LLM proponents believe that these higher level encodings in latent space do in fact match the real world concepts described by our language(s).

However, a much simpler explanation for what we see with LLMs is that instead the higher level encodings in latent space match only the patterns of our language(s), and no deeper encoding/understanding is present.

It's Plato's Cave - the shadows on the wall are all an LLM ever sees, and somehow it is expected to derive the real reality behind them.