Happy Happy Village
If you talk to the town's folk you'll quickly find that everyone has a screw loose.
There's one lady that will give you a fun postcard if you donate to her efforts to save the world from contaminants. A blue cow who appears to be a cult member. And somebody who is bragging to random people about kidnapping Paul with Pokey's help.
So make sure to take time to talk to all the crazies in town.
Back to the Shack
Pokey Proxy Fight
Back in town go to the Happy Happy Headquarters. It's the big building in the middle.
Walk inside and you'll find an onslaught of cultists just standing there.
Collectively they form a maze for you to get through. There are also a few presents scattered so if you have some inventory space you can try to grab those.