The Godhead http://en.wikipedia.org/wiki/Godhead_(Judaism) http://en.wikipedia.org/wiki/Godhead_(Christianity) http://en.wikipedia.org/wiki/Svayam_Bhagavan http://en.wikipedia.org/wiki/Paramatma for an omniscient overarching God figure. In TES, this is the dreamer whose dream is the universe. Every single thing we see, including the people we interact with, are just characters in his dream - hence Velorien's assertion.
The clearest explanation of the Godhead can be found in the latter half of the http://imperial-library.info/content/loveletter-fifth-era-true-purpose-tamriel.
It's better to get an understanding of CHIM first, which will give you a better understanding of the Godhead.
I'd argue for the reverse. CHIM isn't necesary for the Godhead, but the Godhead is absolutely vital to the concept of CHIM. Bringing the C word into this just confuses the issue.