Reaping the Whirlwind

No worries!
There's a great scene in one of my favorite Italian movies, Il Ciclone (The Cyclone), in which the young, romance-deprived accountant who is our protagonist zooms back to his home on his 10,000-year-old moped to take part in the frenzied flamenco party that's taking place on his front lawn.

Unfortunately, the brakes give out and he flies right into a stone wall. Overcome by pride -- and hoping to impress one of the half-dozen Spanish women camped out at his home, he jumps up, dusty and dizzy, and declares in earnest, authentic, Tuscan gibberish -- I'm giving you the rough translation here -- "No worries. I'm fine."

Then, he falls flat on his face.

Scary figures
I was reminded of that scene this morning as I read the headlines and comments on today's Important Economic Indicators. It seems odd to me that, for so long, so many portions of economy and society behave the exact same way as our lovesick Italian. Not only do they see little use in letting up on the gas when there's a party to attend, but they also insist on declaring that everything's fine even after they've driven the vehicle into the rocks.

Tuesday, the Labor Department issued its report on producer prices. No surprise, they took a big leap forward: 0.9%. Of course, nearly everyone seems to think there's no cause for worry there, because most of that jump came from energy costs. I submit that since energy costs are real, and are unlikely to be cooled by Fed-rate hikeage, they ought to remain a worry to real people -- by which I mean anyone who's not a bureaucrat or politician trying to hold the party line.

So, at the same time that energy prices are finally beginning to chew their way up from the depths, we find further evidence that Americans' favorite source of wealth -- ye olde housing bubble -- continues to deflate.

On Tuesday, the Commerce Department reported that April housing starts dropped 7.4% below the March estimate and 11.1% below last year's mark. (And, for a change, these numbers are actually smaller than the margin of error.) If you wonder what the future might hold, consider that April building permits took a 5.4% dive from March and an 8% dip from last year. Meanwhile, the appetite for home-flipping seems to be cooling, as the National Association of Realtors' latest "Pending Home Sales Index," based on March contracts, showed a 6% drop from last year.

Does it trickle down?
Where does this leave investors? In a precarious spot, by my reckoning. Those investing in homebuilders like Toll Brothers (NYSE: TOL  ) have seen this cyclone coming for a while.

But some of us spend a bit of time wondering what the market fallout will be like for companies that aren't directly involved with the housing craze or the energy boom. What will the perception of a hissing housing bubble and high inflation do to the consumer spending that fuels earnings growth?

Consumers are nothing if not fickle. The latest consumer sentiment numbers showed a pretty wild swing from the prior weeks. Of course, those sentiment numbers have a funny habit of not predicting retail sales, so they're not much to invest on.

So long as Americans keep consuming cheap foreign goods at Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) , we might expect to see a modest impact on consumption, though shareholders there may have to brace themselves for margin squeezin's if management teams decide they have to keep eating costs rather than risk turning off customers by passing them on.

How does that belt-tightening play out across the field? Do rising fuel costs have anything to do with lower demand for computers? Can we pin Dell's (Nasdaq: DELL  ) recent unpleasantness on this trend? How much of the pain at GM or Ford is due to a tapped-out American car buyer? Are higher-end goods peddlers, like Coach (NYSE: COH  ) and Nordstrom (NYSE: JWN  ) or Abercrombie & Fitch (NYSE: ANF  ) , immune from these forces?

Foolish bottom line
I've said many times that it's foolish (little f) to build an investment strategy based on macroeconomic guesswork. I continue to believe that, but I also continue to eyeball my investments to make sure that the companies I keep are reasonably priced and rising on sustainable sales, not last-gasp consumer euphoria that may disperse as soon as gas hits four bucks a gallon. A widespread downturn may never come, but that doesn't mean I shouldn't invest as if it could.

Dell and Wal-Mart areMotley Fool Inside Valuerecommendations. If you'd like a free look at stocks that are already priced for the next downturn, afree trialis available. Dell is also a Stock Advisor pick.

Seth Jayson has been predicting doom and gloom ever since he was hit by lightning in '06. At the time of publication, he had no positions in any company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.

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