than $10 billion had a 10 year runway. Somehow, Musk has been able to cash in on the plan in about 40% of the time allocated for him to do so.

And it certainly doesn't appear to be due to robust growth for the company. As we noted a couple days ago after Tesla's earnings, it is bizarre that a company valued more than most other automakers in the world combined on its prospective growth, and is larger than both the entire US and European auto sector, shows muted growth ex-regulatory credits:

 

While superficially, Tesla reported a fifth consecutive quarter of profits, an earnings streak which could add momentum for Tesla’s inclusion in the S&P 500 Index, as noted below a sizable $397MM (up 197% Y/Y, and just under 50% of non-GAAP Net Income) was from the sale of regulatory credits. The amount was fractionally below the record $428MM reported last quarter.

Putting this number in context, TSLA reported GAAP Income of $331MM which were entirely due to the $397MM in regulatory credits.

Musk's compensation goals - as was pointed out by many in early 2018 - have little to do with GAAP profitability and consistent cash flow and instead are focused on 12 market capitalization milestones and 16 revenue and/or EBITDA milestones; the easiest figures to manipulate, should one be so inclined to do so. 

 

Many who were critical of Musk's compensation plan said it offered little incentive for the company to reach profitability, only to grow in size of market cap. Back in 2018, even the New York Times called Musk hitting his pay plan goals "laughably impossible". 

But instead, Musk did it. And he did it in less than three years. For a stunning comparison, while Musk was working his way to $11.8 billion in compensation, Tesla was was working on a $5.6 billion accumulated deficit, as per the company's last 10-Q. 

Independent Restaurants Go Dark To Keep The Lights On

 By Alicia Kelso of Restaurant Dive,

Never before have the lights gone out at so many independent restaurants in such a short amount of time. But there may be opportunity for some to bring their kitchens back to life — in the dark.

There's no question that more restaurants big and small are embracing dark kitchens amid the pandemic. The number of eateries using these concepts grew from 15% pre-pandemic to 51% in May, according to Technomic data.

But while major chains are entering the space to open up another revenue stream or expand into new markets at a reduced cost, plenty of small operators are turning to ghost kitchens just to survive.

The trend may already be having a ripple effect on the industry. Over the past few months, third-party ghost kitchen platforms serving independent restaurants have grown — and are growing — substantially. 

Demand for virtual kitchen companies is growing

Reef Kitchens, which manages food truck-like hubs that can host up to six restaurant brands, has seen an uptick in interest from independent restaurants since the pandemic hit in March. The company expanded its capacity by doubling its kitchens in its top markets, and plans to sign over 100 restaurants this year. COO Carl Segal said local brands now make up about 20% to 30% of the business, while regional and national restaurants comprise 70% to 80%.

"Pre-COVID, we had a good percentage [of] our own digital-only brands that we created to get our system up and running. Throughout the past few months, we started to [shift focus from] our brands and amp up the intensity around local, relevant brands because of demand," Segal said.

Denver-based ChefReady, which rents delivery-only kitchen spaces, has also experienced a "tremendous" amount of interest since the pandemic hit, ChefReady co-founder Nili Malach Poynter said.

"Before COVID, the ghost kitchen model was growing, especially in major cities. Now that COVID has shaken things up, more people are looking into it. Previously, a lot of independents couldn’t wrap their head around this new model, but the devastation they've experienced has changed that. I think the pandemic has opened up everybody to at least consider it," Poynter said.

"Previously, a lot of independents couldn’t wrap their head around this new model, but the devastation they've experienced has changed that. I think the pandemic has opened up everybody to at least consider it."

Nili Malach Poynter

Co-founder, ChefReady

Even online ordering and website design company BentoBox jumped into the ghost kitchen space earlier this year after experiencing an increase in such concepts using its services. In the past month alone, BentoBox has signed up about 30 ghost kitchen concepts and has launched four of its own — Thai Now, Artisans Oven, Heavenly BBQ and Drunk Chicks Chicken.

"Prior to COVID-19, we worked with several ghost kitchens, but we’ve seen a large increase over the past couple of months as restaurants look to reduce operating costs and financial risks," CEO and founder Krystle Mobayeni said.

Bringing independents back to life

The lower-cost model ghost kitchens offer has been a lifeline for some smaller concepts throughout the past few months, either because they’ve been forced to close or because their off-premise business from delivery and carryout has only generated a fraction of pre-COVID revenues.

Segal points to James Beard Award-winning chef Michelle Bernstein as an example. She voluntarily closed her Miami-based Café La Trova due to the coronavirus, but has partnered with Reef Kitchens to "bring it back to life," Segal said.

Restaurateur Michael Schwartz, who temporarily closed all of his Genuine Hospitality Group restaurants in the Miami market during the pandemic, has also partnered with Reef to keep business (and, in some cases, employment) going.  

