I've always interpreted it as a laugh. It really wouldn't be all that different from the time he cracked up in "Color My World."
I don't know how many fans of Surfin' M.O.D. there are out there, but I believe it is one of the very best albums to listen to when everything else just doesn't fit. I could listen to Katrina all day long!
So yeah, Billy's laughing because that's some pretty funny shit he's doing in the studio. It makes me laugh every time I hear it too.
I love the track and laughed my ass off when I first heard it. Hell Ive lost a friend to A.I.D.S and I still laugh. Does that make me a sick fuck (no pun intended) or just a chap with a good sense of humor?