Now, here's a real mystery. If I turn HDR off, the colors are much better.

The VLC screenshot is identical either way, but the playback is much worse with HDR on.

Is HDR causing bad colors? I really don't understand how it works.

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see if its the same on IINA https://iina.io/

This is much better. It actually causes the opposite problem though, the screenshot now has crazy black levels, but the playback is solid and that's what matters.

I'm thinking maybe VLC is over riding the color profile for your monitor. Especially with HDR on.

HDR should make colors more vibrant though.

I don't think HDR makes anything vibrant unless the video is actually mastered for it, which almost nothing is.