Ok, I'll take that.... (Never been a fan of Holley carbs, marine or otherwise, but that's another story)... Let's look at the plumbing of the cooling system....
Correct me if I'm wrong....
Water is pulled in by front pulley driven sea-water pump, which has a 2-way outlet. One going to each exhaust manifold. I'm going to assume the manifold/elbow gasket is a block-off, as if it wasn't that engine would overheat quick smart...
Water exits the exhaust manifold (at the top) and then passes via a hose to the front of the engine block, passes through the block and heads and then gets blocked against the thermostat if it's not open, or flows out the thermostat if it is open, through the elbows and out...
How close am I?
So, what problems do we have here? First up, you want the COLDEST water to be headed for the engine FIRST, not the exhaust manifolds, which under full load will heat that water up to the point for it being not so good for cooling the engine.
Second, when the thermostat is closed, the sea-water pump is deadheaded. Bad idea. Also, no water flowing out the elbows, so they're going to get way too hot, as will the entire exhaust system. Fire risk right there. Also with the thermostat closed, none of the warmed water will come in contact with it to signal it that the engine is at operating temp and it needs to open. I can't see where your engine temp sensor is located, but I suspect the reason why you're not seeing much on the gauge is because there's no water flow within the block/heads before the thermostat opens.
That thermostat housing isn't even remotely right for a marine setup. It's literally just a thermostat cover. Have a look at the water flow diagram I posted earlier, see that it allows for a)water to flow around the engine while it's warming up, and b) for water coming from the sea-water pump, that's not being allowed to enter the engine as it's not warm enough yet, to flow out of the housing and through to the elbows. That ensures that the exhaust gasses are being cooled all the time, not just when the thermostat is open.
You need to completely redesign that cooling system to avoid a fire caused by the exhaust system running at time with no water, and to allow the water in the block to be continuously circulating. The pump that's not on the front of your engine is called a 'circulating pump'.... And you need to get the cooling water into the engine first, not last.
Chris..........