i have the exact same issue! Full Log:
`2018-01-12T14:29:50.333Z - info: [08328] *** FOLDER: c:\Develop ***
2018-01-12T14:29:50.334Z - info: [08328] VSTSVSCode/1.122.0 (VSCode 1.19.2; Windows_NT 6.3.9600; Node 7.9.0)
2018-01-12T14:29:50.334Z - debug: [08328] Looking for an External Context at c:\Develop
2018-01-12T14:29:50.334Z - debug: [08328] No External Context at c:\Develop
2018-01-12T14:29:50.335Z - debug: [08328] Looking for TFVC repository at c:\Develop
2018-01-12T14:29:50.335Z - debug: [08328] TFVC Creating Tfvc object with localPath='undefined'
2018-01-12T14:29:50.336Z - debug: [08328] Using TFS proxy:
2018-01-12T14:29:50.336Z - debug: [08328] TFVC Retrieved from settings; localPath='C:\Program Files (x86)\TEE-CLC\tf.cmd'
2018-01-12T14:29:50.344Z - debug: [08328] TFVC Repository created with repositoryRootFolder='c:\Develop'
2018-01-12T14:29:50.345Z - debug: [08328] TFVC Repository.CheckVersion
2018-01-12T14:29:50.346Z - debug: [08328] TFVC: tf add -noprompt -?
2018-01-12T14:29:50.351Z - debug: [08328] TFVC: spawned new process (duration: 5ms)
2018-01-12T14:29:50.353Z - debug: [08328] TFVC: spawned new process (duration: 2ms)
2018-01-12T14:29:57.102Z - debug: [08328] TFVC: add exit code: 0 (duration: 6756ms)
2018-01-12T14:29:57.103Z - debug: [08328] TFVC Minimum required version: 14.0.4
2018-01-12T14:29:57.103Z - debug: [08328] TFVC (TF.exe, TF.cmd) version: 14.123.1.201709051449
2018-01-12T14:29:57.103Z - debug: [08328] TFVC Repository.FindWorkspace with localPath='c:\Develop'
2018-01-12T14:29:57.104Z - debug: [08328] TFVC: tf workfold -noprompt c:\Develop
2018-01-12T14:29:57.105Z - debug: [08328] TFVC: spawned new process (duration: 1ms)
2018-01-12T14:30:00.011Z - debug: [08328] TFVC: workfold exit code: 0 (duration: 2906ms)
2018-01-12T14:30:00.011Z - debug: [08328] Found a TFVC repository for url: 'http://tfsserver:8080/tfs/mordor/' and team project: 'Web'.
2018-01-12T14:30:00.012Z - debug: [08328] Parsing values from repositoryInfo as string url
2018-01-12T14:30:00.012Z - debug: [08328] TFVC Creating Tfvc object with localPath='undefined'
2018-01-12T14:30:00.014Z - debug: [08328] Using TFS proxy:
2018-01-12T14:30:00.014Z - debug: [08328] TFVC Retrieved from settings; localPath='C:\Program Files (x86)\TEE-CLC\tf.cmd'
2018-01-12T14:30:00.014Z - debug: [08328] TFVC Repository created with repositoryRootFolder='c:\Develop'
2018-01-12T14:30:00.094Z - error: [08328] You are not connected to a Team Foundation Server. Please run the 'team signin' command.
2018-01-12T14:30:28.155Z - debug: [08328] Starting sign in process
2018-01-12T14:30:33.030Z - info: [08328] Signin: Username and Password provided as authentication.
2018-01-12T14:30:33.078Z - debug: [08328] Reinitializing after successfully storing credentials for Team Foundation Server.
2018-01-12T14:30:33.079Z - debug: [08328] Polling interval value (minutes): 5
2018-01-12T14:30:33.082Z - info: [08328] *** FOLDER: c:\Develop ***
2018-01-12T14:30:33.082Z - info: [08328] VSTSVSCode/1.122.0 (VSCode 1.19.2; Windows_NT 6.3.9600; Node 7.9.0)
2018-01-12T14:30:33.083Z - debug: [08328] Looking for an External Context at c:\Develop
2018-01-12T14:30:33.083Z - debug: [08328] No External Context at c:\Develop
2018-01-12T14:30:33.083Z - debug: [08328] Looking for TFVC repository at c:\Develop
2018-01-12T14:30:33.083Z - debug: [08328] TFVC Creating Tfvc object with localPath='undefined'
2018-01-12T14:30:33.084Z - debug: [08328] Using TFS proxy:
2018-01-12T14:30:33.084Z - debug: [08328] TFVC Retrieved from settings; localPath='C:\Program Files (x86)\TEE-CLC\tf.cmd'
2018-01-12T14:30:33.085Z - debug: [08328] TFVC Repository created with repositoryRootFolder='c:\Develop'
2018-01-12T14:30:33.086Z - debug: [08328] TFVC Repository.CheckVersion
2018-01-12T14:30:33.086Z - debug: [08328] TFVC: tf add -noprompt -?
2018-01-12T14:30:33.089Z - debug: [08328] TFVC: spawned new process (duration: 1ms)
2018-01-12T14:30:33.197Z - debug: [08328] TFVC: add exit code: 0 (duration: 110ms)
2018-01-12T14:30:33.197Z - debug: [08328] TFVC Minimum required version: 14.0.4
