I managed to solve this.
There’s a particular set of things that needs to happen to install the OS on a second drive that is not prominently documented for users. The issue seems to be caused by a new concept since the M1 transition called “owner”; the best summary of what’s going wrong is described here: https://eclecticlight.co/2021/07/18/last-week-on-my-mac-the-perils-of-m1-ownership/ and a more thorough explanation that I don’t totally understand by the same person is here: https://eclecticlight.co/2021/07/21/owners-and-users-primary-and-secondary-systems-on-m1-macs/
This particular part caught my eye: “macOS offers to copy a user from the current boot system as the Install User, and the primary admin user, on the second OS.” and “Apple strongly recommends that this offer is accepted, as it ensures that the Install User can access the OIK, and that security is fully preserved.”
I was never prompted to create/copy this user, since I actually hadn’t completed the initial Mac setup before I installed Monterey to the external disk.
Steps that caused the problem:
1. Never finish the first normal boot of the M1 Mac to its internal hard drive (why bother setting up user accounts, etc, when you’re just going to install a completely seperate copy of OS X to an external drive, anyway.)
2. Boot into recovery mode (hold down power button, click gears icon)
3. Format your SSD for installation with disk utility (APFS, GUID partition map)
4. Select Reinstall Mac OS, install to the external drive
5. Boot, proceed through welcome steps, and create the first user account.
6. This user account will NOT be considered the owner of the computer.
At no point was I prompted to copy a user.
Steps that solved the problem:
1. Completely back up the running system off the external SSD. I used both SuperDuper and Time Machine. I’m glad I did both, because I was later unable to use the Time Machine backup from the migration assistant (it failed to find the user accounts!)
2. Boot from the internal SSD
3. Create the initial administrative user for the OS on the internal SSD
4. Fetch the Monterey installer package from the App store
5. Wipe the external disk as above, erase the entire disk and format APFS, with GUID partition map
5. Launch the Monterey installer. It will immediately ask to copy the current admin user. Say yes!
6. Install.
7. After rebooting, use the migration assistant to copy users and files from the backup. It’s safe to migrate everything here, it won’t break anything.
2. Enjoy a system that will let you update it.