"A lot of independents have been forced to close. Some are reopening, but they’re doing so with skepticism about whether they should open and how they should open. We’re able to be an extension of their brand and, in some cases, we’ve hired their employees to help work on their brands," Segal said.

The Local Culinary, a virtual restaurant group with more than 50 delivery-only concepts operating in the same kitchen, has also seen a remarkable increase in demand from independents throughout this past year. In fact, the pandemic is the reason the company expanded its business from company-operated concepts into what it calls the first-ever ghost restaurant kitchen franchise model. This decision was explicitly made to help independent restaurants survive, according to founder Alp Franko.

"We give independents access to up to 50 of our designed-for-delivery brands. We train and assist them throughout the process. Our goal is to help these independent restaurant owners bring in additional revenue on top of their existing revenue stream to be able to pay their bills and stay in business," Franko said. “Since launching the franchise in July, we have received hundreds of potential leads from independent restaurant owners.”

One of those restaurant owners, Richard Leteurtre, from Bistro 1902 in Hollywood, Florida, shut down for two months at the start of the pandemic. He then brought 16 of The Local Culinary’s brands into his existing restaurant to bring in extra sales. Franko said the ease at which Leteurtre was able to incorporate so many brands illustrates why the franchise model is so beneficial. “There is cross prep for several of the key items and ingredients across concepts. So, for example, the same recipe used for crispy chicken might be used in the tacos at another brand.

"Since launching the franchise in July, we have received hundreds of potential leads from independent restaurant owners."

Alp Franko

Founder, The Local Culinary

"In the first month alone, Richard attributed 15% to 20% of his total business to The Local Culinary," Franko said. "He also plans to add five to eight new brands in the coming months and will implement our ghost kitchen concepts in his new restaurant that will open soon."

The Local Culinary has also seen an increase in orders at its flagship South Florida ghost kitchen locations since March. Because of this demand, the company started to grow beyond that home market, signing three locations in San Francisco and eyeing a few locations in New York City, for example.

Branden McRill, founder of Philadelphia’s Fine-Drawn Hospitality, has also jumped into the ghost kitchen space amid the pandemic. The Commons virtual food hall, comprised of several restaurant concepts grouped together into one digital platform, opened earlier this month. The Commons’ layout was created by executive chef Jack Peterson, who conceptualized the ability to arrange the cooking line into six separate, completely differentiated menus. Though it’s early days, McRill is confident in the long-term viability of the model, especially as consumers grow more comfortable interacting with brands digitally. 

"One could say we’re pivoting for the current moment, but the other side of this is we’re actually working on developments for the next step from a business perspective," he said. "I don’t like putting patches on a sinking boat. I’d rather pull the boat back to port, rebuild the boats to be faster and stronger and put it back out to sea. That’s really what we’re more focused on doing. I’m not trying to buy time."

McRill, whose Fine-Drawn Hospitality has seven years’ experience running concepts like Walnut Street Cafe, The Post and Sunset Social, adds that now is the perfect time to take a risk in launching a concept like this. 

"It’s the perfect time period for people to try new things because people are the most open-minded to anything you’re going to do,” he said. "You’re going to get the most open-minded, forgiving audience you’ve ever had." 

The benefits virtual concepts hold for small operators

There are a lot of upsides for independents entering the ghost kitchen or virtual brand space, and chief among them is the lower costs — for occupancy, labor, equipment and more. As operators navigate cost pressures exacerbated by the pandemic, saving on occupancy rates — which can take up to 8% to 10% of a restaurant's gross sales — can ease a significant burden on a low-margin business. 

"Ghost kitchens are not the solution, but they are certainly one solution for restaurants that are looking to lower expenses and avoid uncertainty around reopening," said Mobayeni. “Because of this lower overhead, we predict that ghost kitchens are here to stay."

That’s not to say these concepts will replace brick-and-mortar. Segal said some of the restaurants he has worked with have replaced their physical locations with a virtual brand, but most are leveraging the model to augment their presence.

"Those that have kept their brick-and-mortar running have done so at a reduced capacity, so this is supplementing their business and bringing back some lost revenues," Segal said.

Ghost kitchen models may not be a silver bullet for a devastated segment, either. Without a physical independent restaurant scene, the industry loses its community hubs. The lack of a brick-and-mortar location also means that marketing efforts become more critical to entice digital-native customers, which may be challenging for a previously low-tech eatery to execute well.

Conversely, however, ghost restaurants could inspire even more menu creativity from chef-owned independent concepts. According to Fast Company, traditional restaurants can risk around $800,000 to test new menu items, but if a menu fails at a ghost restaurant, it only costs about $25,000.

"Most independents are owned by chefs and all they want to do is cook. They care about food and creativity. I foresee this model, because of its flexibility, as a big benefit to allow them to continue to do just that," Poynter said. "I would even argue this is opening up more doors for aspiring chefs who want to work for themselves as it requires significantly less capital."

