First, how to fix your AUDIO latency issues, then an explanation as to why it works.
1) USE ANALOG CONNECTIONS! RCA/component audio cables from your console to your stereo, powered speakers, or TV.
2) If you are connecting to a AV/stereo receiver, avoid using video-related inputs. Use audio-only inputs on the receiver such as CD, as opposed to DVD. If your stereo has a 'multi-channel' input, try using that.
3) Check your receiver's manual for a Source Direct mode. Source Direct, often called Direct, or S-Direct, and sometimes just Source, turns off additional processing on your audio signals by your receiver. Signal processing adds latency. Scour your manual for any and all ways to disable any extra sound processing. If you can't do that, try changing your surround mode to Stereo.
4) Also disable any tone-shaping or extra sound modes on your receiver, such as Bass Boost, Graphic Equalization or EQ, reverb modes like Hall, Arena, Stadium, or style settings like Jazz, Rock, Classical. Set these to 0 or Natural, if you can't turn them off.
5) Leave Rocksmith's lag correction setting at the default of 50 for now. First, you want to correct any echo effect you hear between a strumming and hearing it amplified. The lag correction setting has nothing to do with any echo you are experiencing.
5) If you are still experiencing a large amount of latency after following these steps, try connecting to a cheap set of 'powered speakers', or computer speakers or a portable stereo that accepts RCA inputs. These devices are generally too dumb to slow Rocksmith's audio signal down with extra processing, and should be as close to audio-lag free Rocksmith is ever going to get.
Ok, did all that, now what?
Here's the deal. There's a very small amount of latency that is built-in to the Rocksmith cable and the game. It's about 30 ms, which practically borders on the physical limit of human detection. There will always be this delay in any setup. It is not half a second, 500 ms, it's not 300 or even 80. It is manageable and guitarists have been living with lag values higher than that from their pedals, amps, wireless cables, mixing boards, monitors and PAs for ages.
The pronounced lag that you are experiencing resides not in your console or the Rocksmith cable, but in your audio connections and your stereo.
Optical and HDMI cables carry digital signals that have to be decoded to analog before they can be output to your analog speakers. This process takes time. You can avoid this decoding time by simply using analog connections. Analog to analog, all the stereo has to do is amplify the sound, and that is an instantaneous process.
Unless your stereo decides it wants to start playing with that signal. Digital Signal Processing takes your audio signal, samples it a few times, alters it, then ships it off to be decoded. That's just delay added to delay added to delay. You want signal processing OFF. Source Direct modes disable or reduce as much of the signal processing as possible, which results in decreased lag and latency.
So you've got 30 ms of lag built in. Then you've got maybe 60 ms of decoder lag, and 60 ms processing lag. It adds up, and soon it's noticeable.
This is where powered speakers can help you identify your lag problem. Powered Speakers are dumb. They just amplify sound. There shouldn't be any lag involved in that process. They might sound like crap, but at least they will let you hear the difference between 30 ms of latency, nearly instantaneous, and 150 ms of latency, fairly pronounced.
It is possible that your receiver will always be a lag-ridden, 30 pound boat anchor, but how is Ubisoft supposed to know and tell you that?
OK, enough about audio. How about VIDEO LAG and the Rocksmith Lag Correction setting?
As mentioned before, Rocksmith's Lag Correction setting has NOTHING to do with audio lag. Lag Correction only adjusts the point at which the visual note cues of the game are recognized as being played early, or being played late. It gaming terms, it adjusts the notes 'hitbox'. It doesn't delay or correct audio signals at all.
The reason this feature is in the game is because TVs take a while to decode and process video signals. Some are much better than others, and may not suffer ANY lag if configured correctly. Others may induce hundred of milliseconds of delay. Lag Correction advances or retracts notes to correct for this delay.
Twitch FPS gamers noticed this delay first (latency isn't really a significant issue when watching movies) and now most new TVs include a Game Mode which, like Source Direct mentioned earlier, disables or reduces extra processing modes that cause video lag.
So like audio lag:
If you have a Game or Gaming Mode or any other method of disabling processing on your television, TURN IT ON FIRST!!!
And If you can manually change the resolution on your TV, change it to the default resolution of your console. This also reduces lag.
Now you can play with the Lag Correction settings if you need to. Here's some tips for that:
1) Mute your audio completely. Play through a song, using only the visual cues to help you hit the notes at the right time.
2) Listen to what you just played in the replay of your performance following the song. Were you playing the notes early or late? Watch the screen, were you getting more "Late 0.4" messages than usual? More "Early Groove"s? Does it look like you're hitting right on time?
3) If you think you're consistently late, push the notes back a bit by choosing a lower ms value. (e.g. 75 -> 50 ms). If you're consistently early, advance the notes by adding ms to your correction value (75 -> 100). You'll probably have to repeat steps 1-3 a few times to get a good playable setting.
4) Keep your correction adjustments on the smaller side of the bar. With the possible exception of plasmas, most modern TVs don't need 300 ms of lag correction, and many new, affordable LCD TVs with Game Mode enabled don't need any correction at all! Rocksmith's 50ms suggestion really is a pretty good starting point.
I'm confident that if you follow all the steps in this guide, and spend a little time with your Stereo and TV's manual, you can drastically reduce the impact of lag on your game to near unnoticeable levels.
I am not an expert, though I have played guitar for some time, and am a bit of an Audio/Video buff. If anything mentioned here needs to be corrected, please let me know, because I'd be genuinely interested in knowing where I went wrong. Add any tips or suggestions you have as well.
I hope this helps someone. I love this game, and hope you will too.
One final note, the brand or manufacturer of your stereo cables makes absolutely NO difference when it comes to lag, and quite often your sound or picture quality too (especially digital stuff!). Please don't listen to people who tell you you need Monster Cable. They don't know what they're talking about. Peace.