Is this a reflection of him or me?

assuming you've known him your entire life, you should be able to answer that one...
impossible for someone who doesn't know him to answer...
no...

It's a little weird, but then, we don't know your family. Maybe public expressions of love/affection are not the norm. Maybe it made everyone feel a little uncomfortable. Maybe it made him uncomfortable. He may have had a different reaction had you said it to him privately. The fact that nobody said anything leads me to this, but you haven't indicated whether it was unusual or not, for your family.

So, no, it doesn't tell me he's dysfunctional in this one event and context.

And why would there be any blame attached (your last question)?

From an uncle's point of view the first thought that comes to mind is he was using humor. Perhaps in his mind he thought kids like funny people.

Without any further context, I suspect you might lack a sense of humor. That is reply (at least at face value) was meant to be a dry, cheeky one. Or he's a psychopath. You are asking a random group of strangers who have zero idea who you, you uncle, or your family are and where your respective relationships lay.

You have to go around trying to figure out who's dysfunctional and who isn't? Try taking people at face value. Trying to see more than who is there might in itself be dysfunctional.

You did put uncle on the spot and in front of witnesses.