2018-01-12T14:30:33.197Z - debug: [08328] TFVC (TF.exe, TF.cmd) version: 14.123.1.201709051449
2018-01-12T14:30:33.197Z - debug: [08328] TFVC Repository.FindWorkspace with localPath='c:\Develop'
2018-01-12T14:30:33.197Z - debug: [08328] TFVC: tf workfold -noprompt c:\Develop
2018-01-12T14:30:33.199Z - debug: [08328] TFVC: spawned new process (duration: 1ms)
2018-01-12T14:30:34.856Z - debug: [08328] TFVC: workfold exit code: 0 (duration: 1658ms)
2018-01-12T14:30:34.856Z - debug: [08328] Found a TFVC repository for url: 'http://tfsserver:8080/tfs/mordor/' and team project: 'Web'.
2018-01-12T14:30:34.856Z - debug: [08328] Parsing values from repositoryInfo as string url
2018-01-12T14:30:34.856Z - debug: [08328] TFVC Creating Tfvc object with localPath='undefined'
2018-01-12T14:30:34.857Z - debug: [08328] Using TFS proxy:
2018-01-12T14:30:34.858Z - debug: [08328] TFVC Retrieved from settings; localPath='C:\Program Files (x86)\TEE-CLC\tf.cmd'
2018-01-12T14:30:34.858Z - debug: [08328] TFVC Repository created with repositoryRootFolder='c:\Develop'
2018-01-12T14:30:34.871Z - debug: [08328] Started ApplicationInsights telemetry
2018-01-12T14:30:34.871Z - info: [08328] Getting repository information with repositoryInfoClient
2018-01-12T14:30:34.871Z - debug: [08328] RemoteUrl = http://tfsserver:8080/tfs/mordor/
2018-01-12T14:30:34.872Z - debug: [08328] Getting repository information for a TFVC repository at http://tfsserver:8080/tfs/mordor/
2018-01-12T14:30:34.873Z - debug: [08328] Parsing values from repositoryInfo as string url
2018-01-12T14:30:34.873Z - debug: [08328] Starting the validation of the collection. Url: 'http://tfsserver:8080/tfs/mordor/'
2018-01-12T14:30:34.922Z - debug: [08328] Validated the collection and splitting Url and Collection name. Collection name: 'mordor', Url: 'http://tfsserver:8080/tfs/'
2018-01-12T14:30:34.922Z - debug: [08328] Getting project collection... url: 'http://tfsserver:8080/tfs/', and collection name: 'mordor'
2018-01-12T14:30:34.922Z - debug: [08328] Using SOAP to get the project collection information
2018-01-12T14:30:35.062Z - debug: [08328] Found a project collection for url: 'http://tfsserver:8080/tfs/' and collection name: 'Mordor'.
2018-01-12T14:30:35.063Z - debug: [08328] Getting team project... Url: 'http://tfsserver:8080/tfs/', collection name: 'Mordor', and project: 'Web'
2018-01-12T14:30:35.103Z - debug: [08328] Found a team project for url: 'http://tfsserver:8080/tfs/', collection name: 'Mordor', and project id: 'd0328e41-a37e-4e25-8bb0-39be32c4350a'
2018-01-12T14:30:35.103Z - debug: [08328] Repository information blob:
2018-01-12T14:30:35.104Z - debug: serverUrl=http://tfsserver:8080/tfs/, id=3283D0DD-1B24-4005-8199-A49EB69D0294, name=Mordor, url=http://tfsserver:8080/tfs/_apis/projectCollections/3283D0DD-1B24-4005-8199-A49EB69D0294, id=00000000-0000-0000-0000-000000000000, name=NoNameTfvcRepository, url=http://tfsserver:8080/tfs/, id=d0328e41-a37e-4e25-8bb0-39be32c4350a, name=Web, description=Web-Team, url=http://tfsserver:8080/tfs/Mordor/_apis/projects/d0328e41-a37e-4e25-8bb0-39be32c4350a, state=1, revision=15, remoteUrl=http://tfsserver:8080/tfs/
2018-01-12T14:30:35.104Z - debug: [08328] Parsing values from repositoryInfo object as any
2018-01-12T14:30:35.105Z - debug: [08328] _collection: Mordor
2018-01-12T14:30:35.105Z - debug: [08328] _collectionId: 3283D0DD-1B24-4005-8199-A49EB69D0294
2018-01-12T14:30:35.105Z - debug: [08328] _repositoryId: 00000000-0000-0000-0000-000000000000
2018-01-12T14:30:35.105Z - debug: [08328] _repositoryName: NoNameTfvcRepository
2018-01-12T14:30:35.106Z - debug: [08328] _teamProject: Web
2018-01-12T14:30:35.106Z - debug: [08328] _isTeamFoundationServer: true
2018-01-12T14:30:35.106Z - debug: [08328] Finished getting repository information for the repository at http://tfsserver:8080/tfs/mordor/
2018-01-12T14:30:35.106Z - info: [08328] Getting connectionData with accountClient
2018-01-12T14:30:35.106Z - debug: [08328] connectionUrl = http://tfsserver:8080/tfs/Mordor
