Well, if the smoke is going to be generated at all the hot points of the tyre, I'm going to need a new computer.
And the outside wheelarch will fill with smoke because the smoke is being formed on the wheel, which is farther from the centre than the back of the wheelarch. You'd be able to see the face of the wheel, and a bit of tread, then the rest of the wheelarch would be full of smoke which would continue into the car. I think another diagram would illustrate, but since I don't have access to a computer, it probably won't be until tomorrow.
A really hot tyre creates smoke across all the hot sections, which is usually the tyre as a whole, not to mention that smoke rises by convection into the wheelarch. Also, when braking, smoke is sucked up into the wheelarches by virtue of the air in there being relatively calm. So, it isn't that unrealistic IMO.