That's funny! Usually, you can get a clue from context, but it won't help you here. In your topic question, 'That's the **** right there, dude' means that the marijuana they are smoking is really good. I cannot explain why it means that; it just does. **** is excrement, of course. Avoid using it for anything else because you could be seriously misunderstood.
Quote:
Suppose, I am having dinner with my friend, after having some meat,
which was so delicious, can I say to my friend,
"That's the **** right there, dude. You should try that. You will like it."?
NO! Absolutely not never, ever do you want to say something like that! You can make yourself perfectly understood without using that word.
In fact, even if you are talking about excrement, say excrement, not ****. It's pretty vulgar.
The part you mentioned you couldn't explain why but it just means that is interesting. I wouldn't have worried about it much if I were an English native speaker. Haha. Thank you a lot Roger.