That said, McRill believes the future will offer traditional opportunities for brick-and-mortar experiences, but alongside the new digital frontier.

"There’s a hell of a lot of ambience in Katz’s Deli at two in the morning, but if I just want a sandwich, that doesn’t need to be part of the experience," he said. "I think [ghost kitchens] are 100% upon us and are going to continue. And there’s going to be times and places for experiences, and there’s going to be times and places for nourishment and just eating."

The ghost kitchen model is here to stay for independents 

The growth of the ghost and virtual kitchen model should continue for some time and impact the entire industry. Poynter said this is especially true as more operators become anxious about reopening.

"COVID has put a lot of fear into a lot of restaurateurs and independents to realize this could all be taken away. They’re more apprehensive now and will be more mindful in making sure they have a stronger bottom line and keep their costs down as much as possible," she said. "Habits are being created, for both consumers and restaurateurs, and that will be hard to change."

Those habits include staggering growth in delivery, which facilitates these ghost kitchen models. Plenty of customers are finding that it’s more convenient to get their favorite restaurant’s food, or even exciting new options from virtual concepts, brought to them with just the push of a button. Or, they may just be anxious to dine out as the pandemic relentlessly lingers throughout the country. Either way, the timing seems right to have a lower-overhead, delivery-only model in place.

"The truth is it’s an entirely different game now than it was just a year ago. The biggest change we’ve seen from pre-COVID to now is now there is a greater sense of urgency. Independents have gone from having a conversation about this to realizing this is something they may need to do," Segal said. "When an independent restaurant closes its doors, they instantly sever their relationships with their customers. The customer just can’t access them anymore. Period. This offers a lifeline for independents to bring back those relationships by delivering their food to their customers’ homes."

Yuan Slides After China Unexpectedly Suspends "Counter-Cyclical Factor" In FX Fixing

 From Zero Hedge:

China keeps telling the world to stop buying the yuan, and the world keeps refusing to listen.

Just over two weeks after Beijing made it easier to short the yuan after the PBOC cut the reserve requirement ratio for FX derivative sales from 20% to 0%, a move which was "an attempt to moderate the yuan's increase", and which Goldman said "likely signals the PBOC's discomfort with the recent rapid appreciation of CNY", yet which failed to lead to a sustainable drop in the yuan, On Tuesday China lobbed another shot across the bow of the increasingly strong yuan when a statement on website of China Foreign Exchange Trade System announced that some banks that contribute to the yuan’s daily reference rate have recently halted the use of the counter-cyclical factor (CCF).

The confirmation followed a Reuters reports that the PBoC has asked banks to neutralize the counter-cyclical factor which is typically used when the currency is weakening at a pace that is uncomfortable for the central bank i.e. effectively removing it in the midpoint fixing. Under the reported tweak, lenders would have more room to submit quotes for a weaker fixing and guide the currency lower in the spot market, which is precisely Beijing's goal in light of the recent yuan appreciation. The move comes as Goldman writes that the "countercyclical factor has been muted recently" as a result of the recent strength in the Yuan.

As a reminder, the counter-cyclical factor was introduced by the PBOC on May 26, 2017  to reduce exchange-rate volatility while undermining efforts to increase the role of market forces. At the time, the move was seen as Beijing "moving the goalposts" in its bid to reduce yuan volatility, to punish currency manipulators (read Yuan shorts) and limit capital outflows (the currency had weakened for three straight years, triggering draconian capital controls and the surge of bitcoin). The CCF was then suspended in January 2018 when the yuan surged, only to be reinstalled later that year when the Yuan slumped again.

And now the CCF has been re-suspended again.

According to Citi FX trader Charmaine Cheok this is "yet another signal from the central bank that they are loosening the reins on the currency and allowing for more flexibility. I reckon the reason the market is moving higher on spot now is merely a reflection of positioning, this announcement doesn't have any immediate impact on spot."

Other trading desks agreed, noting that this is in line with the policy direction to allow the FX to be more market driven and ties into the goal to promote RMB internationalization. Or at least allowing it to be market driven when it is strong, hoping the recent deflationary appreciation in the yuan will end.

In any case, now that China has confirmed the move, strategists expect higher volatility of the CNH/CNY given the CCF typically dampens stronger USD impact on fixing more than the appreciation side, even if the actual impact could be relatively limited.

While the market impact was muted indeed, the offshore yuan fell after the Reuters report, dropping as much as 0.34% to 6.7234 a dollar afterward. The currency has rallied 6.9% from a low in May and last week reached a two-year high.

And now that the PBOC has both cut reserves and re-suspended the CCF in hopes of weakening the yuan, and seemingly failed...

... the question everyone should be asking is what will China do now to further devalue its currency which continues to surge on the back of dollar weakness and China's "V-shaped recovery" One wonders: is China's economy about to suffer an "unexpected" sharp spike in covid cases to help the PBOC hammer the yuan?