2018-01-12T14:30:35.125Z - info: [08328] Retrieved connectionData with accountClient
2018-01-12T14:30:35.126Z - debug: [08328] Found pinned queries in user configuration settings.
2018-01-12T14:30:35.126Z - debug: [08328] No account-specific pinned query or global pinned query found. Using default.
2018-01-12T14:30:35.126Z - info: [08328] Sent extension start up telemetry
2018-01-12T14:30:35.126Z - debug: id=01e3a444-f067-4537-af1a-268a476f23aa, descriptor=System.Security.Principal.WindowsIdentity;S-1-5-21-405680416-1421812660-549785860-1...
2018-01-12T14:30:35.127Z - debug: [08328] repositoryFolder: c:\Develop
2018-01-12T14:30:35.128Z - debug: [08328] repositoryRemoteUrl: http://tfsserver:8080/tfs/mordor/
2018-01-12T14:30:35.128Z - debug: [08328] IsSsh: false
2018-01-12T14:30:35.128Z - debug: [08328] proxy: not enabled, team services: false
2018-01-12T14:30:35.129Z - info: [08328] Sent TFVC tooling telemetry
2018-01-12T14:30:35.129Z - debug: [08328] Initializing the TfvcSCMProvider
2018-01-12T14:30:35.129Z - debug: [08328] TFVC Repository.CheckVersion
2018-01-12T14:30:35.129Z - debug: [08328] TFVC: tf add -noprompt -?
2018-01-12T14:30:35.131Z - debug: [08328] TFVC: spawned new process (duration: 1ms)
2018-01-12T14:30:35.195Z - debug: [08328] TFVC: add exit code: 0 (duration: 65ms)
2018-01-12T14:30:35.195Z - debug: [08328] TFVC Minimum required version: 14.0.4
2018-01-12T14:30:35.196Z - debug: [08328] TFVC (TF.exe, TF.cmd) version: 14.123.1.201709051449
2018-01-12T14:30:35.196Z - debug: [08328] TFVC Repository.GetStatus
2018-01-12T14:30:35.196Z - debug: [08328] TFVC: tf status -noprompt -collection:http://tfsserver:8080/tfs/Mordor ******** -format:xml -recursive c:\Develop
2018-01-12T14:30:35.198Z - debug: [08328] TFVC: spawned new process (duration: 1ms)
2018-01-12T14:30:39.127Z - info: [08328] Polling for latest current build status...
2018-01-12T14:30:39.127Z - info: [08328] Getting current build from badge...
2018-01-12T14:30:39.128Z - info: [08328] Polling for the pinned work itemquery
2018-01-12T14:30:39.128Z - info: [08328] Running pinned work item query to get count (Web)...
2018-01-12T14:30:39.198Z - info: [08328] No builds were found for team Web, repo id 00000000-0000-0000-0000-000000000000, + branch UNKNOWN
2018-01-12T14:32:04.970Z - debug: [08328] TFVC: status exit code: 0 (duration: 89774ms)
2018-01-12T14:32:04.972Z - debug: [08328] TFVC Repository.FindConflicts
2018-01-12T14:32:04.972Z - debug: [08328] TFVC: tf resolve -noprompt -collection:http://tfsserver:8080/tfs/Mordor ******** c:\Develop -recursive -preview
2018-01-12T14:32:04.974Z - debug: [08328] TFVC: spawned new process (duration: 2ms)
2018-01-12T14:32:12.455Z - debug: [08328] TFVC: resolve exit code: 100 (duration: 7483ms)
2018-01-12T14:32:12.456Z - debug: [08328] TFVC errors (via stderr): An error occurred: Access denied connecting to TFS server http://tfsserver:8080/ (authenticating as DOMAIN\ACCOUNT)

2018-01-12T14:32:12.456Z - error: [08328] Caught an exception during Tfvc SCM Provider initialization
2018-01-12T14:32:12.456Z - error: [08328] Execution of the TFVC command line failed unexpectedly. An error occurred: Access denied connecting to TFS server http://tfsserver:8080/ (authenticating as DOMAIN\ACCOUNT)`

@obrienwritescode I encountered this today and was able to get it working by adding this to VSCode user settings:

    "tfvc.restrictWorkspace": true

I found the solution by looking at where the "fake" comes from. This is the source of the problem: https://github.com/Microsoft/vsts-vscode/blob/aed6d2ebb4b1281c651f46178b9bf47c0e693bd1/src/tfvc/commands/findworkspace.ts#L42

I still get the same error message even with "tfvc.restrictWorkspace": true in my settings

I found out that my issue is caused by a umlaut in my password like "ä or ü"

I had the same problem. It turned out that the "fake" credentials were stored in OSX Keychain. It worked after I removed them from the keychain and entered a command with -login to reset them.

I've documented the complete list of steps that worked for me on Stack Overflow.