The sentence is very difficult to parse, yes, but it is grammatically correct. You can make a noun phrase with an arbitrary number of repetitions of 'fish', call that F, added to F-1 repetitions of 'eat'. IE, 'fish fish fish eat eat', or 'fish fish fish fish eat eat eat'. Each of those is one big noun. You can make it as long as you want.
I'm not sure how to demonstrate this any more clearly than it already has been, but I'll try one last time. "fish that fish eat" is a compound noun. I think we agree on that. And you can shorten that to "fish fish eat", and it's still a grammatically correct noun. "fish fish eat" is a thing. Now you can build a sentence around that thing. For example, "The water fish fish eat swim in is cold." Right? It's easiest to parse if you say the 'fish fish eat' noun more quickly than the rest of the sentence, like, "The water fish-fish-eat swim in is cold."
Of course, we can replace the noun water there with more fish! "The fish fish fish eat swim with are small." In fact, you don't need the 'the' there. "Fish fish fish eat swim with are small," works too. As does, "Fish fish fish eat eat are also small." Note we just replaced 'swim with' with 'eat' there. Now we have actually built a larger compound noun, "Fish fish fish eat eat." Finally, we can replace the verb 'are' at the end and we get, "Fish fish fish eat eat eat," a grammatically correct sentence.
I'm not sure how to demonstrate this any more clearly than it already has been, but I'll try one last time. "fish that fish eat" is a compound noun. I think we agree on that. And you can shorten that to "fish fish eat", and it's still a grammatically correct noun. "fish fish eat" is a thing. Now you can build a sentence around that thing. For example, "The water fish fish eat swim in is cold." Right? It's easiest to parse if you say the 'fish fish eat' noun more quickly than the rest of the sentence, like, "The water fish-fish-eat swim in is cold."
Of course, we can replace the noun water there with more fish! "The fish fish fish eat swim with are small." In fact, you don't need the 'the' there. "Fish fish fish eat swim with are small," works too. As does, "Fish fish fish eat eat are also small." Note we just replaced 'swim with' with 'eat' there. Now we have actually built a larger compound noun, "Fish fish fish eat eat." Finally, we can replace the verb 'are' at the end and we get, "Fish fish fish eat eat eat," a grammatically correct sentence.
Does that help?