> would you say that your dreams are observations of physical events?

Current understanding is that dreams are a side effect of variational model selection. See Hobson, J. A., & Friston, K. J. (2012). Waking and dreaming consciousness: Neurobiological and functional considerations. Progress in Neurobiology, 98(1), 82–98. https://doi.org/10.1016/j.pneurobio.2012.05.003