>Why does “as if the waters had but newly retired” mean there’s a lot of water (and thus mud)? “As much mud as” clued me in, but I don’t get this part.

"Imagine everything here was flooded and then the water leaves. The land would be left super muddy right? That's how much mud there is now".

I'm surprised it's a difficult phrase, I'm not even a native speaker.

The part with the stegosaurus is harder in that it relies on a biblical reference, but there is no way for it to be interpreted by a decent reader as a literal animal, it should at most make you wonder why he's suddenly bringing up that idea ("it would not be wonderful...).

> Why does “as if the waters had but newly retired” mean there’s a lot of water (and thus mud)?

It doesn't. It means there's a lot of mud. It might help if you had the rest of the paragraph in front of you. It sets the scene for us with a bunch of sentence fragments -- bullet points, we would say. Here's the beginning of each of them:

    Michaelmas term lately over...
    Implacable November weather. 
    As much mud in the streets as if the waters had but newly retired... 
    Smoke lowering down from chimney-pots, making a soft black drizzle...
    Dogs, undistinguishable in mire. 
    Horses, scarcely better

... and so on.

And yes, modern audiences aren't attuned to biblical references.