Eddie, I have basically the same setup (iMac, Premiere Pro, Canon DSLR workflow) and some of the same questions as you.
And I am also confused by the workflow that Chris Tompkins is attempting to describe. But as far as I can tell, his second response is encouraging the use of the Mercury PE, using the default MPEG preview format, not changing the preview format to H264-I think he misunderstood what you were suggesting with your question…
Anyway, that’s what I do – edit natively in H264 using the Mercury PE system. And I am saving up for the Pegasus thunderbolt drive, which seems like a fairly good deal, considering the 4x1TB drives that are included.
But to reiterate your initial line of questioning: What is the rationale behind the common refrain of “Don’t edit off your internal hard drive” that Chris has reaffirmed? What specifically arrangement is recommended? Does one edit the project file/folder on the local drive and have all clips on an external? Or the project file external as well?