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It is indeed connected to your library. After choosing that location you get a overview to browse your Photos library like this:
screenshot.png
Ok I still cannot for the life of me get this screen.... I have my photo library on an external and even when I add the alias or navigate to the 'Pictures' folder that it is contained in on the external I do not get the fancy Photos menu like you have.
If anyone knows WHY I do not have this please, feel free to advise and I feel like I have been missing like 50% of the features of the Photos app forever now... :(

EDIT: SCREAMS FROM EXCITEMENT: I got it to work, my library on the computer I was testing it from was not the system one, on this machine the window is there and works like a dream.
Looks like I a going to spam facebook with a bunch of things I have been too lazy to upload because of this reason.
 
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Hold on. I get that dialog box, but not all of my photos are available to me. Is it because some are saved locally, while others are in the cloud? If so, that's a whole lot of extra steps to go through, in a process that is already full of unnecessary steps to access and use pictures.

From Photos: 12 images are available.
Screenshot 2016-06-08 12.47.57.png

From the finder dialog box when I want to use an image for these forums: Note that only three images are available.
Screenshot 2016-06-08 12.47.02.png

[doublepost=1465415726][/doublepost]So now I have to decide what to do with my workflow of my digital images. I'll continue to use Google Photos because it's super convenient, unobtrusive, and free. Since Apple Photos is such a mess, though, I'm thinking I'll have to start storing my images in a local folder from now on. All of them. And not worry about the convince of continuity and storage from my iPhone to my Mac. Maybe I can just keep a pictures folder in my iCloud folder and have everything backed up that way? Maybe I'll just add a pictures folder to my Dropbox and pay for extra storage with them. I've never had any problems with Dropbox in my years of using them.
 
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I would recommend using NAS for your photos back up..This is what I do for the las 2 years and everything is fine and safe.
 
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