What is going on is very simple.
The Smallest Size PDF export joboptions in fact convert absolutely all content to ICC sRGB color, including black text! (We normally would never recommend these options for any PDF creation, especially if you need to subsequently print the resultant PDF file!) Assuming you setup the document when you created it as a print document, the transparency blend space was automatically set to Document CMYK which is effectively whatever your default CMYK color setting is.
However, if you create PDF that is totally RGB (again, not recommended), a CMYK-based transparency blend space may cause real havoc when displaying a PDF page that has transparency. With a CMYK-based transparency blend space, content that is involved with transparency rendering is all converted to CMYK, blended in the CMYK color space, and then converted back to RGB. The visual effect may be somewhat poor!
My recommendation would be that if you really need a compact PDF file from InDesign but maintaining proper color spaces and printability, that you take either the High Quality Print or the PDF/X-4 PDF export joboptions and modify one or the other to downsample the images to some value between 100 and 150 dpi using Automatic (JPEG) with Medium quality. Don't modify other settings. This will cut down the bulk of the PDF file caused by images, the only real aspect of the PDF file size you really have control over anyway. And you won't get the error message you have shown us!
Thanks for the explanation. I did as you suggested and created another pdf preset using "high quality" and downsampled all the images to 150. When I ran it, no error came up. I use smallest just to make it easier to send with an email. Usually not an important print job. The "smallest size" preset I am pretty sure is just the default that came with the program, not one I created.