Ohhh, yes. The guy outside of the bar is trying to convince people he is from Dragon Island, a lauded and discrete island that has dragons and swords and castles and whatnot. By 90% of the world, it's seen as a total myth and not a real place, since people who go there often don't come back.
Smoker is telling you that since that guy is out of his mind and not mentally stable, that she could probably manipulate him to do things a sane person wouldn't do. That's really it, it's just flavor text and says something about Smoker's character. Sorry for the confusion, but thanks for immersing yourself. :- )
If you want to know more about the general world of "The Canvas", I recommend this video: