You're supposed to be listening with your ears, not your ass.
But since your head is up your ass, I understand.
The phrase "blowing smoke", meaning to deceive and/or distract, has been around for years. The "up ones ass" part is a fairly new addition. The origin of the "blowing smoke" part is from stage magic, where magicians use smoke to hide their actions or to distract the audience. So if your actions were meant to distract or deceive, you were said to be blowing smoke. Of course, anyone who studies American slang knows that pretty much any phrase can be improved by adding a reference to someones ass, so I suppose it's inevitable the that is where the smoke would eventually be blown.