is the _imperative_ form of , so literally, it's not "I laugh at my dream" but "Laugh at this dream I had (until now)!". It doesn't make much sense for him to tell Karen to laugh at himself in this context, so I think he's saying this to no one in particular (or, to the listeners of this song). He's describing how silly and laughable his was.
Also note that **** is somewhat special. is usually an intransitive verb ( **** / **** ). The transitive usage of ( **** ) has a scornful/derogatory overtone. You may want to pick a more negative word to translate this .
* Why isn't usually used with particle?
> When used as a transitive verb, means "laugh at~~" in the sense of "ridicule" "deride" "sneer at~~" "make fun of~~".
* "The eye (crust ?) laughs at the booger"?
By the way, **** is "to embrace _each other_ ".