Earlier quoted context omitted.
So, what would be the observable, empirical consequences of the kind of causal understanding and generalization of inference you're describing?
The common current example? A text prompt of "A horse riding an astronaut" without prompt engineering. Though I don't think the successful production of this image will demonstrate intelligence/causal understanding either (but it is a good counter example). Causal understanding is going to be a bit difficult to prove tbh.
I'm not sure why you think this falsifies intelligence. There are plenty of puzzles and illusions that trick humans. The mere presence of conceptual error is no disproof of intelligence, any more than the fact that most humans get the Monty Hall problem wrong is.