No need to fake it... if you can get the retinal projection accurate enough, with fast enough eye tracking, the depth is as real as anything else you'll see in real life...the goal would be to have it feel completely natural.
I keep feeling like watching the Longhorn demo at PDC 2003...
So noting they have described defies the laws of physics.
Edit: although, of course they'll need some intelligence on the surroundings to identify surfaces and stuff. But imagine like re-decorating your work room, adding scifi textures or something, and maybe pipes or whatever ;p
Most likely it suffers the same shaky snap laggy tracking like every other AR setup.
I did see a tiny bit of judder in the footage that was supposed to be exactly what the person wearing the glasses would see, but it was hard to tell.
In case any reader here weren't aware how Kinect works, it sends to the developer a 2D image of the depth. Of course as walod says, there's work to do to identify surfaces (as you can see on the image below, background elements are excluded).
http://www.gadgetguy.com.au/hands-on-with-the-xbox-one/micro...
EX: http://www.photographyblogger.net/wp-content/uploads/2011/06... Now picture an infocus immage behind the blurry background pen's.