Bootstrap said to Step-Brother, “I heard what Jie Yu said. It was big but didn’t stand for anything. It went on and on without coming
back. I was frightened by it, as endless as the Milky Way,
full of mishmash, with no bearing on the human condition.” 
Step-Brother asked, “What did he say?”
said there are spiritual people living in the distant Maiden Mountain. Their
skin is like frost and they are gentle and restrained as virgins. They don’t
eat the five grains but sip wind and drink dew. They mount the cloudy mists,
ride the flying dragons, and wander beyond the four seas. By concentrating their spirit, they keep things from harm and ripen the harvests. I thought he
was crazy and didn’t believe him.” 
Step-Brother said, “Yes. The blind can't relate to art or the deaf to music. But are blindness and deafness confined to the physical body?
The mind has them, too. His talk is like a woman in her season. Those people
he describes, with those powers, will line up the ten thousand
things and make them one. The world longs for chaos, but why should they fret
and make the world their business? 
Nothing can harm these people. Though a
great flood should knock against heaven, they would not drown. Though a heat
wave should melt stone and scorch the earth, they would not burn. From their
dust and chaff you could smelt an Emperor Yao or Emperor Shun. Why would they want to
make things their business? 
A man of Song invested in ceremonial caps and took
them to Yue. But the Yue people cut their hair and tattoo their bodies and had
no use for them.  Emperor Yao brought order to the people of the empire and stabilized
the government within the seas. But when he went to see the four masters of the
distant Maiden Mountain, north of the Fen River, he lost the world in a daze.” 
 Bootstrap talks with Jie Yu in 7.05 and Confucius encounters him in 4.08, but neither of those seem to be the conversation referred to here.
 The description of the spiritual people sounds like 1.03. These spiritual people may have magical powers or their power may be their ability to rely upon the ordinary. Do they somehow ripen the crops? Or do they magically make what is available enough?
 Is Step-Brother explaining Jie Yu's meaning to Bootstrap or telling Bootstrap he'll never understand? If I understand the metaphor correctly, "a woman in her season" is fertile, ready to create offspring, but she needs a partner; similarly, Jie Yu's words are full of meaning but need the right kind of person to yield their fruit. Different translators punctuate the last sentences very differently, some even reading "chaos" with the alternate and opposite meaning, "competent." (See Analects 8.20: 有亂臣十人.) Thus, Legge gets, "That man, with those attributes, though all things were one mass of confusion, and he heard in that condition the whole world crying out to him to be rectified, would not have to address himself laboriously to the task, as if it were his business to rectify the world" (CTP 1.04). Go figure.
 Again, the description of the spiritual people sounds like magic but could just be the magic that comes from acceptance. One line is curious: "From their dust and chaff you could smelt a Yao or Shun." On the one hand, it could be an insult to the Confucian sages Yao and Shun, saying that they are worth no more than the garbage of these spiritual beings. On the other hand, it could be an explanation of where people like Yao and Shun come from, their back-story, so to speak: the famous, accomplished people we recognize as Yao and Shun emerge from this kind of invisible, unrecognized spiritual activity or calm acceptance. This question will haunt us: whether Yao and Shun are false idols or misunderstood byproducts of the real powers. The reference to smelting may be significant. The ability to cast iron was dimly understood at this time but increasingly important for its role in warfare, hence surrounded by an air of mystery.
 Like many of Zhuangzi's one- or two-liners, this man from Song story is so memorable that the context is frequently forgotten. So there are two questions: What does it mean? And how does it fit into the larger passage? The state of Song was the home of the most recently defeated dynasty and hence the butt of jokes (like the classic Mengzi 2A2). (Incidentally, there is a tradition that Zhuangzi was from Song.) Yue was a state to the south of China, once regarded as barbarian but gradually working its way into the Chinese world, due in part to their advanced metallurgy and production of weapons. So the story is multilayered. The man from Song is surprised and disappointed that the barbaric Yue people have no interest in 'civilized' ceremonial caps. At the same time, the reader knows they make great swords! And ceremonial caps, for better or for worse, are no match for great swords. If the man from Song were smart, he could make a great deal of money trading the other way.
What does this story mean here? I think Step-Brother's point is that Bootstrap is asking the wrong questions. Like the man from Song, he values things that have no value here and fails to appreciate the value of things that do not (yet) fit into his world. That is why he is blind to the meaning of Jie Yu's words.
Again, there may be multiple layers of meaning. On the obvious level, the story seems to make fun of the Confucian sage Yao. On another, descriptions like "losing the world is daze" are frequently positive in Zhuangzi. I'm going out on a limb, but I suggest this may be an alternative origin story for Yao. It is not a physical journey but a spiritual one beyond his known world. If so, the story is asynchronous: what happens after he becomes emperor (losing sight of the China that he knows) explains how he became emperor in the first place (his ability to envision a different world). This is an explanation of what made Yao "Yao," how the Yao we know was smelted out of his encounter with the masters of the Maiden Mountain, the experience of losing his world, forgetting everything he (thinks he) knows.
 Earlier in Chinese history, in Yao's time, the Fen River had been the north-western border separating the Chinese from the non-Chinese world (i.e., the “barbarians”). By Zhuangzi’s time, however, military expansion and cultural assimilation had moved the boundary back, so the Fen was closer to the center (kind of like our Mississippi). So it is ironic that what seemed like not-China to Yao was in fact China-to-be as a result of his successes.