I had never heard that phrase, and was delighted at the answer when I googled it its origin, thank you:
http://www.catb.org/jargon/html/N/nasal-demons.html
> “When the compiler encounters [a given undefined construct] it is legal for it to make demons fly out of your nose” (the implication is that the compiler may choose any arbitrarily bizarre way to interpret the code without violating the ANSI C standard)