I apologize if I sound rambly and philosophical. I'm trying to imagine how I'd try to connect with someone who says to me what your nephew said to you.

At the core of it, this is what he's perceiving. That's the key thing to remember. It all sounds fantastical, but it's the only narrative that makes sense given what he's perceiving, which includes things that his brain interprets as aliens, enemy agents, and so on.

The underpinnings of schizophrenia/psychosis are entirely shrouded in mystery. We have some understanding of how the sensory processing centers of the brain would interact with such a state, but much of that is very broad. This much is certain: the brain can have entirely illusory sensory perceptions that are indistinguishable from reality.

Dreams count, but so do hallucinations, daydreams, etc. The key distinguishing factor among all these is can you tell when the illusion ends, regardless of how real it seems. And your nephew, for whatever cluster if causes, is unable to tell the difference.

So I'd keep that in mind. Maybe ask him, without judgment, why he thinks you're unable to see all that he can see. Ask him to help you, not because you believe what he's saying, but because if he's right, you need to know, for your own good? I dunno if that kind of challenge helps or not, but it keeps the channels of communication open, without giving into his reality, but without wholly accepting it, too.

No idea if any of that is remotely useful. But I hope you're able to help in whatever way you can. I think it's great that he still trusts you and speaks to you. That's a good sign, at the very least.