You aren't wrong. The game tells you very little and you have to rely heavily on the sparrow guide and the one good wiki to help you through the game's progression.
When you get items for equipment, what you are getting are actually fragments, not the equipment itself (unless you are buying the equipment from the capitalism camel in your Nightfold). You have to continue through the main story Fables until you unlock the assistance of a blacksmith before you get any new gear.
And the story doesn't really present itself well. Most of the story is in the journal entries you unlock as you play and perform various actions that help to rank up your character.