The difference between these two is explained in the notes and elsewhere, but I usually find these explanations slightly less than intuitive. I've conceptualized it this way: Tiu is the finger-pointing, italicized that while tio is a wavering vague "that...". Obviously this is not rigorous, but it helps me remember.
"Did you see that (tio) weird guy?"
As the extremely strange man goes by and the speaker points a finger:
"That (tiu) guy."
Can someone proficient with Esperanto comment on the accuracy of this conceptualization?
I would try to write out the complete esperanto sentence you're imagining with "tio" and solicit opinions on its grammaticality. Making a maybe incorrect guess at what you meant, I don't think it's right to say Ĉu vi vidis tion strangan ulon? but rather Ĉu vi vidis tiun strangan ulon?
La tabelvortoj je U estas pronomecaj kaj A-vortecaj.
La tabelvortoj je O estas O-vortecaj kaj pronomecaj.
("Correlatives ending in -u can be pronoun-y and adjective-y
Correlatives ending in -o can be noun-y and pronoun-y")
The basic understanding I have of -o vs. -u rests in the idea that tio is the "that" that is a standalone noun, kio estas tio = "what is that?", "ĉi tio estas banano" = "this is a banana". on the other hand the canonical way to use -u is to be a (describe-y, or, if you forgive me for using lexical category names a bit loosely, adjectivey-feeling) thing in front of a noun, "kiun fruktun vi volas" = "which fruit do you want" "tiun frukton" = "that fruit".
But then there's the extra fact that -u words are allowed to stand alone as pronouns, with the understanding that there's an elided "persono" or "homo" or the like in there "kiu ŝatas vin" = "who likes you" ~= "kiu persono ŝatas vin" = "which person likes you"
Actually reading further I'm slightly inaccurate here; -u words are allowed to stand alone and refer to other things besides people if the context makes it clear. Here's my attempt at translating the last section of http://bertilow.com/pmeg/gramatiko/oa-vortecaj_vortetoj/tabelvortoj_u.html into english:
Difference between table-words -u and -o
The table-words ending in -o are standalone parts of sentences. They cannot describe o-words. They correspond to -u table-words + "thing" (or "object", or "stuff")
Kio estas tio? = Kiu afero estas tiu afero?
What is that? = What thing is that thing?
Tio estas speco de meblo. = Tiu afero estas speco de meblo.
That's a kind of furniture = That thing is a kind of furniture
Ĉio restis kiel antaŭe. = Ĉiu afero restis kiel antaŭe.
Everything remained as it was before = Every thing remained as it was before
Kion bonan vi trovis tie? = Kiujn bonajn aferojn vi trovis tie?
What good did you find there? = What good stuff did you find there?
Nenion interesan mi trovis. = Neniun interesan aferon mi trovis.
I didn't find anything good there = I didn't find any good thing there
The table words ending in -u normally describe o-words, but the o-word can be implied. If nothing in the context suggests otherwise, one can assume that it's about a person or people.
Kiu libro estas via? → Kiu estas via?
Which book is yours? = Which is yours?
Tiu seĝo ŝajnas bona. → Tiu ŝajnas bona.
That chair seems good = That one seems good
Ĉiu homo devas pensi mem. → Ĉiu devas pensi mem.
Every person must think themselves = Everyone must think themselves
Kiu persono venis? → Kiu venis?
Which person came? = Who came?
Ĉu estas iu [persono] en la kuirejo? – Jes, Paŭlo estas tie.
Is there someone in the kitchen? - Yes, Paulo is there
Jen kelkaj bonaj libroj. Kiun [libron] vi volas legi? – Mi volas tiun [libron].
Here's a few good books. Which [book] do you want to read? I want that one. [i.e., that book]
Ĉu vi havas krajonon? – Neniun [krajonon] mi havas.
Do you have a pencil? I have none. [no pencil]
(there's a bunch of example sentences in http://bertilow.com/pmeg/gramatiko/oa-vortecaj_vortetoj/tabelvortoj_o.html and http://bertilow.com/pmeg/gramatiko/oa-vortecaj_vortetoj/tabelvortoj_u.html to look at. Is it obvious I completely love the PMEG? :) I read it cover to cover when I was first learning e-o, so much fun)
The ending -u means you talk about a specific object or person, so if you point a guy like in your first sentence, you must use tiu. An easy way to remember is that you can't have "tio" next to another word in -o (tio viro is wrong, tiu viro is ok)
No one is pointing at the guy in the first sentence. That's the point. They are talking about some guy in the abstract (as far as the listener is concerned) in the first sentence. Then the guy passes. Then the third sentence happens.
Your second point, that tio never specifies another noun seems like an extremely useful piece of information. I hadn't noticed this. Can you give me a reference for that?
The first sentence refers to a specific guy, that's the critical point.
Kio estas lakto : you ask what is milk in general
kiu estas tiu lakto: you ask what is this specific milk
No. That's a common misconception.
"tio" usually stands alone. "Tio estas skbilo." = This is a pen.
"tiu" can only stand with a (maybe implicit) noun. "Tiu skribilo estas blua." = This pen is blue.
The noun "tiu" stands with can be implicit. "Jen du skibiloj. Tiu estas blua kaj tiu estas ❤❤❤❤❤." = "Here are two pens. This one is blue and this one is black."
Tiu is used as reply to Kiu ( which ) type questions.
Tio is used as reply to Kio ( what ) type questions.
Kiu is also used as "who"